Oil prices said to drive cyclical recovery in Saudi Arabia

The recent uptick in Saudi Arabia’s oil production will likely be sustained through the rest of 2018, underpinning growth in the oil sectors and creating a positive knock-on impact on manufacturing and transport & logistics, according to Emirates NBD.

“Furthermore, government spending is likely to remain stimulatory for the next 12- 18 months, which should also underpin non-oil sector growth in the Kingdom,” the Dubai-based lender said in a report on Monday.

Saudi Arabia has ramped up oil production since June, following OPEC’s decision to reach 100 percent compliance with the production quotas set in November 2016, following significant over-compliance in 2017.

The wider GCC region has also seen higher oil output since June, which is likely to be sustained for the foreseeable future as US sanctions on Iran come into force next month.

Amid improving oil prices and higher production, the Saudi economy saw a gradual recovery in growth in the second quarter, following a recession last year. The economy expanded 1.6 percent year-on-year (YoY) in Q2, despite contracting 1.3 percent quarter-on-quarter.

The main driver behind growth in Q2 was a 1.7 percent YoY expansion in the oil sector, although non-oil GDP growth also accelerated to 2.1 percent YoY in the second quarter from 1.5 percent YoY in Q1.

According to the report, PMI surveys and official GDP data also show non-oil sector activity recovering, supported by higher government spending.

Private sector credit is also showing signs of growth, even as liquidity conditions remain relatively tight, with government borrowing crowding out the private sector to some extent.

Meanwhile, the Kingdom’s fiscal and external balances have improved dramatically from a year ago, Emirates NBD said.

However, this largely reflects higher oil prices and increased oil production, “rather than a structural change in the underlying dynamics of the budget or balance of payments,” the report noted.

Looking ahead, the government is set to boost spending further in 2019, with the pre-2019 budget statement released by the finance ministry this week showing projected expenditure of SAR 1.106 trillion in 2019, up 7.5 percent from the estimated 2018 spend.

“However, the revenue projection is (in our view) conservative at SAR 978 million, giving an expected deficit of -4.1 percent of GDP. Based on our $73/barrel average oil price forecast for next year, we expect budget revenues to reach SAR 1.0 trillion, for a deficit of -3.6 percent of GDP in 2019, slightly wider than our forecast of -2.8 percent this year,” Emirates NBD said.