Middle East Slow Rebalancing

5 min
Manfred Stamer
Manfred Stamer Senior Economist for Emerging Europe and the Middle East

Saudi Arabia: Higher oil prices and fiscal measures support recovery in growth and improvement in macroeconomic imbalances

Full-blown recession in 2017...

Official data released at the end of March show that the downturn intensified at the end of 2017 – real GDP contracted by -1.2% y/y in Q4 – and confirmed an earlier flash estimate that full-year GDP declined by -0.7% last year. Details indicate that the November 2016 OPEC agreement to cut oil output was the main trigger for the recession in 2017. On the supply side, the non-oil sector grew by +1% while the oil sector shrank by -3%, in which oil extraction dropped by -3.5% while oil refining increased by +2.4%. On the expenditure side, the oil output cut caused a sharp drop in capital formation, with fixed investment falling by -7% and inventories subtracting -0.3pp from 2017 growth, and declining external trade activity. Real exports fell by -3.2% last year and imports by -4.5%, so that net exports made a small positive contribution of +0.2pp to growth. Meanwhile, consumer and public spending both grew modestly by +2% and +0.8% last year, respectively. Note that Q4 real GDP increased by +0.4% in q/q seasonally-adjusted terms which is pointing to a tentative recovery this year.

...to be followed by a moderate recovery in 2018

Looking ahead, opposite forces will affect the economic momentum in 2018. The non-oil private sector PMI fell to an average 53.0 points in Q1 from 56.8 in Q4. This seems to reflect the introduction of a 5% VAT and administered price hikes at the start of the year which have pushed up inflation to +3% y/y in January-February (from -1.1% in December) and possibly affected consumer spending.

But the situation is likely to improve in the next quarters as the government has announced a number of public sector bonuses and higher public infrastructure spending to come. Moreover, the negative impact of the OPEC oil output cut has now waned. Thus oil output should be stable this year and with a higher average oil price than in 2017 this should help to achieve turnarounds in investment and exports. Overall, we forecast real GDP growth of +1.7% in 2018.

Chart 1 Saudi real GDP growth and oil price

Sources: National statistics, IMF, IHS Markit, Allianz Research

Step-by-step rebalancing

The current account balance shifted back to a surplus of +2.2% of GDP in 2017, after two years of deficits, mainly thanks to a rebound in the value of oil exports (+25%). As a consequence, total FX reserves held at SAMA (central bank) have stabilized at around USD490bn since mid-2017, after having fallen from a peak of USD745bn in August 2014 (these reserves include financial assets managed by the SAMA Foreign Holdings SWF). Current foreign assets are still sufficient to cover around 30 months of imports. We forecast the current account surplus to widen to 3% of GDP in 2018.

The rebound in oil revenues combined with austerity measures also helped to reduce the fiscal deficit from -17% of GDP in 2016, however, it remained large at around -9% in 2017 and is forecast at -7% this year. Nonetheless, related risks remain moderate as total public debt is still low at about 20% of GDP and huge financial assets held in two SWFs provide for a substantial cushion.

Chart 2 Fiscal and current account balances

Sources: National statistics, IMF, Allianz Research