IMF: Uncertain oil prices pose main risks to Saudi outlook

JEDDAH: The International Monetary Fund (IMF) says the steep fall in oil prices is likely to dampen growth in Saudi Arabia.
Citing uncertainties about future oil prices, the IMF added that possible escalations of regional tensions are the main risks to the outlook.
Real GDP growth is projected to slow to 2.8 percent this year, and then further to 2.4 percent in 2016 as government spending begins to adjust to the lower oil price environment, the IMF said, adding that it however expects the medium-term growth to be around 3 percent.
Commenting on the IMF predictions, London-based James Reeve, deputy chief economist and assistant general manager at Samba Financial Group, told Arab News: “I agree totally with the IMF's assessment. The government can sustain spending growth by borrowing on the local market, which it is already doing. This will be the mechanism that offsets the loss of oil revenue. But do not expect spending growth to be as strong as in the past.”
Reeve said: “The Saudi economy has slowed, and this trend is expected to consolidate in 2016 before the recovery in oil prices helps activity to pick up again during 2017-2020. The Kingdom’s nonoil growth is set to ease to 2.9 percent in 2016, before climbing back to average around 3 percent during 2017-2020.”
John Sfakianakis, Middle East director at Ashmore Group, told Arab News: “The economy is on a slower growth path on the oil side yet the nonoil economy is still at a positive path. The economy is still well cushioned due to high reserves and the bond issuing program is well received and prudent.”
He said: “Fiscal discipline would have to be applied and revenue generating alternatives would have to be devised as well as a reviewing energy subsidies especially targeted energy subsidies.”

“Government spending will remain the cornerstone of the economy, and with a more straightened fiscal position, it is likely that there will be fewer large capital projects commissioned in the coming years,”Reeve said.
On Tuesday, Saudi Arabia's main Tadawul All-Share Index plunged 2.85 percent to a seven-month closing low of 8,197.02 points.
Camille Accad, economist at Asiya Investments, said: "We will probably not see the 5 percent plus rates witnessed during the period of high oil prices between 2011 and 2013. The Saudi economy was already on a deceleration path before June last year when oil prices collapsed, and the weakness in oil prices has added to the slowdown.”
But he said: “We believe that the Saudi economy will remain strong in 2015 and 2016 because government spending will continue to expand in spite of lower oil prices. Public spending is a tool of social stability, it has been working very well in the last few years and it will continue to be used extensively. In particular, we believe that affordable housing will grow strongly. Last year, the sector grew almost 7 percent and we expect it to remain around that level in 2015 and 2016.”
Accad said: “Keeping the fiscal deficit under control is secondary for the Saudi leadership. Its large foreign exchange reserves are enough to finance current levels of public spending for a few years, and we expect that the government will increasingly rely on raising debt through bonds. This year, $5 billion bonds have already been issued, the first time any bond issuance took place since 2007. We have seen appetite for fixed income in the region and these bonds will easily be sold to local investors."
The IMF report said a central government fiscal deficit of 19.5 percent of GDP is projected in 2015, and while the deficit will decline in 2016 and beyond as one-off spending ends and large investment projects are completed, it will remain high over the medium term.
Nevertheless, government debt is very low and was 1.6 percent of GDP at end-2014. The current account surplus declined to 10.9 percent of GDP in 2014. It is expected to move into a small deficit in 2015 but return to surplus during 2016-2020. It said deposit inflows to banks and private credit growth have slowed in recent months. Nonetheless, the banking system is well positioned to weather lower oil prices and the growth slowdown.
Saudi Arabia has been one of the strongest growing economies in the G20. Rising oil prices and production resulted in large external and fiscal surpluses, and strong government spending led to robust private sector activity. Over the past year, however, the global oil market environment has changed.
The decline in oil prices has increased the importance of structural reforms to switch the focus of growth away from the public sector and toward the private sector.
With unemployment of nationals still high and the working age population growing strongly, the government is continuing to focus on reforms that aim to increase the employment of nationals in the private sector and diversify the economy away from its reliance on oil, the IMF said.
The IMF commended Saudi Arabia’s commitment to promoting stability in the global oil market and to providing financial support for developing countries in the region.
The sharp drop in oil revenues and continued expenditure growth would result in a very large fiscal deficit this year and over the medium term, eroding the fiscal buffers built up over the past decade.
Against this background, they underscored the need for a gradual, but sizable multi-year fiscal adjustment based on a mix of expenditure and revenue measures.
These measures should include comprehensive energy price reforms, firm control of the public sector wage bill, greater efficiency in public sector investment and an expansion of nonoil revenues by introducing a VAT and a land tax, and other measures. The IMF said issuing debt to finance part of the deficit is appropriate and would help promote the development of private capital markets.
The IMF said Saudi banking system is in a strong position to weather lower oil prices and weaker growth, and supported continuing efforts to strengthen financial sector regulation and supervision.
According to Capital Economics Tracker, Saudi Arabia’s growth held steady at around 5.5 percent y/y in June.
The strong GDP growth rate has been supported by the oil sector, where production volumes have been ramped up as part of the Kingdom’s efforts to regain market share from high-cost producers.
Oil output currently stands at close to a record high and is rising by around 6 percent or so in year-on-year terms.