Saudi Economy Resilient, Able to Stand Oil Price Slump

The National Bank of Kuwait (NBK) said in a report that the Saudi economy is resilient and able to stand challenges caused by falling oil prices. The Kingdom seems to have ample fiscal space with central government gross domestic debt a very low 1.6 percent of GDP (USD11.6 billion) in 2014, the report added.

Saudi Arabia could, through a combination of debt issuance and reserve drawdown, weather a period of low oil prices (in the USD50-55/bbl range) for at least two years before even half of the kingdom's foreign reserves are depleted.

According to the NBK report, the Saudi economy has begun to feel the effects of the decline in oil prices: non-oil activity has moderated, the fiscal account has fallen into deficit and the flow of deposits into the banking system, especially government-sourced, has slowed.

Faced with a sizeable fiscal deficit, a consequence of lower oil revenues and record high spending, and the prospect of increased drawdowns of the kingdom's foreign reserves, the authorities in 2015 started issuing sovereign bonds for the first time since 2007.

While banks' interest margins should improve through participation in the bond issuance program, banking sector liquidity will need to be monitored Issuing debt of up to USD 45 billion over the course of a year or two, or even several years, would nevertheless have implications for the domestic banking system.

On the positive side, banks' net interest margins and revenues should improve as banks shift from lower-yielding, short-term liquid assets to higher-yielding, longer term government securities. The NBK report noted that a spate of negative outlook; assessments and a one notch downgrade (AA- to A+) by the ratings agency Standard and Poor's (SP), compounded the market'ss anxieties, weighing heavily on the index.

Government deposits at Saudi Arabian Monetary Agency (SAMA) drawn down; falling foreign reserves spurred the issuance of Saudi Arabia's first sovereign bonds since 2007. By September 2015, the funds in the central government's deposit accounts at SAMA had fallen by -28.0 percent y/y, or USD112 billion.

Thus, the kingdom has ample resources to help it negotiate the economic downturn, at least over the medium term. Clearly, however, prudent fiscal policies will need to be the way forward for Saudi Arabia.

The non-oil activity is likely to remain relatively buoyant, supported by government spending, the NBK said. However, there are signs that the economy is cooling: GDP growth in 2Q15 slowed for the third successive quarter and key metrics of consumer and business activity such as point of sale (POS) and ATM transactions, business confidence and private sector credit growth, have all been slipping. Also, the annual non-oil growth is projected to slow, from 5.0 percent in 2014 to an average of 3.7 percent during 2015-2017.

Headline GDP growth is, therefore, forecast to expand by 3.5 percent in 2015 before slowing to 2.5 percent and 2.3 percent in 2016 and 2017, respectively.