World Economy

Austerity Hits Saudi Arabia Growth

Austerity Hits Saudi Arabia GrowthAusterity Hits Saudi Arabia Growth

Saudi Arabia’s economy expanded at its slowest rate in three years during the first quarter of 2016 as low oil prices forced the government to cut spending and raise costs for industry, official data showed on Sunday.

Gross domestic product, adjusted for inflation, grew 1.5% from a year earlier in the first quarter, down from a revised growth rate of 1.8% in the fourth quarter of 2015. It was the slowest growth since 0.3% in the first quarter of 2013, Reuters reported.

The oil sector expanded 5.1% in the first quarter of this year as the world’s biggest oil exporter increased its production of crude and exported more refined products.

But the non-oil sector shrank 0.7%, its worst performance in at least five years. This may be a source of concern to Saudi policy makers because an ambitious reform plan to help the economy cope with an era of cheap oil, announced last month, assumes rapid growth in non-oil businesses.

Last December, to curb an annual budget deficit of nearly $100 billion caused by slumping oil revenues, the government announced major cuts in spending and energy subsidies. More austerity measures are expected in the next few years.

Within the non-oil part of the economy, the private sector grew 0.2% in the first quarter while the government sector shrank 2.6%, the official data showed.

The weakness of the non-oil sector was partly due to the fact that the first quarter of 2015 was unusually strong; in January that year, King Salman awarded public employees two months’ extra salary to mark his accession to the throne.

But the fourth-quarter 2015 growth rate of 1.8% was revised down sharply from an original estimate of 3.6%. Some analysts believe a similar revision is possible for the first-quarter figures.

Half of its population is under 25, and unemployment is about 30% among the young.


Moody’s in May downgraded Saudi Arabia’s credit rating, underlining deepening concern over the country’s precarious fiscal position and ability to diversify away from oil revenues.

The negative ratings action, the first since Moody’s began rating the kingdom two decades ago, follows similar downgrades by Standard & Poor’s and Fitch.

 “A combination of lower growth, higher debt and smaller domestic and external buffers leaves the kingdom less well positioned to weather future shocks,” the rating agency said. It cut Saudi Arabia’s long-term rating by one notch from Aa3 to A1, on a par with Japan. It said the outlook for the kingdom was stable.

Moody’s predicted Saudi nominal gross domestic product would fall 5% this year due to the effects of the oil price slump, only returning to pre-shock levels by 2019.