RIYADH: The economy of Saudi Arabia will continue to fiscally impress in 2017 in lockstep with the kingdom’s reform programme. Improved oil prices will have a positive effect on confidence more than on headline GDP. What will sway the headline growth figures will be the production cuts that Saudi Arabia will undertake in the first six months of Opec’s output reductions. For 2017, real GDP will grow by 0.8 per cent from 1.4 per cent last year. There will be a slight improvement in growth in the crucial non-oil sector to 1 per cent in 2017 from 0.1 per cent in 2016. The slowdown in 2016 was mainly because of negative sentiment associated with lower oil prices and reduced government spending. These affected business and consumer confidence, and reduced banks’ lending appetite. Construction activity in 2016 contracted significantly as the government consolidated its capital investment projects.
Growth in the non-oil private sector is expected to accelerate slightly as the expansionary budget in 2017 stimulates non-oil economic activity. However, there are downside risks to growth in the form of lower consumer spending because of the recent cuts to public-sector workers’ allowances, and the potential for higher costs for doing business such as energy price increases, and newly introduced fees on municipal, immigration and other government services. The implementation of the National Transformation Program (NTP) in 2017 will stimulate some private activity, particularly initiatives such as the foreign direct investment promotion programme, the Saudi household cash-transfer programme, local content development and regulatory and administrative reform. In 2017, from a sectoral point of view, expect non-oil mining, finance and utilities to be the fastest growing sectors of the economy.
Rebalancing public finances will be important to reach the government’s targeted goal of a surplus by 2020. Reducing expenditures is important in a lower oil price environment. The government announced in October that projects worth 1 trillion riyals (Dh979.5 billion) will be cancelled. The announcement follows a series of far-reaching cuts elsewhere, including a 50 per cent increase in petrol prices, a freeze on ordinary civil servants’ basic salaries and the termination of their annual bonuses. These built on sharp cuts to the capital budget, with transport and building projects scaled back or cancelled. With fiscal adjustment needing to proceed, but likely to have a negative short-term effect on growth and employment, it would be important to introduce growth-enhancing structural reforms to help offset this effect. The effect of slower growth on the banking sector is sure to be felt, but according to the latest report issued by Moody’s, Saudi banks’ profitability is expected to continue to outperform other GCC banking systems.
In 2016, Saudi banks reported a 5.4 per cent year-on-year decrease in net profits, mainly because of rising provisioning charges, a credit negative. The provisioning increase reflects asset quality challenges amid low oil prices. Besides boosting confidence, the 105bn riyals that the Saudi government paid to contractors in the fourth quarter last year led to large repayments to banks. The repayment to contractors, combined with a US$17.5bn international sovereign bond issuance in October that injected liquidity into the banking system and various accommodative monetary policy measures, contributed to a 1.1 per cent increase in bank deposits in the fourth quarter – versus a 1.1 per cent decline in the second quarter and 0.2 per cent decline in the third quarter – and a 0.9 per cent year-on-year increase in bank deposits last year.
