World Economy

Growth to Slow as Saudis Adjust to Cheaper Oil

Growth to Slow as Saudis Adjust to Cheaper OilGrowth to Slow as Saudis Adjust to Cheaper Oil

Economic growth in Saudi Arabia is set to slow this year and next as the government is forced to reduce spending to compensate for lower oil prices, the International Monetary Fund said, Fuelfix reported.

Saudi Arabia’s gross domestic product will grow by 2.8% this year and 2.4% in 2016, the IMF said in e-mailed statement at the conclusion of its regular country consultation. That compares with 3.5% growth last year. Growth may expand to 3% in the “medium term,” it said.

The world’s largest oil producer turned to the bond market this year for the first time since 2007 after oil prices fell by over 50%. The resulting budget deficit, which the IMF projects at 19.5% of GDP, may force Saudi rulers to abandon the country’s traditional largess.

Saudi Arabia needs “comprehensive energy price reforms, firm control of the public sector wage bill, greater efficiency in public sector investment,” the IMF said. “The sharp drop in oil revenues and continued expenditure growth would result in a very large fiscal deficit this year and over the medium term, eroding the fiscal buffers built up over the past decade.”

The government should also introduce value-added and land taxes, the IMF said.

Saudi Arabia sold 20 billion riyals ($5.3 billion) of bonds to local banks and public institutions in August to cover the deficit. Government debt was equivalent to 1.6% of the country’s GDP at the end of 2014, the IMF said.

The drop in oil revenues combined with a war in Yemen and a boost in domestic spending led the country’s net foreign assets to fall for a fifth consecutive month in June. Reserves stood at $664.4 billion, down from $724.5 in January.

Saudi Arabia opened its stock market to international investors in June as part of broader plans to diversify the economy away from oil. The benchmark stock index has since fallen by 13%.

 Budget Shortfall

Saudi Arabia earlier this month issued bonds worth 20 billion riyals ($5.33 billion) to plug its budget shortfall, and said it plans to raise billions more to maintain its spending plans. The country issued development bonds worth 15 billion riyals in June as well, its first sovereign issuance since 2007.

The IMF, whose directors concluded their consultation with Saudi Arabia at the end of July, said the debt issuance to finance part of the deficit was “appropriate,” noting that the step would help promote the development of private capital markets in the country.

The Saudi banking system is in a strong position to weather lower oil prices and weaker growth, the IMF said.

Saudi Arabia and most of the other Persian Gulf Arab nations peg their currencies to the US dollar, in which oil is priced. The IMF said this fixed rate of exchange remains suitable, emphasizing the need for fiscal consolidation to support the peg over the long term. It also saw merit in periodically reviewing the peg in coordination with other Persian Gulf Arab countries to assess the impact of labor market changes and other structural reforms.

With unemployment of Saudis still high and the working-age population growing strongly, the IMF supported the government’s ongoing policies to increase the employment of nationals in the private sector, especially creating opportunities for women.