Saudi Economy Likely to Dip Further

Saudi Arabia’s economy is expected to contract further in 2017 before rebounding next year as the oil crash that began three years ago and heralded a prolonged period of low hydrocarbon prices impacts the region’s biggest economy, the Institute of International Finance said.

The institute said Saudi Arabia’s economy is expected to contract 0.4% in 2017 before advancing 2% in 2018. The unemployment rate for Saudi Arabian nationals has increased to 12.3% and is likely to stay high for several years in the absence of a strong recovery in non-oil growth, according to the IIF, MarketRealist reported.

The institute said that the weakened economic growth was pushing the kingdom’s unemployment higher, adding that reforms were needed to create enough jobs for entrants into the job market.

“Prolonged low oil prices and the need for further fiscal consolidation has shifted the economy to a lower prolonged growth path which will not create sufficient new jobs to reduce the high national unemployment rate,” said Garbis Iradian and Giyas Gokkent, economists at the IIF.

“Deep structural reforms are needed, including quality of education and training to prepare new national entrants to the labor market to find employment in the private sector.”

The world’s biggest exporter of crude oil has been taking measures to shore up its finances in the wake of the steepest drop in oil prices since the financial crash of 2008. As part of that effort, the government sold $17.5 billion in bonds in its first international sale last year. The kingdom is well aware of the need for economic refocusing and has already taken major steps to address the issues. The country’s leaders have announced an economic transformation plan to reduce the government’s reliance on hydrocarbon revenues.

The state relies on sales of crude to fund more than 75% of the budget, and lower oil revenues created a budget shortfall last year that has been estimated at $100 billion.

The kingdom’s reforms include privatizing state industries, including a stake to the public in Aramco, the world’s biggest oil producer.

Under the transformation plan, the government is aiming to reduce the unemployment rate to 9% by 2020. But the IIF said that its projection of non-oil growth of 2% to 3% in the next four years would not be enough to absorb new entrants into the labor market.