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Mon 29 Jan 2018 02:22 PM

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Saudi short-term economic prospects 'do not look brilliant'

New research says Saudi government deficit is set to remain large; risk that reforms could falter

Saudi short-term economic prospects 'do not look brilliant'

Saudi Arabia's short-term economic prospects "do not look brilliant albeit not catastrophic", with a danger that planned reforms could falter, according to new research.

A research note issued by Indosuez Wealth Management, the global wealth management division of Crédit Agricole, said nominal economic growth in the Gulf kingdom was "barely positive" over 2017.

By contrast, it said the UAE, which has also been penalised by lower energy prices, is benefiting from a more diversified economy.

"Rebounding global trade will help Dubai, as will tourism. However, as long as the UAE maintains its currency peg to the US dollar, the UAE has to follow the Fed’s upward move in interest rates which will put a cap on growth."

The research note said the Saudi government deficit is set to remain large as while the recent higher oil price helps to increase the revenue side, there is additional spending in the 2018 budget.

Indosuez said this does not bode well for the gross public debt, which could approach 60 percent of nominal GDP by 2022, compared to just 1.6 percent in 2014.

The research added that the introduction of VAT at the start of 2018 should help improve the picture.

"In a nutshell, the Saudi short-term perspectives do not look brilliant, albeit not catastrophic either. This is where the danger lies as it could allow the dynamics of reform to falter, forcing the country to suffer for longer from the Dutch disease linked to an overwhelming dependence on oil," Indosuez noted.

The growth slowdown has been mirrored by a decline in imports. As a result, the level of reserves has diminished from a high of SR2,797 billion in August 2014 to SR1,850 billion in October 2017.

The report also noted that Saudi Arabia’s high population growth rate of around 1.2 percent per annum looks promising for the economy.

"That fact, coupled with the ambitious Vision 2030 project, hold out urgently needed hope at a time when the country is suffering sluggish economic growth and large fiscal imbalances as a result of the low oil price since 2014," it said.

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