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Saudi economy will contract due to oil output cuts says World Bank

Saudi Aramco CEO Amin Nasser. The World Bank has taken a more hawkish view of the effects of the kingdom's oil output cuts Reuters/Hamad I Mohammed
Saudi Aramco CEO Amin Nasser. The World Bank has taken a more hawkish view of the effects of the kingdom's oil output cuts

The World Bank has forecast that the Saudi economy will contract by 0.9 percent this year with a budget deficit of 2 percent of GDP. 

This is a slightly more hawkish assessment than Saudi Arabia’s most recent estimations of an economic slowdown. 

Analysts and ratings agencies have been revising their assessments in light of oil production cuts that Saudi Arabia and Russia pushed through at Opec+ to raise oil prices during a period of lower global demand. 

In its latest economic update, the World Bank also ascribed its predicted “abrupt decrease” in Saudi economic activity – down from 2.9 percent seen in April – to what it called “subdued prices”. 

Brent crude hit $93 a barrel on September 27 amid predictions it might reach $100, but has since slipped below $90. 

The government thinks that lower oil output will keep prices high enough for a gradual return to GDP levels close to the 8.7 percent of 2022, when it had its first budget surplus in nearly a decade after hitting a low in 2020 during the Covid-19 pandemic. 

Real GDP would grow by 4.4 percent in 2024, 5.7 percent in 2025 and 5.1 percent in 2026, the finance ministry said this week

The ministry said real GDP would grow by 0.03 percent in 2023, compared with a previous forecast for growth of 3.1 percent, and forecast a budget deficit of 2 percent of GDP, compared with an earlier projection of a 0.4 percent surplus. 

Bloomberg reported this week that JPMorgan Chase & Co. is considering adding Saudi Arabia’s riyal bonds to its benchmark emerging-market index. 

This could help attract more capital to deal with the deficit and provide more funding for the megaprojects at the heart of the government’s project to diversify the economy away from oil. 

The International Monetary Fund said last month that growth would slow below its latest official figure of 1.9 percent for 2023. This would be alongside a Saudi budget deficit of 1.2 percent of GDP in 2023 from a surplus of 2.5 percent in 2022. 

BMI (formerly Fitch Solutions) has forecast economic contraction of 0.5 percent in 2023, while S&P saw growth of 0.2 percent. 

The World Bank report saw overall growth in the region taking a hit, now forecast at 1.9 percent in 2023, from 6 percent last year, and lower than the 3 percent forecast in April.

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