With non-oil growth quickening to the fastest since 2014, Saudi Arabia is looking to private businesses to help achieve an economic expansion of 2.3%
Saudi Arabia’s economy barely expanded last year, increasing the need for the government to reconsider its planned spending cuts to deliver faster growth in 2020 in the face of disruptions from the coronavirus and the prospect of lower energy prices.
Held back by curbs on oil output negotiated by OPEC, the economy of the world’s biggest crude exporter expanded just 0.3% in 2019, down from 2.4% a year earlier and short of the government’s forecast of 0.4%.
Offsetting an acceleration in non-oil growth to 3.3%, the oil sector shrank 3.6%, the most since at least 2011, according to data released Sunday by the General Authority for Statistics.
With non-oil growth quickening to the fastest since 2014, Saudi Arabia is looking to private businesses to help achieve an economic expansion of 2.3% this year. Despite signs of a pickup to start 2020, the government may now have to rethink its plans to scale back spending as the impact of the virus outbreak ripples from China to Europe and the Americas.
Saudi policy makers “could opt to defer spending cuts, should non-oil growth be lower than expectations,” according to Bilal Khan, Middle East and North Africa senior economist at Standard Chartered. The bank has revised its 2020 growth forecast for Saudi Arabia to 1% from 2.3% on anticipation of a decline in oil output.
“Fiscal measures could cushion the impact on non-oil economic activity,” Khan said.
Even deeper cuts to oil production will likely be on the agenda of an emergency meeting by OPEC and its partners set to take place this week. Saudi Arabia has led an effort to shore up oil markets against the coronavirus with swift output cuts to compensate for a drop-off in energy demand and crude prices.
“The reduction in crude production means that non-oil growth needs to be sustained at around 4% to reach the expectations of the government. This will be hard to achieve if the kingdom implements its plans to cut spending,” said economist Ziad Daoud.
Oil had its worst week since the financial crisis on fears that the spreading coronavirus will crush demand, with Brent crude sliding below $50 a barrel.
The kingdom’s 2020 budget, which envisages a deficit of 6.4% of gross domestic product, is designed under the assumption that the global oil benchmark will average about $65 per barrel, according to calculations by Bloomberg Economics.
The International Monetary Fund predicts Saudi Arabia would need Brent to trade at $89 to balance its budget in 2020. The energy sector accounts for about 50% of the kingdom’s GDP.
Saudi officials have sounded confident that the economy remains on track for an upturn. Growth this year will be faster than in 2019, “especially in the private sector,” central bank Governor Ahmed Alkholifey told reporters during a conference in Riyadh last month.
It was “too early to tell” what the impact of virus outbreak will be on the Saudi economy, he said.