IMF cuts Saudi Arabia 2016 growth forecast as oil price stays low

Posted on October 19, 2016

The International Monetary Fund has cut its economic growth forecast for Saudi Arabia’s non-oil sector this year to 0.3 per cent, underlining the depth of the slowdown in the oil-dependent kingdom following a two-year slump in crude prices.

In its latest regional outlook, the IMF forecast the Gulf state’s overall gross domestic product would expand by 1.2 per cent, its lowest level since the financial crisis of 2009, compared with 3.5 per cent last year.

The IMF had predicted in May that non-oil GDP would grow by 1.6 per cent but cut its projection to 0.3 per cent as government spending curbs continue to sap business confidence.

“[The non-oil sector] just breaks even,” said Masood Ahmed, regional director for the IMF.

Riyadh, which today began taking orders for its debut sovereign bond expecting to raise about $15bn, has been cutting spending on projects and wages as it seeks to tackle two years of wide budget deficits.

The impact is cascading through the broader economy and knocking consumer confidence, causing the non-oil sector to slide into a technical recession in the last quarter of 2015 and the first three months of this year.

“The fiscal consolidation undertaken by the government, both in direct effects from reduced spending and the indirect effect of [declining] confidence, has begun to show through in the level of activity in the non-oil sector,” said Mr Ahmed.

The fund predicts a rebound in non-oil growth next year to 2.6 per cent, but public wage constraints introduced in late September could hamper this recovery.

Other economists are forecasting a contraction in the non-oil sector this year — the first since 1987.

Monica Malik of Abu Dhabi Commercial Bank said a brief uptick in second quarter real non-oil GDP growth could be revised down and that she expected full-year growth to be negative.

A sharp pullback in government spending in the third quarter would put the private sector under further pressure. “The medium-term outlook for Saudi non-oil growth will remain weak without a pick-up in oil revenue,” she said.

Although oil prices have recovered from a 10-year low of less than $30 a barrel in January to $40-$50 a barrel, the IMF forecasts an average price this year of $43 a barrel, rising to $51 next year.

In an attempt to dilute its dependence on oil and develop the non-oil sector, the government is seeking to implement a highly ambitious “National Transformation Plan” which envisages creating 450,000 private sector jobs by 2020.

The oil price impact has spread across the region’s oil exporters, with collective export revenues set to be about $435bn lower this year than in 2014.

After drawdowns on financial buffers last year, a large part of their collective fiscal deficit of about $200bn this year is being covered by debt issuance. Kuwait is the only Gulf Co-operation Council state not to have tapped debt capital markets so far in 2016.

Regional non-oil growth is expected to fall from 3.75 per cent in 2015 to 1.75 per cent this year as oil exporters cut capital spending and trim public sector expenses. The IMF suggests it could pick up to 3 per cent next year as fiscal consolidation eased.

The IMF forecasts that a partial recovery in oil prices over the medium term will raise non-oil growth to about 3.5 per cent — well below the 7 per cent enjoyed by regional oil exporters between 2000 and 2014.

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