Event

This month the IMF lowered its GDP growth forecast for 2017 for Saudi Arabia to almost 0%. While non-oil GDP is still expected to grow by 1.7%, overall growth is reduced due to a reduction in oil GDP growth. This is related to Saudi Arabia’s commitment of reducing its oil output under the recent OPEC agreement. This adjustment comes after the IMF had already lowered its overall growth estimate for Saudi Arabia in April 2017. At the same time the country went through a political transition and continues to face a regional diplomatic crisis.

Impact on country risk

The economy is still feeling the impact of lower oil prices and the subsequent fiscal consolidation. While remaining under its potential, non-oil GDP growth is projected to improve in 2017 due to improved business confidence, increased public investments in the non-oil economy and a reversal of previously introduced public-sector spending cuts. At the same time, budget deficits remain very large. In 2016 the government deficit was 17.2% of GDP and in 2017 it is still expected to be 9.3%. The deficit is projected to fall to less than 1% by 2022. But this optimistic IMF projection assumes a number of deep structural fiscal reforms. The current-account deficit which was around 4% in 2016 is expected to disappear in 2017 due to the increased oil exports, thereby ending the two-year period of twin deficits.
Overall, the reform drive currently remains on track, concrete plans are for example in place in order to increase non-oil government revenue and to reduce water and oil subsidies. Additionally the kingdom has set up a monitoring agency that has to follow up the reforms in all government ministries. The question will be how the population and the economy will respond to these reforms. Further belt tightening risks creating discontent among the population as people have become used to the government largess. The recent scaling back of previously taken spending cuts in the public sector reflects this. It also remains to be seen whether the reforms will effectively lead to the strong expansion of the private sector that is needed in order to expand the number of private-sector jobs that the reforms aim to achieve. The current uncertainty created by the diplomatic rift with Qatar could potentially impact foreign investments in the country. If the reforms are well implemented and turn out to be effective, they could improve the long-term risk outlook for the country and make the country risk less correlated with the oil price. But currently the reforms are still putting pressure on the commercial risk outlook (currently in category C) due to their impact on for example economic growth. The short-term political risk outlook (currently in category 2) is not impeded due to the country’s large foreign-exchange reserves. Political risk in the country has increased due to last month’s political transition. Saudi Arabia’s King Salman promoted his son, Mohammed bin Salman, to crown prince. Thereby replacing his cousin, the more experienced Mohammed bin Nayef. This can have an important impact on the reform drive given that he has been the driving force behind the kingdom’s plan to move the oil-dependent economy away from oil. But at the same time the transition risks dividing the large Saudi Arabian royal family.

Analyst: Jan-Pieter Laleman, jp.laleman@credendo.com