Saudi non-oil growth will accelerate to 3.2% in 2021: NBK

Non-oil activity in Saudi Arabia is expected to accelerate to 3.2 percent in 2021 from two percent last year, supported by record government spending that aims to stimulate the private sector, create jobs and cushion subsidy cuts, National Bank of Kuwait (NBK) said in a recent report.

Headline growth will, however, lag non-oil growth at one percent in 2019 and 2.4 percent over 2020-21 due to the Kingdom’s OPEC+ oil production cut obligations, under which the country has so far over-complied by 293 percent  (9.69 million barrels per day in May).

OPEC agreed to extend its oil production cut agreement to March 2020.

“While oil output will likely rise to near quota levels (10.3 mbd), we don’t believe that, given current and projected oil market dynamics to 2021, there is scope for further gains without pushing oil prices below the $70-80/bbl range that the authorities are thought to be comfortable with,” the report noted.

Public finances are on a more sustainable footing, despite continued sensitivity to oil prices. The fiscal deficit narrowed to six percent of GDP in 2018, but is expected to widen this year on likely lower-than-budgeted oil revenues.

NBK expects the fiscal deficit to shrink further to 4.9 percent of GDP by 2021 as non-oil revenues increase from 10.1 percent to 12.5 percent of GDP.

“Oil sector activity will remain subdued as Saudi Arabia is leading efforts to manage OPEC oil supply. Public finances are improving thanks to higher tax revenues, but the deficit will continue to weigh on public debt. Risks to the outlook stem from continued sensitivity to oil prices, slow diversification, and limited private sector employment growth,” said Dr. Saade Chami, chief economist, NBK Group.

Additionally, further energy/utility price hikes and another mooted sugary drinks tax will push inflation to 0.8 percent in 2020 from -1.5 percent in 2019.

Inflation has been negative since the start of 2019, weighed down by falling real estate prices and housing rents as well as by base effects related to the 2018 subsidy cuts and VAT rollout, NBK said.