S&P says 2024 will focus on decline in inflation, non-oil growth key driver of Saudi economy

The Kingdom of Saudi Arabia's flag

S&P Global Ratings said that 2024 will focus on “the landing”, which means to rein in inflation to target while trying to keep the pace of activity moderate and avoid a recession.

Labor market resilience, the surprising feature of the post-COVID cycle so far, will be key to this outcome.

The Saudi economy is forecast to contract slightly in 2023, largely owing to an OPEC+-related contraction in Saudi oil production, S&P Global Chief Economist Paul Gruenwald told Argaam.

Paul Gruenwald, Global Chief Economist, S&P Global Ratings

This decline will be followed by 2.3% overall growth on average in 2023-2026, as the ratings agency expects the non-oil growth to remain reasonably strong and be a key driver of the Kingdom’s economic growth. The oil sector will, however, be subject to OPEC+ output targets and global oil prices, he stated.

Lower credit growth

The Saudi banks’ credit growth to taper off slightly, to 8%-10% over 2023-2025, due to higher rates, maturing mortgage market and tighter local and global liquidity conditions, Gruenwald said.

Corporate lending is also expected to be a chief contributor to loan growth as the Vision 2030 projects are implemented, he added.

Mohamed Damak, Senior Director - Financial Services, S&P Global Ratings

Central bank movements

On the other hand, Mohamed Damak, Senior Director - Financial Services, indicated that the tightening cycle for major central banks is at or near the end.

“Policymakers are watching the transmission of previous rate hikes work through their economies. This is happening faster in Europe and slower in the US.”

Once the core inflation is on a clear downward trend, Damak said the central banks will start to lower policy rates, which will likely commence around mid-2024.

Ravi Bhatia, Lead Analyst, Sovereign Ratings, forecasts SAMA to largely mirror any movement from the US Fed to preserve the peg between the Saudi Riyal and the US Dollar.

A drop in rate could be beneficial for banks as they have accumulated a significant amount of fixed rates mortgages and a portion of their deposits migrated to interest bearing instruments, he noted.

Ravi Bhatia, Lead Analyst, Sovereign Ratings, S&P Global Ratings

Declining inflation and economic growth drivers

Under S&P’s baseline, the current cycle is likely to end in late 2025 as inflation returns to target and economies get on their sustainable paths, the analysts said.

Between now and then growth will be below potential in order to cool demand pressures, they added.

Over the medium term, the noticeable feature will be stronger investment (driven by the energy transition in both the fossil fuel and renewable sectors) and higher interest rates (needed to equilibrate savings and investment).

Globally, the growth baton will pass from China to India although the former will still drive aggregate growth, the ratings agency said.

For Saudi Arabia, the narratives on medium-term economic growth will also be influenced by the evolution of oil prices and the advancement of the implementation of Vision 2030.

Geopolitics

Geopolitics is on the rise, including in relation to the energy transition. A key part of this transition will ensure that the Global South has the financial resources it needs to decarbonize their economies while still maintaining strong growth.

The multilateral institutions have a key role in mitigating hard-to-abate risks and catalyzing private sector flows, which will form the bulk of investment financing.

Saudi banks remain in a net external asset position and are expected to remain resilient in the unforeseen event of rising geopolitical risk.

At the same time, S&P Global expects the banking system to continue resorting to international capital markets to palliate the insufficiency of local funding.

“The government and its related entities played a key role over the past two years in helping the banking system deal with liquidity pressure and we expect this support to remain prevalent,” the ratings agency noted.