Saudi economy slips as government pushes oil cuts

Reuters/Evelyn Hockstein

• Economy takes hit for Vision 2030
• Oil policy ‘is working’ says expert
• Non-oil GDP growth forecast at 4.4%

Analysts see the Saudi economy contracting in 2023 as a result of voluntary oil production cuts. 

Higher prices, however, will still ensure that state coffers are full enough to meet the kingdom’s number one priority – funding its mammoth Vision 2030 diversification projects. 

The International Monetary Fund said this month it saw a slowdown in GDP growth to 1.9 percent from 8.7 percent last year due to lower oil sales, as well as a swing to a fiscal deficit of 1.2 percent of GDP in 2023, from a surplus of 2.5 percent in 2022. 

• $100 a barrel oil raises global inflation fears
• Saudi construction workers spoilt for choice
• Saudi banks face slowdown as giga-projects take toll

In recent reports, BMI (formerly Fitch Solutions) sees the economy contracting 0.5 percent in 2023, while S&P sees growth of 0.2 percent – a negative turn the economy last experienced when the Covid-19 pandemic first hit in 2020. 

Banks have also taken a hit as they witness a slowdown impacting liquidity, net profits and share price due to the pressure of funding the kingdom’s $1.25 trillion giga-projects – seen as vital if the economy is to diversify away from oil by 2030. 

The central bank’s foreign assets also fell to a 14-year low in July – possibly due to funnelling cash to the Public Investment Fund. 

“The strategy is simple – cut output to boost revenue and therefore boost cash available for non-oil diversification,” said Bill Farren-Price, a senior research fellow at the Oxford Institute for Energy Studies.

“It seems they are doing well since July. The oil policy is working,”

Saudi Arabia and Russia led oil producers towards an Opec+ policy of production cuts as global demand began to weaken in late 2022 on fears over China’s recovery. 

Though criticised by the US administration, driving prices up in this way can bring a swing producer like Saudi Arabia more revenue from less oil. 

“Past experience has taught Riyadh it’s better to proactively reduce output to prevent markets becoming oversupplied than waiting until oil prices collapse,” said Richard Bronze, head of geopolitics at Energy Aspects.

“Had producers not ​implemented cuts, oil prices could have kept falling, which would have reduced revenues.” 

Energy analysts say oil demand is set to pick up next year, while oil prices could even hit $100 a barrel by year’s end.

“GDP growth is likely to swing heavily into positive territory next year – BMI predicts 3.5 percent and S&P sees 3.4 percent.”

Neom

The government is treating predictions of a slowdown as a hiccup, touting growth in the non-oil economy, which has been buoyed by an easing in price inflation.

The IMF sees non-oil GDP growth at 4.9 percent this year and 4.4 percent in 2024.

“In 2022 we were the fastest growing G20 country and this year, if you take just the non-oil GDP part, we are the second fastest in the G20, so it’s like a fight between Saudi Arabia and India, a good fight,” Crown Prince Mohammed bin Salman told Fox News in an interview aired just ahead of Saudi National Day on September 23. 

He singled out tourism as a growth area, covering 7 percent of GDP. The kingdom wants to raise the number of annual visits to 100 million by 2030 from around 40 million at present. 

The government is also on track to meet its target of 70 percent home ownership by 2030 and find jobs for Saudi nationals.

Unemployment fell to 8 percent in 2022, with female labour force participation shooting up from 20 to 36 percent in just three years.

But attracting investment remains a challenge, as the government tries to cajole companies to locate their regional headquarters to the kingdom, or be locked out of government contracts worth 1 million riyals ($267 million) or more. 

Foreign direct investment fell 59 percent in 2022 to $7.9 billion, while the much smaller UAE was riding high at $23 billion.

One major bank, Switzerland’s UBS Group AG, has identified Saudi Arabia as a “slow jurisdiction” in granting regulatory approvals. 

Greg Priddy, a senior fellow at the Center for the National Interest in the United States, said the giga-projects – such as tech city Neom, economic zones, luxury housing and infrastructure projects – risked becoming white elephants if the kingdom cannot attract a mass of foreigners from around the world to live and work in them. 

“This is the elephant in the room. Otherwise, the current boom is just a sugar high based on government spending rather than pump-priming for a less oil-dependent future,” he said. 

“I see the Saudis probably pushing harder on this as 2030 approaches, unless the foreign capital and talent just shows up on its own, which I don’t think it will.”