Saudi Arabia: Higher crude prices prop up growth in Q4
March 29, 2017
A rebound in oil prices and less restrictive fiscal policies shored up economic activity in Q4 2016. GDP expanded 1.2% annually in Q4, up from Q3’s multi-year low of 0.9% growth. Nevertheless, economic conditions remain weak overall as Saudi Arabia’s large fiscal deficit is restraining once thriving government support, while still low crude prices limit any upswing in the all-important oil industry.
The oil sector expanded 4.0% annually in Q4, which marked an acceleration over Q3’s 3.6% rise. The improvement mainly reflected increasing oil prices, which jumped from USD 43.6 per barrel in Q3 to USD 47.6 per barrel in Q4. Oil prices started to climb in late September, following the tentative agreement reached by members of the Organization of the Petroleum Exporting Countries (OPEC) to limit crude supply. Under the final deal formalized in November, Saudi Arabia took the largest share of the cuts. The Kingdom started to implement the agreement that month, resulting in a reduction in oil production from 10.60 million barrels per day (mbpd) in Q3 to 10.54 mbpd in Q4.
Higher crude prices took some pressure off domestic financial markets and boosted market confidence. As a result, activity in the non-oil sector rebounded from a 0.7% contraction in Q3 to a 0.4% expansion in Q4. At the sector level, the financial sector expanded at the fastest pace in nearly three years, while the transportation and the communication segments rose at a healthy pace. Government services benefited from softer tightening, and rebounded to a mild 0.4% growth in Q4 (Q3: -3.9% year-on-year).
This year growth will be plagued by lower crude output in compliance with the OPEC oil deal, geopolitical risks and weak policy support due to the Kingdom’s large budget deficit. Nevertheless, higher crude prices and the implementation of Saudi Arabia's Vision 2030 reform agenda will help growth to recover in the long-term. The cornerstone of the Kingdom’s diversification strategy is a partial sale of Aramco, the world’s biggest producer of crude oil, late next year. In an attempt to make the sale more appealing to international investors, on 27 March, the government slashed the tax rate applied to the company from 85% to 50%, applying this retroactively from 1 January. The company also pays a 20% royalty on revenues. The tax rate is key to determinate the valuation of the company, which government officials set at USD 2 trillion.