World assessments of Saudi economic reforms are fair
A recent credit and financial assessment report issued by Moody’s Investors Service affirmed Saudi Arabia’s A1 rating with a stable outlook for the economy. It also raised the Kingdom’s gross domestic product (GDP) growth forecasts for 2018 and 2019 to 2.5 percent and 2.7 percent, respectively, from its previous expectations of 1.3 percent and 1.5 percent, as reported in April of this year.
Moody’s also reviewed and adjusted its financial projections for the Kingdom’s deficit following the publication of the government’s preliminary budget statement for next year. It forecasted that the deficit for 2018 and 2019 will be about 3.5 percent and 3.6 percent, respectively, instead of its previous expectations of 5.8 percent and 5.2 percent.
Additionally, Moody’s anticipated that the Kingdom’s debt trend will improve significantly over the next two years, as it is expected that it will remain below 25 percent of GDP in the medium term, which represents a small percentage compared to the strong government financial position. As a consequence, Moody’s predicted that Saudi Arabia’s financial deficit will decline to about 3.5 percent of GDP in 2018, compared to its 9.3 percent level in 2017.
Moody’s based its positive assessment of the Saudi economy on the following facts and assumptions: Expected higher oil production; developments of the non-oil sector will continue to contribute more to GDP growth; the plans to diversify the economy away from oil are likely to contribute to the country’s medium- and long-term growth; the Kingdom’s reasonable control of expenditure, even in the face of higher oil revenues; the outstanding results in the collection of non-oil revenues, which rose by 43 percent in the first half of this year compared to the same period last year; an increase in oil prices by about 37 percent on average; and the levy of VAT on goods and services, with proceeds nearly tripling after the introduction of the tax on Jan. 1, 2018.
It is worth noting that Moody’s assessment of the Kingdom’s economic performance has exceeded what was forecast by the Saudi government in its preliminary 2019 budget statement.
The International Monetary Fund (IMF) has also published a similar assessment report regarding Saudi Arabia’s economic reforms. The assessment was part of the the World Economic Outlook (WEO) report, which was discussed at the IMF and World Bank annual meetings in Bali, Indonesia, last month. While the IMF’s updated WEO report showed a decrease in the global growth projections and cuts in most of the developed and emerging economies’ growth estimates for 2018 and 2019, the IMF projected the Saudi economy will grow by 2.2 percent in 2018 and 2.4 percent in 2019.
Last but not least, Fitch Ratings has also raised its estimate for the growth of the Kingdom’s economy in 2018 to 2.2 percent from 1.8 percent in its previous report (in June), which brings it in line with the IMF assessment and also reflects the global trust in the Kingdom’s economic and financial reforms.
In my opinion, these positive assessments of the Saudi economic reforms are fair, since they reflect the Kingdom’s serious efforts in enforcing the economic reform programs that are in line with Vision 2030.
Such assessments are also fair due to the positive economic and financial results in the recent government financial and budget reports. For example, the economic data indicated that Saudi GDP grew by 1.4 percent in the first half of 2018, compared to a negative growth of 0.8 percent for the same period of the previous year — this was due to non-oil GDP recovery of 2 percent this year compared to 0.1 percent in 2017.
I also believe that the government’s serious commitment to the implementation of the economic and financial reforms in accordance with the Kingdom’s Vision 2030 and the government Fiscal Balance Program gave strong comfort to Moody’s, the IMF and Fitch to issue such fair statements regarding Saudi Arabia’s economic performance.
Finally, I believe that the international assessment of the Kingdom’s reforms will improve further in the future, since the government is very firm in its endeavor to diversify its economic and revenues base.
Talat Zaki Hafiz is an economist and financial analyst.