Economic Outlook

Saudi Economic Growth

In 2016, the Saudi economy expanded by 1.4 percent, slowing notably from 4.1 percent in 2015. This represents the slowest growth rate since 2002, when overall GDP expanded by 0.1 percent. A smaller increase in oil production, by 2.4 percent, meant a slower oil sector growth at 3.4 percent. Meanwhile, annual growth in the nonoil private sector was nearly flat at 0.1 percent. Based on outlook for the current year,it is forecasted an overall economic growth to slow further to 0.2 percent in 2017, owing to negative growth in the oil sector, while non-oil sector growth should accelerate but remain weak.

The non-oil sector will recover following the negative sentiment associated with delayed payments by the government during 2016. Our view is that the economy will still be driven by a supportive fiscal policy, with the recently announced FBP providing a financial roadmap untill 2020. This should provide the private sector with clarity when deciding to invest in the domestic economy. The SR200 billion incentive package announced along the FBP will be an important factor in stimulating growth for businesses. Meanwhile, the Unified Citizen’s Program will shield the most vulnerable households from any negative impact stemming from energy price reform, thereby preserving their purchasing power during 2017.

The oil sector, the largest sector of the economy, accounting for 44.3 percent in real terms at the end of 2016, is forecast to decline marginally, as lower oil production, will lead to negative growth. Saudi Arabia’s full year average crude oil production based on direct communication data was 10.5 mbpd in 2016. This was directly a result of higher year-on-year crude oil and refined product exports. Saudi domestic consumption is usually at its lowest during the first few months of the year, as cooler temperatures result in less energy consumption. In addition to the seasonally observed pattern, domestic consumption will also be pushed down even further as a result of slower economic growth and higher year-on-year gas production takes effect. However, in the case of non-compliance from other OPEC members, we would expect to see Saudi production rebounding pretty quickly to around 2016 levels.

Wholesale and retail sector (16.1 percent of non-oil GDP) growth contracted by 1.2 percent in 2016, compared to 2.8 percent growth in 2015. Seen the subdued performance in consumer spending rebounding in the year ahead, but not significantly (Figure 15). Despite the negative impact stemming from domestic energy price hikes and public sector allowance reductions, we believe the commencement of the household allowance program by mid-2017 will allow low-to-middle income households more room in spending on retail goods. It is well established that higher income groups are most likely to be affected by the energy price hikes, due to their proportionally higher use of energy consuming products. High income groups have a lower marginal propensity to consume retail goods, and are less likely to adjust their spending patterns significantly as a result of higher energy prices. We also expect to see a rise in demand for consumer products towards the end of 2017, as consumers bring forward the purchase of goods in anticipation of VAT in 2018, thereby pushing up demand for retail products in 2017.

We expect transport and communication (14 percent of non-oil GDP) to experience a slight slowdown in the year ahead, from 2.6 percent to 2.4 percent. The Kingdom’s ranking in the World Economic Forum’s Logistics Performance Index (LPI) has gone down in 2016; it was ranked 49th in 2014 but now holds the 52nd position. The LPI takes into account the competitiveness of a country’s trade logistic performance and areas of improvement in comparison to 159 other countries, and ranks it accordingly. This drop underlines the need for investment and infrastructure development in the Kingdom’s transport and telecommunications sector. In an effort to address this issue, the government has allocated the sector SR52.2 billion in its 2017 budget; mainly relying on public-private partnerships to improve local infrastructure, efficiency, and global communication.