The IMF’s August 2018 report on its Article IV consultation with Riyadh raised Saudi Arabia’s forecast real GDP growth for 2018 to 1.9 per cent, up from 1.7 per cent in previous estimates. The upgrade was largely the result of strengthening oil prices and revenues above the IMF’s initial oil price baseline.

The fund also affirmed Riyadh’s progress to be largely in line with its objective of achieving fiscal balance by 2023.

As Timothy Callen, IMF mission chief for Saudi Arabia, explains: “Our view is that – at least with our oil price baseline – the policy measures they are implementing will get them towards that target, though [they are] probably not sufficient to hit that target.

“But it depends on what you assume about the oil prices. Our calculation was that a price of [about] $72 a barrel would get you a balanced budget in 2023.”

The IMF’s oil baseline, however. is derived from the oil futures market, which sees a gradual decline in oil price futures to about $60 a barrel by 2023.

Saudi’s falling deficit

The near-term outlook has improved, however, with the latest IMF data forecasting a contraction in the fiscal deficit in 2018 to just 4.6 per cent – down from 9.3 per cent in 2017, and about 7.2 per cent in previous estimates – followed by a similar trajectory in 2019 that will reduce the deficit to 1.7 per cent.

The projection comes with the caveat that although the consolidating trend is expected to reverse again after 2019 – as the oil price baseline declines – but reforms should ideally realise consolidation by 2023.

As Callen explains: “What is really driving the improved fiscal position in the near term is the higher oil prices. The path of oil prices [has improved], particularly in the near term, and then the deficit is projected to increase over the medium term, because we have declining oil prices in our baseline.”

Further improvements

The projected figure for the government’s gross debt as a share of GDP in 2018 has meanwhile come down from 20.7 per cent in the regional outlook last year to 19.1 per cent in the consultation report.

Non-oil growth has also strengthened to 2.3 per cent, according to the report, up significantly from 1.3 per cent in the IMF’s October 2017 regional outlook. Callen attributes this to the introduction of VAT on 1 January 2018, as well as the fully realised effects of the excises levied on tobacco and carbonated energy drinks in 18 June 2017, and the expatriate levy effective from 1 July 2017.

While the doubt thrown over the future of the proposed Saudi Aramco initial public offering (IPO) has raised questions about the path forward for the Vision 2030 objective of raising the value of assets held by the Public Investment Fund to upwards of $1.8bn, the IMF does not anticipate any wider economic impact.

Saudi Arabia’s outlook

Callen notes: “What is going to determine the macroeconomic outlook, particularly in the medium term, is the whole range of reforms that are being pursued, rather than any one individual reform – so, if the government continues moving ahead with other reforms in terms of developing the capital markets, improving the business environment and strengthening the fiscal policy framework, the economy is going to be in much better shape in the medium term and growth will be stronger than it is today.

“In terms of the broader development of the equity and debt market, clearly there have been a lot of steps taken – including the FTSE Russell inclusion and MSCI inclusion next year – that will bring capital flows into the country,” he adds.

“A lot is going on in terms of the development of the domestic debt market, as well: the primary dealer system has been introduced and bonds are now listed on the stock exchange – so there are quite a lot of positive developments going on here anyway, and all of those, over time, will help diversify corporate financing and saving opportunities, with or without the Aramco IPO.”

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