"Saudi Arabia 2.0" - Q1 2018 MENA Outlook Extended Outline

Date: Dec 2017

Q1 2018 MENA Outlook Extended Outline

"Saudi Arabia 2.0"  

Our regional theme analyses changes taking place in the Kingdom of Saudi Arabia including fiscal adjustments and restructuring of public finances as well as opportunities that such reforms bring for foreign investors. It also highlights the social reforms Saudi Arabia has embarked upon, and examines changes in domestic politics and foreign policy.

Having run a record deficit in 2015, Saudi Arabia started adjusting public finances in the face of lower oil prices from 2H 2016. We expect an expansionary fiscal budget in 2018, higher than the USD 237B (35% of GDP) budgeted for 2017.

According to the quarterly budget report from the Ministry of Finance, the combined year-to-Q3 deficit stood at USD 32.2B (4.7% of GDP). This means that the government has room to run a deficit of USD 20.5B in the last quarter of 2017 and still meet its budgeted deficit target of USD 52.8B (7.7% of GDP) for FY2017.

Privatisation has become a central plank of Saudi Arabia’s plan to reduce the role of the public sector in the economy.

Lessons from Latin America, and especially Chile, where large-scale privatisation programmes were launched, particularly in the infrastructure sector, starting in 1974, could serve as models for Saudi Arabia.

A number of successful projects contributed to higher rates of development and a reduction in the infrastructure gap.

The anti-corruption purge is contextualised within a larger inter-play of power consolidation as Prince Mohammed Bin Salman’s vision for the modernisation of Saudi Arabia has so far led him to single out rivals, of his, and “of the state”.

Geopolitically, foreign policy tensions between Saudi Arabia and Iran have been unravelling through proxies, and it remains unlikely that either of them is inclined otherwise.

Due to regional conflicts and the ongoing adjustment to lower oil prices, GDP growth in MENA is expected at 3.2% in 2018, up from 2.2% in 2017 but below the 5.1% posted in 2016 and the average of 3.7% over 2010-2016.

Overall growth in the GCC in 2018 is projected at 2.2% in 2018 from only 0.5% in 2017 and 2.2% in 2016 due to the lower oil output, compared with 4.4% over 2010-2016.

For the non-oil economy, the picture is more optimistic, as the growth forecast in MENA (ex Saudi Arabia) is 3%-4% YoY. These rates of economic expansion are roughly half of what we saw prior to 2014, yet are closer to the global emerging market average of 4.6%. Non-oil growth in the GCC is also expected to recover to 2.6% in 2017 from 1.8% in 2016.

Geopolitical risks persist despite success in the fight against ISIS, mainly due to continuing sectarian tensions, the rivalry between Iran and Saudi Arabia, and the ongoing Qatar rift. This is oil price-positive for 2018.

Our Sino-MENA Monitor anticipates significant developments in four areas of Sino-Saudi economic cooperation in 2018: Aramco IPO; nuclear reactor projects; increasing investments by Aramco and SABIC in China; and capitalising on the opening of the kingdom in infrastructure and entertainment sectors by Chinese companies.

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