Saudi economy set to rebound in 2018, 2019 on higher oil output: NBK

Saudi Arabia's gross domestic product (GDP) growth is expected to accelerate to 2.2 percent year-on-year (YoY) this year and 1.9 percent next year, as oil output increases and domestic demand recovers, National Bank of Kuwait (NBK) said in a new report.

The improved outlook comes against a backdrop of continuing structural reforms under the ambitious Vision 2030 plan and at a pace less likely to impinge on consumer demand and private sector activity, it noted.

According to recently-released quarterly GDP data for Q1, the Kingdom's real output expanded by 1.2 percent YoY, ending a run of four consecutive quarters of negative growth. The non-oil sector posted a growth of 1.6 percent YoY, while oil GDP expanded by 0.6 percent YoY.

Saudi crude production, which averaged 9.95 million barrels per day (mpd) in 2017, is expected to increase significantly during H2 2018 after OPEC+ announced plans to boost aggregate output by one mpd to ease output cuts to calm consumer worries and restrain price spikes.

The bank estimates oil output could rise by 260,000 barrels per day on average at 10.2 mpd compared to last year, with 2019 "likely to see further increase in production." However, it warned that the Kingdom’s growth prospects will be contingent on higher oil prices.

Meanwhile, non-oil growth is expected to grow at 1.9 percent YoY in 2018, underpinned by the government’s expansionary budget, private sector stimulus programs and general easing in fiscal austerity measures.  

"The uptick in the performance of the non-oil sector in Q1 2018 compared to Q4 2017 was largely a reflection of output gains in the manufacturing, financial and real estate services sectors as well as in the government sector," the report added.

Furthermore, Saudi unemployment continued to pose a challenge, more than two years into the government’s Vision 2030 reform drive. Though the authorities plan to bring the unemployment rate down from 11.6 percent in 2015 to 7.0 percent by 2030, the rate has been going up. It reached 12.9 percent in Q1 2018 —the fourth consecutive quarterly rise — as the labor force expands at almost twice the rate of employment.

According to NBK, inflation is set to ease to 2.9 percent in 2018, as the effects of January’s value-added tax (VAT) and energy price hikes wear off. Inflation will trend lower at 1.8 percent in 2019, it noted.

In addition, Saudi Arabia's fiscal deficit is projected to narrow from nine percent of GDP in 2017 to 6.1 percent and 4.6 percent of GDP in 2018 and 2019, respectively.

The report said it expects government debt to rise from 17.3 percent of GDP last year to 24.6 percent of GDP by end-2019 amid continued local and international debt issuance.

"We expect the authorities will increasingly try to minimize reserve drawdowns and rely more on debt issuance to take advantage of the still relatively low global interest rates," the bank said.