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26-Feb-2018

Saudi Arabia Economics - 2018 is an inflection point in growth dynamics; pace of recovery is still uncertain

2018 is an inflection year for Saudi Arabia’s growth story…

Saudi Arabia’s growth dynamics are set to turn a corner starting 2018 as gov’t adopts an expansionary fiscal stance – extending beyond the fiscal budget – and phases out its balanced budget target by three years, thanks, primarily, to rising oil prices. We upgrade our growth forecasts for 2018 and 2019 to 2.2% and 2.7%, from 1.8% and 2.2%, respectively, to account for higher investment spending. The various social and economic reforms (primarily increased Saudisation and women participation in the economy) will potentially expand economic growth in the medium term. Investment is likely to take the lead in driving economic growth, though it is still likely to remain driven heavily by the public sector, led by the Public Investment Fund (PIF). 
 
…question is, how fast given initial headwinds?

We expect the pace of such turnaround in activity to be rather gradual, gathering pace in 2018 before having a real push in 2019. The consumer story remains torn between two opposing forces: on the one hand, a boost to real disposable incomes of nationals (thanks to the allowances and pay-raise for public employees approved earlier this year), while expats, on the other hand, are bearing the brunt of the fiscal measures, driving some to leave the country (some 300k expat jobs were lost in 9M17 on a gross basis). Overall, consumer confidence has been hit by the fiscal measures, likely taking a few months for disrupted consumption patterns to normalise. Finally, the pace of the public investment spending – whether through the budget or PIF – remains to be tested, especially when considering the sizeable SAR340bn of investment spending planned for the year. So far, project awards and bidding trends are not pointing to a strong pick-up in investment spending in 2018.
 
Turnaround in growth is largely at the expense of fiscal reforms

The turnaround in the growth story has, thus far, come at the expense of the pursued structural changes in fiscal balances. The gov’t has so far used every wave of oil price recovery in boosting fiscal spending – the latest are allowances approved earlier this year – therefore, Saudi Arabia’s fiscal balances remain highly dependent on oil prices. We, therefore, see a risk for the newly set target for a balanced budget to extend beyond 2023 and foresee a stabilisation of the non-oil GDP deficit at 36% of non-oil GDP. Nevertheless, the gov’t will have other revenues streams of nearly SAR1trn at its disposal to drive the spending spree, including: i) PIF’s balance sheet; ii) Aramco’s IPO; iii) privatisation programme; and iv) proceeds from settlements of corruption cases. The risk, though, is that these are mostly of a one-off nature and are yet to be materialised.

Mohamed Abu Basha