JEDDAH — The economic outlook in Saudi Arabia remains heavily influenced by the global oil market – both in terms of domestic production and investment in the sector, but also through the role of oil exports in financing imports for consumption and non-oil business, and through funding government expenditures, The ICAEW Economic Insight: Middle East, said in its latest quarterly economic forecast for the region prepared directly for the finance profession.
The outlook for 2017 therefore remains constrained by Saudi’s recent move to lead OPEC’s production cuts. The country has cut oil production by close to 6%, to 9.9 million barrels per day. Output is likely to be sustained around this level for the first half of 2017, before rising again in the second half of the year – partly due to seasonal factors and partly in response to patchy compliance among other OPEC members. Nevertheless, the fall in oil production versus 2016 will mean oil GDP is around 2pp lower in 2017 than in 2016.
This will outweigh a modest rebound in non-oil activity. The successful issue of the $17.5 billion international bond in late 2016 has allowed the government to fund a 25% increase in infrastructure spending in 2017. Raising finance outside the kingdom has also enabled the government to place less debt locally, thereby reducing the ‘crowding out’ of private borrowing. The Initial Public Offering (IPO) in a stake in Saudi Aramco should give this process a further boost in 2017. Moreover, although the stronger dollar (and therefore through the currency peg, the stronger riyal) will do little to help with international competitiveness in the medium-to-long term, it is helping to slow price inflation.
Overall the direction of economic momentum is shifting in Saudi Arabia, but to a limited degree. Infrastructure spending remains well below the average (from 2011-2015). Overall government spending will still fall by around 6% in 2017 as the government rationalizes its wage bill and the military. Meanwhile, although market interest rates have recently been falling, they may well rise again in 2017, as policy rate rises in the US will likely need to be matched by Saudi Arabia given the currency peg. Finally, while consumers will certainly welcome slower retail price inflation, part of the gain will be lost to reductions in utility subsidies and the introduction of VAT in 2018.
“We expect non-oil GDP to grow by 1.8% in 2017 - a welcome rebound after growth of just 0.2% in 2016, but little more than half the pace of 2015. More positively, as the government makes progress on tackling the budget deficit and financial conditions ease further, non-oil GDP growth can pick up – to 3.2% in 2018, and 4% thereafter. Alongside stronger global oil demand, this will be enough to take overall GDP growth back towards 3% per year from 2018.”
This will be some way short of growth experienced over the past couple of decades (4.3% per year between 2000 and 2015), and at a time when the working age population will grow at close to 2% per year, ensuring a sustained need for job creation. The economy will also remain heavily influenced by conditions in the world oil market. Both considerations point towards a need to accelerate economic diversification. The prioritization of infrastructure spending in the recent budget is positive in this respect, but this is already an area in which the economy excels. Other areas, which will require more fundamental changes in attitudes, are more crucial to boosting growth potential.
This is illustrated by the 2017 edition of the World Economic Forum’s Global Competitiveness Index. Saudi Arabia’s infrastructure ranks as the 31st best in the world, just below Ireland and above Norway. However, the economy ranks 65th for labour market efficiency (lower than several sub-Saharan African economies), which incorporates metrics such as the link between pay and productivity. The barriers facing new entrants to business (both new domestic firms and inward investors) are also among the highest in the world, protecting firms from competition and undermining innovation.
In summary, the moment of acute economic risk in Saudi Arabia has passed, but the greater challenge lies ahead. Creating jobs for new Saudi workers requires workers to have skills and wage expectations that are competitive in the global economy, and companies that compete more intensively for business. These are both areas in which the government’s aspirations of Vision 2030 must begin to translate into action.
While Saudi Arabia is on the right track to pass the moment of acute economic risk, the Kingdom has to accelerate economic diversification efforts in order to overcome the greater challenge that lies ahead, according to a new ICAEW report. With the working age population expected to grow by close to 2% per year from 2017-2027, creating jobs for new Saudi workers is critical, says the accountancy and finance body. This requires Saudi workers to have skills and wage expectations that are competitive in the global economy as well as companies that compete more intensively for business.
The report ‘Economic Insight: Middle East Q1 2017’, produced by Oxford Economics, ICAEW’s partner and economic forecaster, said Saudi Arabia prioritization of infrastructure spending in the recent budget is positive, but this is already an area in which the economy excels. Other areas, which will require more fundamental changes in attitudes, are more crucial to boosting growth potential.
The report explains that the 2017 edition of the World Economic Forum’s Global Competitiveness Index illustrates this matter. Saudi Arabia’s infrastructure ranks as the 31st best in the world, just below Ireland and above Norway. However, the economy ranks 65th for labour market efficiency (lower than several sub-Saharan African economies), which incorporates metrics such as the link between pay and productivity. In addition, the barriers facing new entrants to business (such as the complexity of starting a new firm and the restrictions on inward FDI) are also amongst the highest in the world, protecting firms from competition and undermining innovation.
Tom Rogers, ICAEW Economic Advisor, and Associate Director of Oxford Economics, said: “Now is the time to action Vision 2030. Saudi Arabia must improve its labor market efficiency and business environment. Even though it looks as though the moment of acute economic risk has passed, long run growth can only be sustained through efforts to diversify the economy.”
According to the report, the economic outlook in Saudi Arabia remains heavily influenced by the global oil market – both in terms of domestic production and investment in the sector, but also through the role of oil exports in financing imports for consumption and non-oil business, and through funding government expenditures.
The report warns oil prices will not rise significantly due to the expected rise in global production, especially from US shale producers who are responding to stabilizing prices by increasing drilling activity. Brent crude is forecast to average $52 per barrel in 2017 and 2018, before a more vigorous acceleration from 2019 onwards.
Michael Armstrong, FCA and ICAEW Regional Director for the Middle East, Africa and South Asia (MEASA), said: “While lower oil GDP is of course not a good news for Saudi Arabia, this has outweighed a modest rebound in non-oil activity. The government has successfully issued a $17.5 billion international bond in late 2016 and raised finance outside the Kingdom. Overall the direction of economic momentum is shifting in Saudi Arabia, but to a limited degree. Infrastructure spending remains, but is expected to fall by around 6% in 2017 as the government rationalizes its wage bill and the military.” — SG
