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Saudi economy under pressure, but light at the end of tunnel

Insight & News
December 9, 2017
Saudi Arabia is currently looking at a brighter future than before. After years of fledgling hydrocarbon revenues, high subsidies and unemployment, the first signs of a recovery are there. The ongoing oil price rally, showing higher volatility but with an upward potential to hit $70 barrel before the end of 2017, has increased optimism as the government coffins are refilled again. The last years have been hard. According to the World Bank’s most recent listing, the Kingdom of Saudi Arabia was the world’s 20th largest economy in 2016 with a gross domestic product (GDP) of $646.4 billion. In 2014, the Kingdom’s GDP totaled $756.4 billion. Something had to change, hence major economic restructuring programs, such as NTP2020 and Vision 2030.

International rating agencies are also more optimistic about the Kingdom. Fitch Ratings Agency confirmed two weeks ago that it positive about the strength of Saudi Arabia's economy and the effectiveness of economic reforms being carried out by the government of the Kingdom. It has affirmed the Kingdom's strong credit rating at ‘A+’ with stable outlook. Fitch said that Saudi Arabia’s ratings are “supported by strong fiscal and external balance sheets, including exceptionally high international reserves, low government debt, significant government assets and strong commitment to an ambitious reform agenda.” The rating agency stated that Saudi’s central government deficit is expected to narrow to 8.7 percent of GDP in 2017, from 17.2 percent in 2016, largely as a result of higher oil prices and because clearance of arrears that widened the 2016 deficit by 4.4 percent of GDP will no longer be necessary. In the same report Fitch has praised the strength of the Saudi banking system, where it classified the banking sector in the Kingdom as "A", which is a very strong rating with only four countries in the world receiving such higher rating. This in turn reflects the stable profits built on huge capital. The shares for regulatory capital from the first tranche of the sector was 17.2% at the end of June 2017.

Still, the climb to the top is still far, as some of the hard needed investments and economic plans have been hit by ‘slight’ delays. At the beginning of November the government needed to admit that it has pushed back the target date for eliminating a big state budget deficit caused by low oil prices to 2023 from 2020. Saudi minister of finance Mohammed al Jadaan disclosed the change at a seminar on the economy that was closed to the media. The latter plans were targeting to eliminate the deficit in 2020, which totaled a record $98 billion in 2015. The latter has now moved to 2022, not to hurt economic growth too much. Current oil prices however could change this again, as money is again rolling in.

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