Saudi Arabia’s oil output cut is paying dividends

Oil economies have to live with the consequences of the swings of global demand

October 2, 2023

Amaala Saudi Arabia — Giga-projects such as tourism destination Amaala are costing Saudi Arabia billions, which higher oil prices are helping to offset

Saudi government statistics released today suggest its strategy of cutting back oil output and ramping up prices during a period of slower global demand is paying off.

Over the summer, analysts began to downgrade their GDP expectations for the kingdom as the impact of the production cuts began to kick in on the wider economy, which is still mainly dependent on oil revenue.

The International Monetary Fund said growth for 2023 would fall below its latest official figure of 1.9 percent and the budget would see a deficit of 1.2 percent of GDP, after last year’s surplus of 2.5 percent. Some analysts were even predicting a contraction.

There have already been impacts across the economy, as banks experience a slowdown, affecting liquidity, net profits and share price and the central bank’s foreign assets fell to a 14-year low in July.

But the finance ministry statement released today shows that after stagnating this year at 0.03 percent, with the budget deficit dipping to 2 percent of GDP, the economy will quickly recover – to GDP growth of 4.4 percent in 2024, 5.7 percent in 2025 and 5.1 percent in 2026.

This will offset rising budget deficits as the government pushes on with its massive giga-projects – the centrepiece of the Vision 2030 plan to develop the non-oil economy – seen at 1.9 percent of GDP in 2024, 1.6 percent in 2025, then 2.3 percent in 2026.

Ambitious projects

Funding these mega-projects is clearly the government’s priority. They are seen as key to spurring long-term economic growth through not only employing Saudi nationals but also attracting massive foreign investment and a new population of foreign residents and tourists.

The figures being bandied around are astronomical in every way – $1.25 trillion spent so far on the giga-projects, such as Neom, Amaala and Murabba in Riyadh, and a possibly over-ambitious target of 100 million yearly visitors.

Given this aim, it was no surprise that in alliance with Russia the Saudi government went with the tried-and-tested strategy of implementing a cut to oil output to force up prices when it saw that global growth was slower than expected as China stuttered back to life after its draconian Covid lockdowns.

Oil markets are notoriously fickle. Brent fell to $16 a barrel when Covid-19 hit in 2020 and now it’s hovering near $100.

Global demand is broadly seen as peaking at the end of this decade before green industries begin to really bite hard at fossil fuel consumption.

Oil economies have to live with the consequences of those kinds of swings. Just last year Saudi Arabia was riding high again on GDP of 8.7 percent.

If they see a pathway to reaping major gains on high prices, producers such as Saudi Arabia are going to take it as they plan ahead. So far, the bet seems to have worked.

Andrew Hammond is AGBI’s Saudi Arabia correspondent