Saudi rebound to begin with a modest GDP growth
Three years of fiscal consolidation and rising oil ease budget pressure
The Saudi Arabian economy that witnessed slow growth during the last three years and a negative growth of -0.7 per cent last year is projected to grow in the range of 1.9 per cent, according to projections by the Institute of International Finance (IIF).
Earlier this week, the International Monetary Fund (IMF) projected the real GDP growth at 1.7 per cent. Both organisations say the economic prospects of the Kingdom have improved somewhat, supported by fiscal stimulus and higher oil prices.
“We see a modest rebound in overall growth to 1.6 per cent, supported by the stabilisation of oil production and fiscal stimulus. Real GDP contracted by 0.7 per cent in 2017 due to the decrease in oil production, in the context of the Opec agreement, and fiscal consolidation,” said Garbis Iradian, Head of Mena research, IIF.
Based on high frequency indicators (PMI, cement sales, credit growth, and point of sale transactions), non-oil growth in the first quarter of this year may have remained below 1 per cent. Continued sluggishness of bank credit could hamper private sector economic activity. The pace of private sector job creation for nationals has slowed in 2016-2017, leading to a higher Saudi national unemployment rate of 13 per cent in 2017.
For the remainder of this year growth is expected to gain traction. The increase in government expenditure, combined with the substantial increase in spending on infrastructure through Public Investment Fund (PIF) and a private sector stimulus, will boost non-oil growth. The authorities have also launched a 5-year private sector stimulus programme in the amount of $53 billion (Dh194.5 billion) (7 per cent of GDP) for five years. The package includes subsidised loans to provide affordable housing and financial support for troubled SMEs.
“We expect economic activity to improve for the rest of this year, as the growth dampening impact of VAT introduction fades and consumption and investment pickup in response to the fiscal stimulus,” said Boban Markovic, research analyst at IIF.
Non-oil growth
Over the medium term, nonoil growth is projected to accelerate from 2.7 per cent in 2018 to about 4 per cent by 2023, as megaprojects are being implemented and progress is made in improving the business environment and diversification. Large-scale projects include airports, railways, new resorts on the Red Sea, and entertainment complex outside Riyadh.
Consumer price inflation is expected to increase from -0.2 per cent in 2017 to 3.6 per cent in 2018 due to the introduction of a 5 per cent VAT in early 2018 and the sharp increase in domestic fuel prices (both one-off shocks).
Consumer prices jumped by 3.4 per cent, month-overmonth in January of this year, driven by higher prices for food and transportation. Analyst see a decline in the average inflation in 2019 to 3 per cent as domestic demand remains relatively weak.