A midterm report card for the performance of the Saudi economy in 2017 would probably give top marks for effort, but would likely end with: “Could do better.”
It has been a difficult year so far. It was flagged up at the time of the budget last December as a crucial 12 months for the economy, and for the Kingdom’s long-term strategy to diversify away from oil dependency.
At the halfway stage, the need to get away from reliance on energy revenue is all the more apparent because what has impeded policymakers’ efforts more than any other factor has been the vagaries of the international oil markets.
In the first part of the year, the oil price responded well to the cuts announced by the Organization of the Petroleum Exporting Countries (OPEC) in December. But that recovery has fallen away in recent weeks and currently stands at around $49 per barrel, below the $50 mark used in the Finance Ministry’s budget projections last year.
Even when it was trading in a $52-$58 range in the first quarter, it was not enough to counteract the falling volumes traded. The result, as official figures from the Kingdom’s General Authority for Statistics revealed recently, was the first contraction of the Saudi economy since the bad days of the global financial crisis in 2009.
Gross domestic product (GDP) fell by 0.5 percent, down from the comparable quarter of 2016, and sharply lower than the 1.2 percent growth in the last quarter of 2014. An analysis of the statistics by London consultancy Capital Economics showed that the decline was entirely due to weakness in the oil sector of the economy. Oil output fell by 2.3 percent, enough to throw the whole economy into reverse.
But there was some good news. The non-oil sector of the Saudi economy showed further signs of recovery with a 0.6 percent year-on-year increase. A lot of that was due to an increase in consumer spending as fiscal austerity was eased. Further improvement in the non-oil sector is likely to come in the rest of the year as the impact of government benefits is fully felt.
A fall of 0.5 percent is not a disaster and could be quickly made up with a rise in the oil price. The problem is that virtually none of the experts are predicting any significant increase in global oil prices anytime soon. In the past few weeks, Goldman Sachs, JP Morgan and Bank of America Merril Lynch have been among the big banks to cut their forecasts for crude for 2017, with few now seeing much beyond $50 as the average for the year.
It is the same old problem: Regardless of the discipline Saudi Arabia has shown in sticking to – or even undercutting – the agreed levels, there is still too much of the stuff for sale on the global market. Libya and Nigeria keep pumping it out, and US shale producers have shown incredible resilience, which few expected, to keep increasing the number of rigs at these prices.
It will take some time yet to reach the “global balance” status Saudi policymakers see as the ultimate goal. If it is any consolation, Saudi Arabia is not the only one slipping up in this oil patch. The UAE, its staunch ally and neighbor, is also feeling the effects.
Emirates NBD, the country’s largest bank by assets, has just cut its forecast for GDP growth in the UAE from 3.4 to just 2 percent this year, citing adverse crude prices as the main reason. The non-oil sector of the UAE is cause for optimism, as global trade and infrastructure investment ahead of Expo 2020 prove to be bright spots for its more diversified economy.
Amid this challenging economic situation, the standoff with Qatar is looming large, making headlines worldwide. So far, the economic consequences have been less dramatic, with no interruption to oil shipments in the Arabian Gulf or gas supplies to the UAE. But if the standoff continues, the prognosis could worsen.
The US Brookings Institute, a foreign policy think tank, recently said: “The long-term economic implications of the blockade are likely to be costly to Saudi Arabia, the UAE, and Bahrain. This will arrive in the form of lost business opportunities, revenues from tourism and reduced investments.”
Published in Daily Times, July 4th , 2017.