Saudi economy has proved resilient — but now comes the challenge
As the decision makers in Vienna got down to the nitty gritty on Thursday, the economic policymakers back home were looking through the range of oil price variables to see how the OPEC deliberations will effect their budget calculations for 2019.
Though it is still too early to say where the oil price will settle after Vienna, especially after the recent volatility in global crude prices amid a wave of geopolitical forces pulling it this way and that, the economic background is relatively benign — or at least less unpredictable than it has been for several years.
The risk is that those same mercurial geopolitics can throw off course even the best laid plans, and that Saudi Arabia — the biggest of the regional oil-exporting economies — finds itself contending with more variables than policymakers would ideally like.
But for the time being, the economic context is encouraging. The International
Monetary Fund (IMF) in
October raised its forecast for
Saudi Arabia to 2.2 percent in
2018; after a fall of 0.9 percent last year, that is welcome news.
The IMF’s sums were drawn up before the oil price began its recent descent — it is down about 30 percent since the start of October — but a better guide to recent performance comes from a report by Capital Economics, the
London-based consultancy.
CapEcon’s survey of purchasing managers’ index (PMI) data showed that business confidence in Saudi Arabia rose to 55.2 in November, its highest level this year, even as the price of oil was plummeting. (Similar optimism was expressed in the UAE).
It could be, of course, that the survey did not capture the full effect of the oil price fall — it was being compiled before the sharpest part of the decline — but in Saudi Arabia and the UAE the PMIs probably also reflected the positive effects of fiscal and economic stimulus measures introduced this year.
In Saudi Arabia, there was also the boost to consumer spending from the recently announced reinstatement of some public-sector bonuses.
Can this positivity extend into next year, when oil prices might look very different? The IMF says it can, predicting 2.4 percent growth in the Kingdom in
2019.
This is backed up by a recent assessment from Bank of America Merrill Lynch (BoAML). The US bank’s MENA research team forecasts higher growth for Saudi Arabia on looser fiscal spending.
Gradual fiscal reforms, the introduction of household and cost of living allowances, greater support for the private sector and the ongoing megaprojects will all help stimulate economic activity over the next 12 months.
Saudi Arabia’s financial position is improving, too, with the fiscal deficit narrowing on higher-thanbudgeted oil revenues over the course of the full year, the non-oil sector broadly on target, and greater spending discipline, with higher current spending offset by lower capital spending.
As ever, there are risks. “The impact of recent geopolitical uncertainty on the domestic political and business environment, foreign direct investment, private sector investment, growth, oil and foreign policy bears watching,” said BoAML.
In the longer term, it is all about oil prices, geopolitics and the reform program, and the delicate balance between the three.
“A prolonged period of low oil prices, fiscal reform slippage, devaluation, and regional geopolitical threats remain the primary risks. An exodus of expatriates and their families due to fees and Saudization could weigh on private consumption,” the bank’s analysts said.
The resilience of the Saudi economy, and especially the non-oil sector in the face of recent volatility, is commendable, but the big question is whether it will last.
CapEcon said that lower oil prices will not cause major balance sheet strains in the largest Gulf economies, but “at the very least, we expect fiscal support is key to fade and we expect the recovery in non-oil sectors to park in the coming quarters,” the consultancy said. That means the government could face challenges in providing the level of stimulus necessary to continue pump-priming the non-oil sector.
This is why the delicate negotiations in Vienna are being mirrored by an economic balancing act in Riyadh. As policymakers prepare for a crucial budget at the end of this month, they had some key economic advantages compared with previous years, but the geopolitical background is less certain.