Saudi Arabia GDP Q2 2016

Saudi Arabia

Saudi Arabia: Low oil prices continue to dampen growth in Q2

September 29, 2016

GDP expanded 1.4% annually in Q2, which was below the 1.5% rise in Q1 and the weakest expansion in over three years. Oil prices remained at low levels in Q2 despite their gradual increase, which hampered economic growth. Moreover, high government borrowing in order to plug the Kingdom’s soaring fiscal deficit is draining funds from the financial system. This, in turn, is sending interbank rates to multi-year highs, squeezing liquidity and, ultimately, hurting business activity.

The ongoing low oil price environment prompted oil-related activities to decelerate from 5.1% growth in Q1 to a 1.6% expansion in Q2. Conversely, the non-oil sector rebounded from a 0.7% drop in Q1 to a mild 0.4% expansion in Q2. The improvement mainly reflected stronger growth in the government sector (Q1: -2.6% year-on-year; Q2: +1.3% yoy) as authorities have likely stepped up policy support following Q1’s dismal performance in the public sector. However, the austerity measures in place to reduce the fiscal gap, coupled with higher borrowing costs for businesses, continued to hurt a number of industries in the private sector. The construction and the electricity, gas and water sectors contracted at the fastest pace since the current series began in 2011, while manufacturing and financial services decelerated markedly in Q2.

Q2’s still-resilient growth figure surprised market analysts. Our FocusEconomics panel had expected a much weaker expansion of 0.9%, but analysts warn that GDP figures could eventually be revised lower, as happened in Q4 2015 when growth was cut from a preliminary estimate of 3.6% to 1.8%.

Going forward, activity in the non-oil sector is expected to decelerate further. On 26 September, the Cabinet decided to cancel bonus payments and cap overtime payments and annual leave for state employers. Moreover, the government cut ministers salaries by 20% and reduced house and car allowances for the Shura Council members by 15%. While nearly two-thirds of Saudis are employed in the public sector, their salaries and allowances account for roughly half of the government budget. These measures, which will be effective from 1 October, constitute a final attempt to rein in the government’s soaring budget deficit this year, which ballooned to 15.0% of GDP in 2015.

FocusEconomics panelists project that the economy will grow 1.1% in 2016, which is unchanged from last month’s estimate. For 2017, panelists expect the economy to grow 1.5%.

Author: Ricard Torné, Lead Economist

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Saudi Arabia GDP Chart

SaudiArabia GDP Q216 0

Note: Year-on-year changes of GDP in %.
Source: Central Department of Statistics & Information (CDSI) and FocusEconomics Consensus Forecast.

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