Saudi economy to contract this year, recover in 2018: CE

Saudi Arabia’s economy is expected to contract this year on the back of oil output cuts. Although recovery is likely in 2018-19, it will be at a weaker rate than anticipated, London-based Capital Economics (CE) said in an economic outlook report.

The consultancy said Saudi Arabia’s overall GDP is likely to contract by 1 percent this year before growing by around 1.5 percent in 2018-19.

According to the latest GDP data, the country’s economy contracted by 0.5 percent year-on-year (YoY) in Q1 2017, as oil production cuts weighed, CE said.

With the Organization of Petroleum Exporting Countries (OPEC) extending the output limit deal by another nine months, it will continue as a drag on the economy for the remainder of this year.

“Austerity looks set to resume in 2018-19. A value-added tax is set to be introduced early next year which, combined with fresh subsidy cuts, will push up inflation, eroding incomes and dampening consumer spending,” the report said.

With the Saudi riyal pegged to the US dollar, local interest rates will rise in line with those in America. As a result, the credit growth will reach a trough soon but is likely to stay “sluggish,” CE said.

“The elevation of Mohammed bin Salman to crown prince has raised hopes of a fresh impetus to push through his Vision 2030 reform plans. However, we think the program will fall short of its lofty goals,” the report said.

The United Arab Emirates, meanwhile, is expected to be the best-performing economy in the Gulf as the recovery in the non-oil sector is likely to gather momentum in 2018-19.

The UAE’s economy is forecast to grow by 2 percent in 2017, before picking up to 3 percent to 3.3 percent in 2018-19, CE said.

In Qatar, the recent diplomatic fall-out with the neighboring Gulf countries is likely to have limited impact on the country.

“There are more fundamental reasons to be downbeat on Qatar’s economic outlook. In particular, a period of deleveraging and tighter monetary conditions means that credit growth, a key driver of the economy over the past few years, will be weak,” the report said.

Elsewhere, Kuwait’s GDP growth is estimated to be between 0.5 percent and 1 percent in 2017-19.

Economic growth in Bahrain and Oman growth is expected be weaker than expected in 2017-19. CE has chalked in growth of 2 percent to 2.5 percent in Bahrain and 0.5 percent to 1 percent in Oman.

Overall, the agency expects the slowdown in the Middle East and North Africa region to bottom out in the second half of this year, with the growth likely to strengthen in 2018-19.