BofAML forecasts Saudi economy will not meet 2018 growth targets

The Saudi economy may not be able to live up to the lofty growth expectations laid out in Tuesday’s record budget, according to Bank of America Merrill Lynch (BofAML).

In a report the bank said issues including a higher fiscal breakeven oil price could dent the credibility of the kingdom’s reform plan, while there were several uncertainties surrounding the Saudi economy including a recent anti-corruption drive that has snared businessmen, royals and former ministers.

Read: Saudi says most people detained in anti-corruption sweep have settled

The kingdom unveiled its largest ever state budget yesterday, with plans to increase spending to a record SAR978bn ($261bn) in 2018. It also confirmed plans to shift a target to eliminate its budget deficit from 2020 to 2023.

Read: Saudi reveals largest ever state budget

Much of the new spending is being directed towards infrastructure projects to the benefit of private sector firms, according to ministers. The kingdom also revealed a $19.2bn stimulus plan for the private sector lasts week.

Read: Saudi unveils $19.2bn stimulus package for private sector

BofAML said the kingdom’s new breakeven oil price would be $85 based on its spending assumptions, $5 higher than that seen in 2017.

It also projected the kingdom was unlikely to meet government forecasts of 2.7 per cent GDP growth next year including 3.7 per cent growth in the non-hydrocarbon sector due to the nature of a private sector stimulus package and the timing of off-budget mega projects.

“In contrast, we see real GDP growth of 1.3 per cent, with non-hydrocarbon real GDP growth not exceeding 2 per cent,” it said.

Of the stimulus plan in particular, the bank said 30-40 per cent appeared to represent higher capital allocations to government funds and was unlikely to support growth directly while having an immediate fiscal impact.

The bank projected the 2018 deficit would remain similar to 2017’s SAR239bn ($63.7bn), or 8.9 per cent of GDP on the assumption of an average oil price of $56 a barrel.

In contrast, authorities are predicting a deficit of SAR195bn ($52bn) or 7.3 per cent of GDP based on an average oil price of $60.