At the time of the Saudi budget statement back in December, I wrote here that the 2017 fiscal plans were a sign the country was on “the right track toward economic diversification and transformation.”
The National Transformation Plan 2020 and Vision 2030 strategy — for which this year is crucial — have to be continuously tested in the real world of the Saudi economy. And two months into the year seems a reasonable amount of time to tentatively gauge whether the strategy is working.
It is an appropriate time in another sense too. The beginning of March marks two months since the Organization of the Petroleum Exporting Countries’ (OPEC) first cuts to crude oil production since 2008. This lifted the oil price, as was intended, underpinning another crucial factor in the budget predictions.
Saudi Arabia’s Ministry of Finance assumed a price of $50 per barrel for its 2017 revenue forecasts. But crude has been trading in a range of roughly $52.50 to $55.50 per barrel, almost $10 better than the levels seen before the OPEC cut.
A recovering Saudi economy
For the Saudi economy, the crucial question is the net revenue effect: Has the higher price offset the lower production levels to the overall benefit of the exchequer?
On the basis of the evidence of nearly three months of trading, the answer has to be: So far, so good.
Capital Economics, the London research consultancy I use as a go-to bank of information in these situations, recently produced a report on the Gulf oil-exporting economies which suggests that, while it is still early days, the OPEC cuts and the budget measures are helping stimulate overall activity in the Saudi economy, which is recovering from the big slump of early 2016.
Oil production was of course reduced by the OPEC deal. In the case of Saudi Arabia, it has actually cut by more than it was obliged to, with output reduced to 9.95 million barrels a day, below the pledged level of 10.06 million, Capital Economics notes.
But the overall impact on energy export revenues has been positive, more than offset by the 20 percent rise in prices since the deal took hold.
For the two biggest regional economies, Saudi Arabia and the United Arab Emirates (UAE), if oil stays just at its current level for the rest of 2017, combined oil-export revenues would be more than $35 billion higher than last year, equal to a significant 3.5 percent of gross domestic product (GDP). The oil economy is growing at a “robust pace,” the consultancy said, so the oil cuts strategy is working in this respect.
It is also having a positive trickledown effect on the rest of the Saudi economy, enabling the government to ease the fiscal austerity that was a feature throughout 2016.
“Indeed, the Saudi government has resumed payments to contractors, which has reportedly allowed some construction projects to restart,” noted Jason Tuvey of Capital Economics.
OPEC cuts and budgetary measures are stimulating activity in the Saudi economy following the big slump of early 2016.
A key indicator, the purchasing managers’ index (PMI), rose for a third consecutive month in January, reflecting a resumption of payments to contractors and restarted construction projects, suggesting a faster rate of growth in the overall economy this year. That will be music to the policymakers’ ears.
Another key indicator, inflation, is also moving in the right direction. Headline consumer prices in Saudi fell for the seventh consecutive month in January, down 0.4 percent from a year earlier. This is the first time inflation has been in negative territory year-on-year since the early 2000s.
Food inflation — which makes up 20 percent of the overall basket — has fallen at a steep rate, partly because of a global fall in food basics but also because of reported deep discounting by Saudi supermarkets.
Impact of subsidy cuts
This is all good news, but the picture is clouded by two factors: The effect of the unwinding of last year’s subsidy cuts, which gave a sharp shock to inflation last year — especially in transport, housing and utilities — but which has not (so far) been present this time.
Further subsidy cuts planned for later this year, while accompanied by the Citizens Account program could reverse the deflationary trend.
On top of this, an improving non-oil economy and GDP growth is likely to lead to a recovery in domestic demand, which is itself potentially inflationary.
It is worth noting too that rising oil prices have also had a beneficial effect on Saudi Arabia’s neighbor, the UAE, with an increase in PMI and GDP figures, rising air passenger numbers at Dubai International Airport and a small but significant leveling off in the depreciation of real estate.
It is early days, and there are many variables at play in the complex macroeconomic backdrop. But after just a couple of months of Saudi Arabia’s transformational year, the early indications are that the strategy is having the desired economic effect.
• Frank Kane is an award-winning business journalist based in Dubai. He can be reached on Twitter @frankkanedubai