Saudi Arabia: Harsh austerity drives growth to decelerate sharply in Q3
December 31, 2016
Saudi economic activity deteriorated markedly in Q3 as a result of negative spillovers stemming from the government’s sharp fiscal consolidation process. GDP expanded 0.9% annually, which was below the 1.4% rise in Q2 and the weakest expansion since Q1 2013. The Kingdom’s large fiscal deficit is the result of the fall in oil prices over the past two-and-a-half years, which has hit the economy mainly via two channels. Firstly, the government is heavily relying on domestic borrowing to fund its rampant fiscal deficit. This is sending interbank rates to multi-year highs, squeezing liquidity and, ultimately, hurting business activity. Secondly, the government implemented harsh austerity measures over the course of last year, such as reductions in public sector bonuses and allowances, government spending and capital expenditures. While these measures will have a positive economic impact in the long-term, the immediate consequence is slower growth.
As a result of the Kingdom’s economic situation, activity in the non-oil sector contracted 0.7% annually in Q3, which contrasted the mild 0.4% increase in Q2 and marked the sharpest drop since the current series began in 2011. The slump in non-hydrocarbon activities was felt particularly in government services and the construction sector. Conversely, oil-related activities benefited from the surge in crude production, which jumped from 10.3 million barrels per day (mbpd) in Q2 to 10.6 mbpd in Q3, and slightly higher oil prices.
In a separate publication, the Central Department of Statistics & Information presented the preliminary growth estimate for 2016. According to the report, much weaker dynamics in the non-oil sector prompted the economy to decelerate markedly to a 1.4% expansion in 2016. While hydrocarbon activities showed a stronger performance, they also softened compared to 2015. Data for 2015 were revised, revealing that GDP had expanded 4.1% in 2015, above the preliminary estimate of a 3.5% expansion.
In light of developments in 2016, the government presented the annual budget for 2017, which includes higher spending to jumpstart the economy. Higher spending will mainly be seen in municipality services, payouts to low-income citizens, health and social development, economic resources, infrastructure and transport, and public programs. Moreover, in 2017, SAR 42 billion will be allocated to the multi-year National Transformation Plan. Despite increased expenditure, the fiscal deficit is projected to fall from SAR 297 billion (12.4% of GDP) in 2016 to SAR 189 billion in 2017 mainly due to higher oil revenues. The 2017 fiscal deficit will be financed by issuing debt and drawing from reserves.
While the 2017 budget appears to be supportive of growth, some factors reveal that the impact could be rather limited. The expected increase in oil revenues could be too optimistic given the sizeable oil production cut that Saudi Arabia has to implement this year in compliance with the Organization of the Petroleum Exporting Countries’ (OPEC) oil deal signed in November. Moreover, analysts warn that the actual spending for 2016 might have been higher as the government did not include some payments in the budget. Taking these expenses into account, the deficit for 2016 would have been SAR 402 billion (or 16.8% of GDP). Therefore, if these expenditures are included, the official budget for 2017 would imply a 4.3% cut in spending.