Saudi economy expected to shrink by 14 per cent this year

20 October 2015

Nominal GDP contracts as decline in oil prices hits government revenues across GCC

  • Moody’s forecasts 24 per cent drop in Kuwait GDP
  • Crude prices forecasts for 2016 and 2017 reduced
  • Debt issuance volumes likely to increase on weaker fiscal balances

Saudi Arabia’s nominal GDP is expected to shrink by 14 per cent this year as the sharp drop in oil prices hits growth across the GCC, according to a new forecast by Moody’s.

In nominal terms, Saudi GDP was estimated to have grown only 1 per cent in 2013 and 2 per cent in in 2014, the ratings agency said.

The Brent crude price is widely expected to average $55 a barrel in 2015 compared with an average of $99 in 2014 and over $100 in each of the preceding three years.

Moody’s expects the average Brent price to increase to just $57 a barrel in 2016, increasing to $65 in 2017, having slashed its previous forecasts of $65 and $80 for the respective years.

“The decline in oil prices since mid-2014 has hurt economic growth and weakened fiscal and current account balances in all six member states… albeit to varying degrees,” said Moody’s analysts.

“Government could take steps in 2016 to reduce subsidy spending and enhance revenues, among other measures,” the ratings agency added. “But fiscal balances will be much weaker than they were before 2014, increasing the need for financing and meaning that debt issuance volumes are likely to increase.”

Aggregate nominal hydrocarbon GDP for the six GCC member countries fell 11 per cent between 2012 and 2014 to $705bn, Moody’s said.

For 2015, Saudi Arabia is expected to record a 2.8 per cent increase in real GDP growth – which does not take into account movements in commodities prices – driven by increased oil production and continued government spending.

Saudi Oil GDP has accounted for 47 per cent of total GDP in recent years but this is expected to decline to around 35 per cent by the end of 2015, according to Moody’s.

In addition to the drop in oil prices, Riyadh’s finances are coming under increasing pressure from the military offensive in Yemen. MEED recently reported that the current account of the kingdom’s central bank, Saudi Arabian Monetary Agency (Sama), is expected to fall by almost 9.8 per cent in 2015 to $659.8bn, from the $716.7bn recorded in 2014.

The Saudi government plans to float sukuk (Islamic bonds) this autumn to finance its record budget deficit, while Riyadh is also preparing to float up to $27bn-worth of bonds in the final quarter. Moody’s expects bond issuances on a monthly basis through to the end of 2015.

Moody’s expects Saudi Arabia to record a fiscal deficit of 17 per cent of GDP in 2015 due to the decline in oil prices, a two-month wage gift to the public sector after the crowning of King Salman at the start of the year, and plans to raise expenditure in nominal terms.

In early October, it emerged that the Saudi Finance Ministry had ordered government clients not to award any project contracts for the rest of the year.

Riyadh is not the only government in the region feeling the impact of falling oil prices. Moody’s expects Kuwait’s nominal GDP to contract by 24 per cent this year after a 5.7 per cent drop in 2014.

The UAE, Qatar, Oman and Bahrain are also significantly impacted by the fall in oil prices, although the ratings agency did not provide GDP forecasts of 2015.

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