The Saudi Arabian economy, the biggest in the Arab world, is poised to grow by 1.6 per cent this year amid a rebound in oil prices and an easing of fiscal austerity, according to BMI Research.
Private sector activity, however, will regain traction at a slower pace as the introduction of VAT weighs on business confidence in the first half of the year.
“The Saudi economy will recover in 2018, as continued gains in oil prices support the government’s move towards a more expansionary fiscal policy in turn boosting consumption in the kingdom,” BMI said in a report.
“Beyond the short-term headwinds posed by the introduction of VAT, business activity will also strengthen.”
The research firm, a unit of Fitch Group, noted that government’s shift towards a more expansionary fiscal policy will be a key driver of growth over the coming quarters, boosting both government and private consumption.
BMI joins a number of research firms, rating agencies and economists forecasting increased growth for the kingdom’s economy.
S&P Global Ratings affirmed Saudi Arabia's credit rating in April with a stable outlook on the expectation that economic growth will accelerate in 2018 as the world's biggest oil exporter continues to boost spending.
S&P said that its forecast of oil prices stabilising at an average of $60 per barrel from 2018 to 2021 would help the government keep its finances in order. The kingdom, Opec's biggest oil producer, is expected to produce 10 million barrels a day in 2018, in line with Opec’s 2016 decision to reduce supply. Next year, it’s expected that there will only be a gradual increase in production, S&P noted.
BMI said in its report that fiscal stimulus by the government especially would help to give consumption a shot in the arm and that there were already signs that people are spending more money. The research firm noted that consumer and credit loans returned to positive year-on-year growth in the fourth quarter of 2017 after contracting for three straight quarters.
While the introduction of a 5 per cent VAT in January weighed on consumer sentiment, its effects are starting to wane, although it may only be towards the second half of the year that consumer confidence returns with gusto, BMI said.
“While we also believe that higher oil prices and stimulus measures will support business activity, the introduction of VAT will continue to pose short-term headwinds, underpinning our view that gains will primarily be seen in the second half of the year,” the report said.
Oil prices edged lower on Friday, although Brent still gained for a third straight week amid supply concerns should the United States reimpose sanctions on Iran.
Brent crude futures fell 10 cents, or 0.1 per cent, to settle at $74.64 a barrel. This month, the global benchmark hit highs above $75, a level last seen in late 2014.
US West Texas Intermediate (WTI) crude futures fell 9 cents to settle at $68.10 a barrel, also a 0.1 per cent loss.
Brent gained about 0.5 per cent last week - its third consecutive weekly gain - while WTI posted a weekly loss of about 0.5 per cent.
US President Donald Trump will decide by May 12 whether to reimpose sanctions on Iran that were lifted as part of an agreement with six other world powers over Tehran's nuclear program. The renewed sanctions would likely dampen Iranian oil exports, disrupting global oilsupply.
"That's the biggest factor right now that's driving the market. And that's why you're seeing low volatility today and for the most part during the week," Rob Thummel, portfolio manager at energy investment manager Tortoise Capital, told Bloomberg.
"The market is just kind of waiting on that."