Saudi Arabia: Economy contracts again in Q3 on worsening dynamics in the oil sector
December 31, 2017
The economy declined for a third consecutive quarter in Q3 as the oil sector continued to suffer from low oil production in compliance with OPEC’s oil-cap deal. Moreover, austerity measures adopted by the government in recent years to plug its large fiscal deficit continued to dampen overall economic activity. In year-on-year terms, GDP declined 0.4% in Q3, which was nevertheless an improvement over Q2’s 1.0% contraction.
The hydrocarbon sector continued to exert downward pressure on overall economic growth as output remained limited by the OPEC-dictated cuts per an agreement signed in November 2016. Moreover, oil prices traded at low levels for most of Q3. As a result, the oil sector contracted 4.1% annually in Q3 (Q2: -1.8% year-on-year), marking the sharpest fall since Q2 2013. While the OPEC decision to extend the deal to the end of 2018 will continue to put a dent in crude supply, the rise in oil prices as a consequence of a tighter oil market has the potential to boost the oil sector.
The recovery in the non-oil sector, however, gathered steam in Q3, propelled by strong global growth. Moreover, the non-oil sector benefited from less restrictive fiscal policy and brighter economic prospects for next year, which boosted business sentiment. Annual growth in the non-oil sector accelerated from 1.6% in Q2 to 2.7% in Q3. Among the main subcomponents, wholesale and retail trade rose at the fastest pace in nearly two years, while growth in financial and real estate services strengthened. The construction sector, which bore the brunt of fiscal austerity, remained the economy’s main weak spot and contracted for the seventh consecutive quarter.
The General Authority for Statistics presented its preliminary growth estimate for 2017. According to the report, a dismal performance in the oil and construction sectors led the economy to contract an estimated 0.7% in 2017, contrasting the 1.7% rise in 2016. That said, the economic performance deteriorated in most sectors. The silver lining was wholesale and retail trade following the government’s decision to reverse some austerity measures, such as salary cuts and benefits for public sector employees, in April.
The government presented its 2018 budget plan, the largest in Saudi Arabia’s history, on 19 December. The budget is intended to foster economic growth and continue with Crown Prince Mohammed bin Salman’s Saudi Vision 2030, which is aimed at diversifying the Kingdom's oil-dependent economy. The expansionary 2018 budget will amount to SAR 978 billion (USD 261 billion), an increase of 5.6% compared to the SAR 926 billion in the 2017 budget. The lion’s share of the increase will be earmarked for capital expenditure, which is set to increase 13.6%. Furthermore, the government will allocate SAR 133 billion through the Public Investment Fund (PIF) and National Development Funds (NDFs) in off-budget spending to finance mostly infrastructure and housing projects. The increase in the budget will be largely covered by rising revenues. In this regard, the 2018 budget includes the newly introduced value-added tax (VAT) of 5% for most goods and services, which came into effect on 1 January and is expected to increase tax collection by SAR 23 billion in 2018.
Despite the increase in revenues, the fiscal deficit is expected to reach SAR 195 billion (around 7.3% of GDP) in 2018. The budget deficit will be financed by the issuance of new debt and the reserves accumulated by the government. Moreover, the government announced that the objective to balance the budget has been pushed back from 2019 to 2023.
Saudi Arabia GDP Forecast
According to the 2018 budget unveiled in December 2017, the government expects the economy to expand 2.7% in 2018. FocusEconomics panelists are less optimistic and project GDP will rise 1.5% in 2018, which is down 0.2 percentage points from last month’s estimate. For 2019, panelists expect the economy to rise 2.3%.