"Saudi Arabia: From 1.0 to 5.0" - Q1 2018 MENA Outlook

Date: Dec 2017

Q1 2018 MENA Outlook Now Available

"Saudi Arabia: From 1.0 to 5.0"  

What a year it’s been, as the MENA region once again delivered unprecedented change! Nowhere has this been more true than in Saudi Arabia, our regional theme for Q1 2018 as we usher in the new year.

We analyse the momentous changes taking place in the kingdom, including the ambitious fiscal adjustment and the restructuring of public finances as well as opportunities that reform is bringing to foreign investors. We also highlight the social reforms Saudi Arabia has embarked upon, and examine 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.

Fiscal expansion in 2018 and the fact that oil prices seem to have bottomed out could boost private sector growth in Saudi Arabia in 2018, and if sustained, could impact growth in countries like the UAE and Bahrain in 2019 depending on its magnitude and extent.

As we expected, an expansionary budget of USD 260B (36.7% of GDP) was endorsed for 2018, higher than the USD 237B (35% of GDP) budgeted for 2017.

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

The experience from Latin America and especially Chile, where large-scale privatisation programmes were launched, particularly in the infrastructure sector starting in 1974, highlight that such initiatives can succeed.

We explain how a number of major projects contributed to higher rates of development and a reduction in the infrastructure gap.

The Saudi anti-corruption purge is contextualised within a larger inter-play of power consolidation and revenue exigencies, as Crown 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 continue to unravel through proxies, and it remains unlikely that either country 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 also below the average of 3.7% over 2010-2016.

Overall growth in the GCC 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. 

Meanwhile, the unfolding of China’s One Belt One Road strategy forges ahead, and we examine it this quarter through a Saudi lens. We expect significant developments in three areas of Sino-Saudi economic cooperation in 2018: the Aramco IPO; nuclear reactor projects, and increasing investments by Aramco and SABIC in China.

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10 January 2018 @ 1300 GMT

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