Saudi Arabia: Risks and challenges

Zawya: Saudi Arabia is an open economy. The one notable exception is the restriction on foreign participation in the stock market. The near-term economic outlook is broadly favourable and the main risks to the economy are the geopolitical risks and the evolution of oil prices.
Our outlook for the Saudi Arabian economy is broadly positive. Risks are concentrated in the social sphere which, if not addressed, could lead to a heightened risk scenario also in the political field. Economically, it is the price of oil on which the country is the most dependent. Should the Kingdom continue to modernise, liberalise and strengthen its institutions, it has every chance of exceeding the expectations and to secure its role as a force to be reckoned within the global economy.

Oil has produced a windfall of wealth and will continue to for generations to come. We expect the Saudi economy to continue to grow strongly, in the vicinity of 6 per cent, on the back of a stable oil economy and an improving non-oil economy. Inflation is likely to remain under control at close to 5 per cent as long as oil prices do not rise strongly from current levels. Given the weak global economy, we are not forecasting a sharp rise in oil prices in spite of what can be seen as a structural supply constraint on a world level. Our scenario rather leaves room for oil prices to weaken somewhat, putting downward pressure on the current account. Imports are also likely to reduce the current account surplus as they are set to increase if the non-oil part of the economy continues to strengthen.

The government’s budget surplus is likely to shrink with possibly a lower oil price and with increased fiscal spending in favour of the non-oil sector and in support of the stated priority areas of education, health, housing and job creation. The non-oil primary balance is not likely to improve unless tax reforms are enacted that achieve a broadening of the tax base. The level of government debt is in such a scenario likely to creep up somewhat.

Interest rates are tied to the defence of the USD/SAR parity. A departure from this policy would of course change that situation. In either case, it must be highlighted that interest rates are at very low levels globally as well as in Saudi Arabia, and that the next move is much more likely to be up than down.