The message one gets from reading the latest report released by the International Monetary Fund (IMF) on the Saudi economy according to the article four of consultation with member countries is that it continues to be ‘strong’ and that it has replaced its previous two worries with new ones.
In nine months between July last year and this month, the IMF had two reports on the Saudi economy. While the first described the economy as ‘strong’ and its outlook ‘positive,’ and risks broadly balanced, and that Saudi Arabia has been one of the best performing economies within the G20, the recent report confirms that its outlook remains favorable, and growth above 4 percent is expected through this year and next thanks to government spending.
This year’s report speaks about the international and regional roles the Kingdom is playing as a stabilizer providing assistance and is one of the main sources for expatriate remittances back to their homes, which helped those countries economically.
Last year’s report, however, highlighted two main problems: the rising inflation and the inability of the private sector to provide jobs.”
This time, the IMF said inflation remains subdued and, according to official figures, inflation declined for the fourth consecutive month in March reaching 2.6 percent on year-on-year basis.
Despite that the new report highlighted a new worry. It “expects the fiscal surplus to decline further in 2014 as government spending increases, and the budget may move into deficit in the next few years. It is therefore important to slow the growth of government spending.”
The actual performance of last year’s budget showed that it registered a SR206 billion surplus against a budgeted surplus of only SR8 billion. That is a big factor as it accounts for 4.8 percent of the GDP and it was mainly used to expand government spending on infrastructure and services.
Over the past decade, the Saudi economy got used to higher spending that exceeds the budget.
This year was the first balanced budget since 2005 and it remains to be seen how the actual performance will go and whether the government can put a cap on the tradition to overspend or not. One of the main reasons to stick to the budget and save extra income is to cater for a possible rainy day if the oil market is to go into one of its downturns.
Outlook for the oil market is one of key differences this time as well.
Last year, the market was gripped with the potential impact of the shale oil and whether the spread of the fracturing technology will lead to a negative impact on conventional oil market in terms of volumes produced and eventually on prices and income generated for producing countries.
This time, and according to the Paris-based International Energy Agency (IEA) monthly report released in May, there will be a renewed call on OPEC to pump more oil to meet growing demand, which is expected to reach 92.8 million barrels per day (bpd).
And for that OPEC is expected to furnish the market with additional 800,000 bpd from what it used to produce in April, which was the lowest level of production in five years.
That could be attributed to three factors: the diminishing non-OPEC supplies, which will rise by 100,000 bpd only and the growing worry about the level of inventories, which remained ‘tight.’
IEA estimated that there is a ‘wide’ deficit of 110 million barrels to their five-year seasonal average, according to the report, which puts stockpiles in the 34 IEA members were at 2.57 billion barrels in March, down 2.5 million from the previous month.
It was left to OPEC, namely Saudi Arabia and Iraq to fill the gap by raising their production.
While Iraq is more or less a newcomer given its new projects that came on-stream, the Kingdom has a solid history as a trusted supplier.
It has demonstrated once and again that it can fill the gap created not only by diminishing supplies from non-OPEC producers, but also filling any gap resulting from disruption of supplies from fellow OPEC members as happening now in Libya, Nigeria or Angola.
But that should not be a factor for complacency for pushing to diversify the economy and reducing the unhealthy dependence on oil.
Rather these favorable conditions should be the engine for the much needed change.
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