ECONOMY

NON-OIL SECTOR IS DRIVING FORCE BEHIND SAUDI ECONOMIC GROWTH

Saudi Arabia doubled its non-oil revenues since 2017, which bodes well for its economy.

The International Monetary Fund (IMF) believes the country’s ongoing economic transformation has been supported by commendable reforms under the Vision 2030 agenda and higher oil prices. All these have helped the kingdom create high growth, keep unemployment rate at record low levels, stem inflation, and build strong external and fiscal buers, while reducing its reliance on oil.

The economic outlook has balanced risks, the IMF said in its latest country report. The fund expects real GDP growth to hit 1.9% in 2023 and 2.8% in 2024. Non-oil revenue will rise 4.9% and 4.4% in 2023 and 2024, respectively

Higher oil prices, potential changes in OPEC+ production cuts, and accelerated structural reforms could boost growth. Conversely, rapid non-oil investment growth could increase domestic demand, possibly aecting prices and external accounts negatively. Lower oil prices due to subdued global activity pose a short-term risk, and a shift away from fossil fuels could impact medium- to long-term growth.

While welcoming the impressive non-oil revenue mobilisation eorts already initiated by Saudi authorities, the IMF called for additional fiscal adjustment over the medium term, which would allow the kingdom to maintain stronger buers and meet intergenerational needs while mitigating risks from oil price volatility.

Non-oil tax revenue has also doubled over the past four years to reach 10.6% of GDP and 14% of non-oil GDP in 2022.

“To support such a strategy, (IMF) directors called for additional non-oil revenue eorts, including by maintaining the VAT rate. Most directors recommended faster increases in energy prices to reduce subsidies, although a few directors called for continuing the gradual implementation articulated in the Vision 2030 road map.

 

FISCAL HEALTH

Meanwhile, the kingdom’s fiscal situation remains robust, with public debt close to 24% of GDP and is assessed to be sustainable.

“Results from stress scenarios suggest low overall risk of sovereign stress, with existing buers that can support periods of fiscal deficits (reinforcing the importance of a comprehensive view of sovereign assets and liabilities),” the IMF said.

The fund also lauded the kingdom for its agile borrowing strategy and innovation in lengthening debt maturities, further improving interest risk management, reducing refinancing costs, building a yield curve in domestic and international markets, developing green issuance, and further deepening the local debt market.

 

VISION 2030 IMPACT

Indeed, the ambitious Vision 2030 agenda, which permeates every sector of the economy, will emerge as a growth catalyst. Supported by sizeable investments, Vision 2030 will boost imports of both intermediate and final goods.

“As the diversification strategy bears fruit over the medium term, non-oil exports are expected to increase although not at the same pace as imports,” the IMF said.

Net foreign assets, which include holdings of the Public Investment Fund and Saudi Aramco, are expected to stabilise at a lower level, reaching a cover of around 13.8 months of imports or the equivalent of 36% of GDP by 2028, the IMF estimates.

On the upside, the IMF sees higher than expected oil production, should OPEC+ production cuts be reversed. Meanwhile, accelerated structural reforms supported by the full implementation of the National Investment Strategy could further improve growth and the outlook.

 

ROBUST BUSINESS SENTIMENT

Investor and business sentiment also remains stable, although rising competition and higher interest rates have eased demand, according to the latest S&P Global Rating’s purchasing managers index (PMI). This is to be expected as new foreign firms have been seen entering the market, and thus increasing the level of competition. In fact, high competition has prompted firms to increase theirs stocks of purchases. Unemployment is also expected to fall, with firms attracting talent and marketing staff.

More encouragingly, both employment and wages continue to increase in response to the companies’ expansion plans.

“Employment levels in the non-oil economy rose solidly in August, with the rate of job creation picking up from July. Sustained new business growth contributed to hiring, according to panellists, with some mentioning the recruitment of marketing sta. Greater hiring and output helped firms to reduce their outstanding work levels further,” S&P noted.

The strong corporate sentiment has been a source of strength for the kingdom’s non-oil sector.

The IMF report noted that Saudi corporations have consistently outperformed peers in the GCC and emerging markets, while maintaining high liquidity.

“While the leverage ratio is still low and allows for some room, it is higher than comparators in the region and caution should still be exercised in the period ahead in view of higher interest rates and the large funding needs expected from forthcoming large investment programmes,” the IMF said.