RIYADH: The Saudi economy will continue to slow in 2016, as the private sector gradually adjusts to the new norm of fiscal deficits and lower spending announced by the government, Jadwa Investment has predicted in a report.
The report comments on the reduction in the level of spending outlined in the 2016 Saudi budget: “This move underscores the government’s determination and ability to support economic activity despite the prevailing subdued oil pricing environment.” According to the report, as oil prices fall year-on-year, the fiscal deficit will remain in double digits, but that the government is expected to gradually diversify its revenue base and consolidate its spending.
The report added that price increases for domestic energy products mentioned in the budget is a welcome move that points to the start of a new trend of reform in domestic economy policymaking. The report further presents an energy price reform model in order to determine the long-term economic gains/losses resulting from such reforms.
The energy price reform model compares three different price scenarios with pre-2016 domestic prices ($10pb) from 2016-2035. The report found that “the recent reform to prices will enable the government to increase its domestic oil revenues, on average, by an additional $18 billion per year for the period 2016-2035, rising from $7 billion in 2016 to $36 billion in 2035.”
The pace of the slowdown will likely moderate this year as the private sector gradually adjusts to the new norm of fiscal deficits and lower spending by the government, Jadwa said.
The report attributed a slower increase in credit and money supply growth in the Kingdom to a psychological response to domestic and external factors, and added “rising domestic energy prices will be the major source for inflationary pressure in 2016.” It predicts an accelerating trend in inflationary pressures, leading to an average headline inflation rate of 3.9.”
The report also noted that whilethe dollar/riyal peg will remain under speculative pressure during 2016, there is no risk to the peg that has been in place for 30 years and which, as the IMF has pointed out, is appropriate for the structure of the economy.
Further, it said that the current period of low oil prices is set to remain throughout 2016, pulled down primarily by persistently high oil supply. The report added “we expect Saudi oil production in 2016 to remain unchanged, year-on-year, at 10.2 mpbd. Saudi’s current strategy of maintaining market share will result in lower levels of oil revenues in the short-term, but will benefit it in a few years’ time.”
