Oil cut extension raises risk of Saudi economic contraction this year

DUBAI – Saudi Arabia faces the risk of an economic contraction this year following its decision to extend crude production cuts, highlighting its still significant dependence on oil as reforms aimed at diversification move slowly .

Riyadh says it wants to stabilize the oil market by extending a voluntary reduction in oil production of one million barrels per day until the end of 2023. Its announcement Tuesday sent oil prices above $90 for the first time this year, but they are below average prices. by around $100 a barrel last year following Russia’s invasion of Ukraine.

Falling oil production and revenues this year could put a strain on Saudi Arabia. economy decline for the first time since 2020, at the height of the COVID-19 pandemic, although a large dividend from state oil producer Saudi Aramco is expected to provide a cushion for public finances.

Reducing oil production for three more months, on top of production cuts earlier this year, would result in a 9% drop in production in 2023 – the largest production drop in nearly 15 years for the de facto leader of OPEC – said analyst Justin Alexander de Khalij. Economy.y

GDP Outlook

Monica Malik, chief economist at Abu Dhabi Commercial Bank, now expects Saudi gross domestic product (GDP) to contract by 0.5 percent this year, revising her forecast from last month for growth of 0.2 percent this year, while Alexander said non-oil growth was expected to be about average. about 5 percent this year to maintain growth.

“This is actually precisely the growth rate of the first half of the year, but leading indicators such as the PMI (purchasing managers index) have signaled a slight slowdown, which may be difficult to maintain in the second half of the year. As a result, a slight contraction in real GDP seems likely,” said Alexander, also a Gulf analyst at GlobalSource Partners.

Last year, Saudi Arabia economy rose 8.7 percent and generated a budget surplus of 2.5 percent of GDP, its first surplus in nine years as oil hit a high near $124. This year the government forecasts a surplus of 0.4 percent of GDP, but some economists say even that could be optimistic.

Saudi Aramco, 90% state-owned and awash in cash after last year’s boom, announced last month that it would pay shareholders a dividend of nearly $10 billion in the third quarter from its cash flow. of free cash flow – the first in a series of additional payments on top of its expected base dividend of more than $150 billion for 2022 and 2023 combined.

“Even so, we think the government will record a budget deficit of 1.5 percent of GDP this year – well below the budget estimate of a surplus of 0.4 percent of GDP,” said James Swanston. from Capital Economics in a note.

The Saudi Finance Ministry did not immediately respond to a request for comment.

The kingdom’s deficit stood at 8.2 billion riyals ($2.19 billion) for the first half of this year.

An International Monetary Fund official, who had forecast a deficit of 1.2 percent of GDP this year, said Thursday that the budget would be closer to balance thanks to the extra payment from Aramco and that, unlike a growing number of economists, the IMF also believes the economy will experience slight growth this year.

The PIF continues to spend

Growth in the non-oil sector economy stay strong for now.

The Public Investment Fund (PIF), the sovereign wealth fund responsible for steering Saudi Arabia’s ambitious Vision 2030 economic project, has spent billions on the world’s biggest football stars, golf, tourism and entertainment , as well as manufacturers of electric vehicles.

“Certainly, we see no signs of the Public Investment Fund’s acquisition streak slowing down,” RBC Capital Markets said in a note.

PIF did not immediately respond to a request for comment.

Yet state-led reforms and investments saw the share of the non-oil sector’s contribution to GDP reach 44% of GDP last year, an increase of just 0.7 percentage points from 2016. .

“I think the reality has sunk in that the pace of change cannot move as quickly as had been hoped and that the economy remains dependent on hydrocarbons and will be for some time,” said Neil Quilliam, a research associate at Chatham House in London.

According to reports, up to $50 billion in new Aramco shares could be offered on the Riyadh stock exchange before the end of the year, generating significant funds that could be devoted to major projects. The government sold 8% of Aramco to PIF and one of its subsidiaries.

Funding for the PIF comes from capital injections and transfers of government assets, debt and investment income. However, it posted a loss of $15.6 billion last year, mainly due to its investment in SoftBank Vision Fund I and a broader market slowdown, particularly in the technology sector.

“So far, PIF investments have not proven to be as successful as hoped and the country has also not attracted the FDI (foreign direct investment) it hoped for… So Aramco is going to be the horse let them keep beating,” Quilliam said.

($1 = 3.7507 riyals)

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