Saudi Arabia’s Real GDP To Grow By 1.8% In 2018

Saudi Arabia’s real GDP is projected to grow by 1.8% this year as non-oil GDP is also expected to support the economy by increasing 2.8% on an annual basis, the latest NCB Saudi Economic Perspectives 2018 titled “Policy Dynamism to Stimulate Growth” forecast.

“Despite recent discussions of adjusting the OPEC and non-OPEC oil production cut agreement, we do not expect a substantial increase in Saudi oil production.”

As such, Saudi production is expected to average at 10mmbd, resulting in real oil GDP to marginally increase by 0.5% on an annual basis.

Recent announcements underscore adamancy on the part of the government to utilize the realized savings from streamlining expenses towards stimulating economic growth, which is apparent from elevated budget allocations to capital expenditures, the National Transformation Plan stimulus, the PIF medium-term strategy, and government support measures notably to low and middle-income brackets.

Accordingly, we expect private non-oil GDP growth to accelerate, reaching 2.2% in 2018.

The OPEC-led strategy to reduce global crude inventories to the industry’s five-year average and thus rebalancing the markets is close to being achieved during 2H2018. In addition, fundamentals and geopolitical factors are being supportive to oil prices, with an improvement in global economic outlook, mainly from China, and high compliance levels by OPEC members.

Furthermore, oil supply disruptions in Nigeria, Libya, and Venezuela although erratic and unpredictable have been supportive to prices.

Nevertheless, these elevated oil prices are propping up US production that recently reached an all-time high of around 10.7 mmbd as well as higher exports that registered 1.73 mmbd by the end of October, a multi-year high.

Meanwhile, the three rating agencies downgraded the Kingdom’s sovereign rating on multiple occasions over the past three years.

However, as the macroeconomic backdrop stabilized, coupled with an improvement in the government’s finances, S&P, Moody’s and Fitch affirmed Saudi’s rating at A-, A1, and A+, respectively, with a stable outlook.

Given the investment grade ratings, international debt issuances received strong investor appetite.

The government issued $21.5 billion worth of dollar-denominated debt in 2017, bringing total public debt to SR438 billion by the end of last year, representing 17.1% of GDP.

“We expect debt levels to continue rising to 20.5% of GDP, equating to SAR555 billion by the end of 2018.”

SAMA preempted the first US hike of 2018 by raising the reverse repo rate to 1.75%, the first time since 2009, and raised the repo rate by 25 basis points to 2.25% to avoid capital outflows.

A corridor of 50 basis points constitutes a narrow margin that will require attentive assessment going forward. While maintaining the currency peg will continue to be a challenging task for SAMA in 2018 and 2019 due to the volatility of oil prices and rising public debt, the size of net foreign assets at $486.2 billion by the end of March should give SAMA enough power to defend the exchange rate.

“We believe SAMA might resort to either direct liquidity injections, reducing reserve requirements, reducing the loans-to-deposits ratio limit of 90%, or possibly a combination to tackle any shortage of liquidity and reduce the risk of a monetary drag offsetting the announced fiscal stimuli.”

“Downside risks to our outlook are the possibility of a trade war between the US and China that can take place due to the escalation of rhetoric and the announcements of tariffs and counter-tariffs,” the report said.

The political rhetoric between the US and North Korea remains hostile despite the scheduled meeting between US President Donald Trump and North Korea's leader Kim Jong Un. Looking forward, myriad geopolitical concerns pertaining to Iran and North Korea will remain hanging clouds on the global economy as well as Saudi’s economic performance, NCB said in the report.