Saudi Arabia’s high population growth rate of around 1.2 per cent per annum and the ambitious Vision 2030 project are favourable to economic growth, a report said.

One should not be fooled by the monthly purchasing managers’ index (PMI) which has managed to remain above 50, implying an economic expansion, added the report titled “Global Outlook 2018: Markets, Investment & Structuring – H1 2018” by Indosuez Wealth Management – the global wealth management division of Crédit Agricole.

The PMI relates only to the non-oil private sector and does not reflect the whole economy – a serious omission in a country where the oil- and the public sectors weigh so heavily in the economy, at 43.8 per cent and 16.1 per cent of GDP respectively in Q2 2017.

Nominal growth has, according to our estimates, been barely positive over 2017. For 2018, we should not expect too much from the increase in spending announced in the budget as the fiscal multiplier effect will be lower if the reduced 7.3 per cent of GDP public deficit target is met.

 As could be expected, the growth slowdown has been mirrored by a decline in imports. This is good news in terms of external risk as Saudi Arabia’s reserves have already been taxed by the worsening current account, and by the need to defend the currency peg. As a result, the level of reserves has diminished from a high of SR2.797 billion ($745 million) in August 2014 to a much lower SR1.850 billion in October 2017. Nevertheless, the reserves remain considerable at a level close to the equivalent of five years’ worth of imports.

The government deficit is set to remain large. The higher oil price helps to increase the revenue side, but there is additional spending in the budget. This does not bode well for the gross public debt, which could approach 60 per cent of nominal GDP by 2022. For the sake of comparison it was 1.6 per cent in 20141. The introduction of a VAT at the start of 2018 should help improve the picture.

 In a nutshell, the Saudi short-term perspectives do not look brilliant, albeit not catastrophic either, the report said. This is where the danger lies as it could allow the dynamics of reform to falter, forcing the country to suffer for longer from the Dutch disease linked to an overwhelming dependence on oil.

In terms of the regional business cycle, the leadership will be taken over by the United Arab Emirates (UAE). The UAE has also been penalised by lower energy prices, but benefit from a more diversified economy.

Rebounding global trade will help Dubai, as will tourism. However, as long as the UAE maintains its currency peg to the US dollar, the Emirates have to follow the Fed’s upward move in interest rates which will put a cap on growth. – TradeArabia News Service