ICAEW’s latest Economic Insight report claims the outlook for the Saudi economy remains strongly tied to the developments in international oil markets. Rising oil prices this year and potential supply disruptions from Libya, Venezuela and Iran, have improved the economic prospects for the Saudi economy, given the Kingdom’s role as a major oil producer with substantial spare production capacity. Despite the positive outlook, the accountancy and finance body says certain challenges to the Saudi economy remain.
Economic Insight: Middle East Q3 2018, produced by Oxford Economics, says the Saudi economy is expected to rebound to 2.1% growth this year against a backdrop of rising oil production, higher public spending, steady progress of economic and social reforms and recovering oil prices. The economic prospects this year are in contrast to the 0.9% contraction in 2017, when economic activity was weighed down by low oil prices, various austerity measures and restricted levels of oil production due to the OPEC-plus mandate.
Oil production in Saudi Arabia is expected to average around 10.10 million barrel per day this year, representing a 1.4% year-on-year increase on the 9.96 million barrel per day registered last year.
The non-oil sector will also support growth, buoyed by pro-growth government initiatives and higher public spending. The US$19.2 billion private sector is expected to play a key role in driving growth in the non-oil sector and cushioning businesses from the changing macroeconomic landscape.
Preliminary figures by the Saudi authorities show that real GDP grew by 1.2% year-on-year in Q1 2018, which compares favourably to Q1 2017, when the economy contracted by 0.8%. The oil sector grew by 0.6% year-on-year in Q1 2018, while the non-oil sector grew by 1.6% over the same period.
On the social front, for the first time in the Kingdom’s history, women were granted the right to drive and cinemas opened their doors for the first time in over three decades in April. These events signal the steady progress of social and economic reforms in the Kingdom.
But in spite of the more promising economic prospects, the report says certain challenges to the Saudi economy remain, notably the high local unemployment rate and the need to attract increased levels of Foreign Direct Investment (FDI) to support Vision 2030 and expand the role of the private sector.
Michael Armstrong, FCA and ICAEW Regional Director for the Middle East, Africa and South Asia (MEASA) said: “Saudi Arabia is on the right track to economic diversification and is implementing the necessary fiscal and social reforms to support these efforts. We’re also encouraged by the recent inclusion of Saudi Arabia in the MSCI Emerging Market Index. This will definitely help in attracting foreign investment, which in turn will support the expansion of the private sector’s role in generating output and creating jobs.”
Middle East economies are starting to recover after a slow start to the year
Macroeconomic conditions are seeming more promising for Middle East economies after a relatively slow start to 2018. Overall, the Middle East’s GDP is expected to grow from 0.9% in 2017 to 2.4% in 2018.
Higher crude production and recovering oil prices will aid growth in an otherwise sluggish oil sector and strengthen fiscal and external balances for the GCC economies. The global crude oil price is forecast to average at US$78 per barrel in H2 2018, and at US$74.5 per barrel for the year.
According to the report, citing recent IMF figures, Bahrain and Saudi Arabia are under the greatest pressure with highest fiscal break-even oil prices this year at US$113 and US$87.9 per barrel, respectively. Followed by Oman and UAE at US$77.1 and US$71.5 per barrel, respectively. Kuwait and Qatar enjoy the lowest fiscal break-even oil prices at US$48.1 and US$47.1 per barrel, respectively.
The non-oil private sector is also starting to show some signs of recovery. The Purchasing Managers’ Index (PMI) for Saudi Arabia and UAE, the region’s biggest economies, reached their highest levels this year in June, reflecting growing momentum in the non-oil private sector.
Mohamed Bardastani, ICAEW Economic Advisor and Senior Economist for Middle East at Oxford Economics, said: “Although the rise in oil prices promises to support growth in the region, rising interest rates and tighter monetary conditions could slow down the momentum in the non-oil private sector. Moreover, any escalation of the trade war between US, China and the EU, could weigh on the region’s economic outlook through weaker external demand and lower oil prices.
“Sustained implementation of economic and structural reforms is needed to improve the business environment, eliminate impediments to job creation and to reduce the government’s footprint in the economy.”