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Tue 19 Jan 2016 02:30 PM

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Saudi Arabia's economy set to grow at slowest rate since 2002

International Monetary Fund, HSBC cut growth rates amid continuing oil price slump that is weighing on Gulf kingdom's finances

Saudi Arabia's economy set to grow at slowest rate since 2002

Saudi Arabia’s economy is set to grow this year at the slowest pace since 2002 as the oil-price plunge drains the kingdom’s finances, according to projections released by the International Monetary Fund and HSBC Holdings on Tuesday.

Economic growth in the world’s largest oil exporter will slow to 1.2 percent, the IMF said in an update to its World Economic Outlook. That’s still more optimistic than HSBC, which expects the biggest Arab economy to expand 0.8 percent. Growth was 3.4 percent in 2015.

The prolonged oil slump saddled Saudi Arabia with a budget deficit of about $98 billion last year, pushing officials to cut spending, consider an international sovereign bond sale and cut energy subsidies. The price of Brent crude has fallen by more than 40 percent since October, when the IMF last released forecasts for the kingdom and said growth would be 2.2 percent this year.

The fundamentals “seem to point to a low-for-long scenario for oil,” Maury Obtsfeld, director of the IMF’s research department, said in a video released with the new data.

“With Iranian oil coming online, with the resilience in the shale extraction industry in the US, the possibility of shale extraction elsewhere, it’s hard to see oil going back to the $100 a barrel level anytime soon,” he said.

The benchmark Tadawul All Share Index for stocks trimmed gains after the data, trading 3.3 percent higher at 5,705.93 at 2:37 p.m. in Riyadh. The measure has lost 33 percent over the past 12 months.

Saudi Arabia relied on oil for 73 percent of its revenue last year, a level of dependence the government is keen to reduce. Among other measures, it’s considering new forms of taxation and privatizing state assets, including an initial public offering for Saudi Arabian Oil Co, Deputy Crown Prince Mohammed bin Salman told The Economist this month.

“However, even allowing for significant reductions in outlays this year, we expect weak oil prices to leave Saudi Arabia with a budget deficit of well over 10 percent of GDP, suggesting the Kingdom faces multiple years of spending cuts and austerity as it seeks to rebalance public finances,” HSBC economists Simon Williams and Razan Nasser wrote in a report.

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