Saudi Arabia’s non-oil growth to remain solid at 2.7% in 2020, IIF says

Balancing budget by 2023 is feasible and fiscal trajectory is secure, the Washington-based institute says

Non-oil growth in Saudi Arabia is expected to remain solid at 2.7 per cent in 2020. Getty Images

Non-oil growth in Saudi Arabia, the biggest Arab economy, is expected to remain solid at 2.7 per cent in 2020 driven by further recovery in private sector economic activity, which will be supported by interest rate cuts, the Institute of International Finance (IIF) said.

The kingdom’s Purchasing Manager’s Index, a composite gauge reflecting the health of the non-oil economy, rose to 58.6 in November - the highest in four years - and point of sale transactions, a proxy for retail sales, continues to expand, reflecting the momentum in the kingdom's non-oil private sector economy, according to the IIF. Credit growth in the country has also picked, climbing to 3.5 per cent year-on-year in October, marking a recovery in lending for construction and manufacturing, the two key non-oil economic growth drivers in the kingdom, the report adds.

“We expect overall real gross Domestic product to shift from a contraction of 0.3 per cent in 2019 to a growth of 1.9 per cent in 2020, as crude oil production is [also] projected to increase slightly,” Garbis Iradian, Middle East and North Africa chief economist at IIF, said.

The overall contraction in 2019 is mainly due to the decline in crude oil production of 4.5 per cent due to Opec+ agreement and the September attack on Aramco’s oil facilities, he noted.

"We expect the fiscal breakeven oil price to continue its decline through 2023, supported by adjustment in current spending and non-oil revenues. Non-oil revenues could increase significantly if the VAT rate is raised gradually from 5 per cent in 2019 to 9 per cent by 2023, Mr Iradian explained.

The report also said balancing the kingdom's budget by 2023 is feasible and the fiscal trajectory is much more secure than a few months ago as the government restrains spending and oil prices remain slightly above $60 per barrel.

However, significantly lower oil prices will lead to large deficits, causing the government's debt-to-GDP ratio to exceed 40 per cent by 2023.

Preliminary estimates by the authorities put actual spending in 2019 at 1048 billion Saudi riyals ((Dh1.03 trillion), well below the budgeted 1.11tn riyals. Despite lower oil prices in 2019, revenues have risen on the back of a special oil dividend transfer from Saudi Aramco, which led IIF to revise its estimate of the kingdom's fiscal deficit for 2019 to 4.7 per cent of GDP from 6.2 per cent, it said.

The medium-term economic outlook of the broader Mena region, however, hinges on sustained implementation of reforms and a de-escalation of tensions in the region, two necessary ingredients to create an "enabling environment for higher private investment and growth", Mr Iradian said.

"While some progress has been made, the region needs to pursue deeper reforms to strengthen the business climate, improve competitiveness, and foster diversification and job creation."

The regional governments will need to strike the right balance between resuming fiscal consolidation and sustaining the current modest non-oil growth.

“Fortunately, monetary policy in the region is easing as the Fed is expected to reduce further US interest rates. This would support private credit and non-oil growth,” he said.

Egypt, the largest North African economy, with 6 per cent GDP expansion leads Mena economies, however, for other oil importers in region, economic recovery is more gradual on the back of recent reforms.

"The pace of growth [of some oil importers] will still be insufficient to significantly reduce the high unemployment rates," he added.