Saudi GDP to grow 2.2% in 2018 on higher oil prices: IIF

Saudi Arabia’s real gross domestic product (GDP) will reach 2.2 percent this year, supported by higher oil prices, the Institute of International Finance (IIF) said in a recent report.

"After contracting one percent in 2017, Saudi Arabia’s GDP growth is set to recover to 2.2 percent this year reflecting higher oil production and the effect of substantial fiscal stimulus spending,” the report noted.

Saudi authorities will, however, have to avoid complacency in the context of the partial oil price recovery, it added.

Higher oil prices will provide boost to economic activity, helping the Kingdom strengthen its external position and reduce deficit by nearly three percentage points to 5.8 percent of GDP this year. Oil prices neared almost $80 a barrel last month.

Meanwhile, the oil price hike is likely to widen the current account surplus to $82 billion in 2018, equivalent to 10.6 per cent of GDP, up from $15 billion last year. Official reserves will increase by $36 billion to $532 billon by year-end, the report said.

According to IIF, elevated public spending will further drive growth, as Saudi authorities benefit from additional oil revenue to loosen their fiscal stance following three years of consolidation.

At an average Brent oil price of $72/barrel – 33 per cent higher than the average price in 2017 – and a 1.5 per cent increase in oil production, revenue gains will more than offset the high level of public spending (an increase of 18 per cent), the report said. Though public debt will gradually rise, it will remain below 30 percent of GDP by 2020.

Despite the predicted economic growth, the rise in public spending is expected to increase the Kingdom’s fiscal breakeven oil price to $92 per barrel, from $84 in 2017.

"Given the high volatility of oil prices and the continued large fiscal deficit, it is particularly important to ensure that government spending is not increased rapidly to levels that may become unsustainable if oil prices fall beyond 2018," the IIF advised.

Separately, the consultancy said the Saudi government needs to step up efforts to improve the business environment, since private investment remains “weak and non-oil growth may have remained below one percent in the first half of 2018.”