Dubai: After reporting a better than expected GDP growth in the second quarter of this year, Saudi Arabia’s economic growth is expected to slip into negative territory this year, according to economists and analysts.
“Saudi second quarter GDP growth was better than expected, but a headline contraction is only a matter of time,” said Jaap Meijer, Managing Director of Research, Arqaam Capital.
The kingdom reported a stronger than expected 1.4 per cent real GDP growth in the second quarter of this year, down from 1.5 per cent in the first quarter. Non-oil GDP grew 0.4 per cent compared to -0.7 per cent in the first quarter of this year as the government sector contributed surprisingly to growth, while the private sector remained barely positive at 0.07 per cent.
Oil GDP growth slowed to 1.6 per cent in the second quarter from 5.1 per cent in the first quarter. Oil GDP growth is expected to drop to -2.8 to -4.7 per cent after the Opec oil deal goes into effect, curbing total GDP growth by about 2 per cent and most likely pushing GDP into negative territory.
In context of the fiscal compulsions faced by the kingdom, analysts expect Saudi energy policy to be less aggressive. “Increasing macro constraints suggest that energy policy will attempt to put a floor under oil prices. To remain consistent with the targeted government debt accumulation path, we estimate that oil prices have to average at least $50/bbl in 2016-20, along with no growth in spending,” said Jean-Michel Saliba, an economist at Bank of America Merrill Lynch.
Twin deficits
Current account deficit stands at an annualised 8.6 per cent in the first half of the year, a notch higher than the 8 per cent in the first half of 2015, but strongly improving compared to the 12 per cent in the first quarter of 2016. Exports were boosted sequentially by the higher oil price, while imports dropped 14.4 per cent in the first half of this year due to spending cuts.
The financing picture suggests that the central government budget deficit likely stood at 210 billion Saudi riyals ($56 billion; Dh201.5 billion) in the first half of 2016, which annualises to a very large 17.7 per cent of GDP. Analysts say it is possible that part of the financing picture reflects undisclosed off-budget commitments.
Following the recent round of fiscal reforms involving curbs on government spending some economists expect a lower fiscal deficit in the range of 13 to 15 per cent.
Revenues are on track to exceed the budget by 19 per cent, while spending is now 15 per cent ahead of budget. “Recent public sector wage cuts should only bring the 2016 spending figure down marginally. Despite the recent firming of the oil price, fiscal austerity remains inescapable,” said Meijer.
Recent reform measures related to government pays have sent out a strong signal that the government is willing to make changes in areas that had previously been out of bounds for cutbacks.
“The impact on growth could be greater than the fiscal savings as the majority of Saudis work in the public sector and the psychological impact of these cuts could be significant,” said Monica Malik, Chief Economist of Abu Dhabi Commercial Bank.
Lower capital expenditure by the government is expected to be a decisive factor in fiscal position. “The government appears to be reviewing capex plans with a view to cutting 87 billion riyals in projects (3.7% of GDP). This is in line with our opinion that there is a need to further rationalise capex, on top of plans to raise non-oil revenues,” said Saliba.
Recent liquidity injections of $5 billion has helped calm interbank markets. But with the upcoming government external borrowings, the rate relief could be short-lived as speculative forward positions on the riyal could push up interbank rates.
