Beltone Financial expects the overall gross domestic product (GDP) of Saudi Arabia to decline to 0.7% in 2019. This resulted from the growth of non-oil GDP at 2.6% and 2.8% in 2019 and 2020, respectively, with the recovery in demand due to a deflationary environment and higher project spending, especially in the sectors of construction, transportation, and power.
On the other hand, oil GDP growth declined by 1% year over year (YoY) in the first half (1H) of 2019 and is expected to recede 2% in 2019, as the Organisation of the Petroleum Exporting Countries (OPEC) reached a deal in July 2019 to extend production cuts throughout 2H 2019 until March 2020.
Saudi Arabia’s GDP expanded 0.5% YoY in the 2Q 2019, easing from a 1.7% advance in the previous period. It was the weakest growth since the last quarter of 2017.
Beltone analysts expect private spending to recover by growing 4.1% in 2019, with the growth normalising to 3.3% in 2021, thanks to increased government spending on social benefits and induced demand from continued headline deflation.
Private spending grew 1.9% in 2018, almost half the growth achieved in 2017 due to enacted fiscal reforms including expats levies and value-added tax (VAT), in parallel with an increase in energy prices. Owing to this and the reduced employment among non-Saudis which constitute 77% of total workforce as of 2017, the consumption growth declined.
In 1H 2019, private spending grew 4.4% YoY aided by growth in female employment and average deflation rate of 1.8% in 1H 2019 versus an inflation rate of 2.6% in 1H 2018.
For headline inflation and monetary policy, Beltone expects inflation converted from deflation to inflation, then back to inflation, as average inflation in 2018 recorded 2.5%, compared to a deflation of 0.2% in 2017. On a monthly basis, the economy has been in deflation since the beginning of 2019 due to the faded impact of fiscal reforms to record 1.6% in nine month 2019, with an expected average reading of 1.3% in 2019. Accordingly, eased monetary policy is expected to mark the third rate cut during the year.
Saudi Arabian Monetary Authority (SAMA) reversed its monetary policy in line with the Federal Reserve (FED) as SAMA cut its repurchase agreement (repo) to 2.25% in October from 2.5% in the previous month, and its reverse repo rate from 2% to 1.75%.
Belton analysts expect budget deficit to widen temporarily in 2019, with lower expected oil revenues to record 6% below the budget. They expect a reduction of the budget deficit by 1.1% of GDP to record 7% in 2020 as oil revenues pick up pace after 2019.
In addition, they predict the state budget to balance by 2025 with improved revenues other than the oil stream, versus the government’s target balance by 2023. They added that the current account surplus is to recover in 2020 to 8.3% of GDP, up from 6.7% in 2019 with the resumption of oil exports.
In terms of employment, Beltone expects it to grow at a declining rate with an average growth of 1.5% over 2019-2025, compared to an average of 3.7% throughout 2012-2015, in an effort to increase Saudi Arabia’s labour participation and limit growth in expats’ employment after implementing “Nitaqat” (Domains) programme for employment in 2013.
In October 2018, 12 areas of retail sector were limited to Saudi nationals only and many expats’ contracts ended, 1.26 million expats have exited Saudi Arabia’s workforce throughout 4Q 2017-4Q 2018, declining 9% by the end of 2018. Beltone expects 1Q 2019 will mark the end of this wave.