Now Reading
Saudi economy accelerates in Q1, may not be sustained

Saudi economy accelerates in Q1, may not be sustained

Gross domestic product, adjusted for inflation, grew 2.4 per cent from a year earlier in the first quarter

Saudi Arabia’s economy accelerated in the first quarter of 2015, showing the world’s top oil exporter can cope with low energy prices, but growth may slow as the government faces pressure to rein in spending.

Gross domestic product, adjusted for inflation, grew 2.4 per cent from a year earlier in the first quarter, against a revised 1.6 per cent in the fourth quarter of 2014, the state statistics department said on Thursday.

The figures indicated Saudi Arabia had offset the impact of oil’s 50 per cent plunge since mid-2014 with a combination of heavy state spending and a strong private sector.

“Today’s data add to the evidence that Saudi Arabia’s economy has weathered the storm created by lower oil prices relatively well so far,” wrote Jason Tuvey, Middle East economist at London-based Capital Economics.

“There are no signs that the economy is collapsing, as some had feared.”

The oil sector, which accounts for about 40 per cent of the economy, grew 1.8 per cent in the first quarter as Saudi Arabia ramped up production to gain global market share. It had shrunk 0.7 per cent in the fourth quarter.

The private sector expanded 3.3 per cent, slowing from 4.7 per cent but staying robust as the retail and construction industries boomed.

Monica Malik, chief economist at Abu Dhabi Commercial Bank, said other recent data and a bullish mood in the private sector suggested first-quarter growth might well be revised higher.

Nevertheless, the kingdom may find it harder to sustain growth in coming quarters if oil prices stay below $70 a barrel.

Cheap oil has created a state budget deficit which the International Monetary Fund projects at 20 per cent of GDP this year, equivalent to roughly $150bn.

So far, the government has financed its spending — including lavish handouts such as a two-month bonus payment for state employees to mark the accession of King Salman — by drawing down foreign reserves at the central bank, which acts as a sovereign wealth fund.

This cannot continue indefinitely — the central bank’s net foreign assets have dropped $65bn since August to $672bn in May. The government may issue bonds, but economists also expect it to become more cautious about spending.

Malik predicted the government would “rationalise” spending next year, continuing core economic development projects but trying to ease the burden by attracting private funding.

“Next year will probably see weaker growth,” Malik said. “We’re unlikely to have the same growth in current government spending as this year.”

Tuvey predicted GDP growth would slow to around 1.5 per cent late this year and early next.

There are already some signs of spending cutbacks; state oil giant Saudi Aramco has curtailed some projects, while a plan to build 11 soccer stadiums around the country has largely been shelved, sources told Reuters last month.


Scroll To Top