Ekonomske analize
Saudi Arabia

Saudi Arabia

Population 31.3 million
GDP 20582 US$
B
Country risk assessment
B
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Synthesis

major macro economic indicators

  2014  2015 2016 (f) 2017 (f)
GDP growth (%) 3,7 4,1 1,4 0,5
Inflation (yearly average) (%) 2,7 2,2 3,7 1,9
Budget balance (% GDP) -3,4 -15,9 -13,0 -9,5
Current account balance (% GDP) 9,8 -8,3 -6,6 -2,6
Public debt (% GDP) 1,6 5,0 14,1 19,9

 

(f) Forecast

STRENGTHS

  • A quarter of global oil reserves and largest OPEC producer
  • Predominant regional economic and political role
  • Economy going through a diversification process and more open since joining the WTO end-2005
  • Solid financial situation
  • Robustness of the banking system

WEAKNESSES

  • Significant dependence on the hydrocarbon sector where there is little job creation, and growing domestic energy consumption
  • High unemployment rate among Saudi nationals
  • Governance weaknesses hampering the business climate
  • Unstable geopolitical environment

RISK ASSESSMENT

An economy which is suffering from the impact of the fall in hydrocarbon prices

Saudi growth saw a sharp slowdown in 2016. In response to the fall in the price of hydrocarbons, which has affected the government finances, the authorities have significantly reduced their capital spending, leading to a contraction of added value from the private sector. The sectors which depend on government contract, such as construction, have reported a decline in their activity levels over the year, penalised by an extension of payment delays from the public sector. The sectors which rely on household demand, such as distribution and commerce, have also been impacted by the slowdown in consumption. The freeze on recruitment and salaries in the civil service, which employs more than 50% of the working-age Saudi population, and the slowdown in the non-oil economy weigh on household purchasing power. Conversely, the increase in oil production was the principal contributor to growth.

The activity is likely to recover gradually in 2017. The agreement reached in Vienna between the various members of OPEC should favour a gradual rebalancing of the oil market, pushing prices slightly upward, which will relieve pressures on the government's finances. The policy of austerity initiated in 2016 is likely to be replaced with more support on the part of the public sector for the non-oil sector. Compliance with the production quotas should however constrain the oil GDP of the kingdom. In addition, conditions for financing of the private sector should improve. The tightening of liquidity on the banking market, which led to a slowdown in credit growth in 2016, should weigh less on the non-oil sector in 2017, with the authorities turning towards the international debt market in order to meet their financing needs. The termination of subsidies on energy products and regulated goods led to an increase in inflation in 2016. Inflationary tensions are likely to be more moderate in 2017, thanks to the appreciation of the US dollar, to which the Saudi Riyal is anchored, and should lead to a reduction in imported inflation.

 

Fall in the twin deficits

Government receipts continued to contract in 2016, due to the weakness of the price of hydrocarbons. In addition, non-oil receipts were constrained by the slowdown in non-oil activity. The policy of budgetary austerity initiated in 2016 has however resulted in a reduction of expenditure. The reform of the public sector, which was materialised by a freeze on salaries, as contained the growth in total payrolls. It is likely to be continued in 2017, enabling the authorities to reduce their incompressible current expenditure. The authorities are likely to continue to enlarge their tax base, by creating new local taxes, particularly at the level of the municipalities and by increasing fees for nationals, after having surcharged them for expatriates. The increase in the price of oil should in addition relieve the pressure suffered by the government finances. At the time of the presentation of the Saudi Vision 2030 development plan, the government announced the launch of a large programme of privatisations, which is likely to include the opening up of the capital of the Aramco oil monopoly, as well as a sell-off of public land. Following these measures, the government deficit should continue to be reduced in 2017. The significant financing needs generated by the fall in the price of oil have led to a substantial increase in government debt but, with regard to the significant Saudi reserves, it remains sustainable. The authorities have turned gradually towards the international debt market to meet their financing needs and to relieve the domestic debt market which is suffering from liquidity constraints. The country completed an initial bond issue of $17 billion in October 2016 and it is likely to continue to call on external financing.

After having fallen slightly in 2016, the current account deficit should contract significantly in 2017. Although the price of a barrel of oil in 2016 was lower than in 2015, the fall in export receipts was offset by the reduction in imports resulting from the economic slowdown. The slight rise in prices in 2017 and the slow economic recovery should enable the trade balance to return to positive territory. The economic gloom is also affecting transfers by expatriates, which are tending to diminish, leading to a contraction in the balance of revenues. The foreign currency reserves should thus stabilise in 2017 and amount to around $521 billion.

 

Towards a planned structural transformation

Following the accession of King Salman in 2015, the Saudi executive was renewed in depth with the appointment of Prince Mohammed Ben Nayef to Security and Crown Prince Salman ben Abdelaziz Al Saoud to Economic Affairs and Defence. The latter began a vast programme of economic transformation, which should lead the country towards more diversification and limit the Kingdom's dependency on oil. He thereby also intends to profoundly modify the economic functioning and organisational processes of the State in order to reduce the weight of bureaucracy. Even though a proportion of young people are looking forward to more transformation, the Crown Prince has nevertheless to deal with the reticence of some of the tribes and clerics.

In terms of foreign relations, the Kingdom has reversed its external policy, particularly toward the Egyptian neighbour, but remains directly involved in the political crisis in Yemen. 

 

Last update: January 2017

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