An upturn in oil prices could weaken Saudi Arabia's resolve to follow through on reforms
Saudi Arabia's ambitious National Transformation Plan (NTP), which aims to reduce reliance on oil, could be a drag on the economy in the short-term as authorities rein in spending, analysts said.
The five-year plan, part of a wider reform push known as Vision 2030, was launched last month to restructure the economy of the world's largest oil exporter, boost non-oil revenues, increase private sector participation and create more jobs.
"The NTP aims to reduce the strong link between economic growth and the public sector," Dima Jardaneh, head of economic research for MENA at Standard Chartered Bank, said in a recent report. "NTP implementation could weigh on growth in the next couple of years since it targets curtailing government spending and generating savings for the government."
She forecast real gross domestic product (GDP) to grow 1.5 percent this year and 2.3 percent in 2017. HBC was more pessimistic, expecting the economy to grow around 1 percent in both 2016 and 2017, a pace of expansion that stands some 3-4 percentage points below the trend rate that the kingdom enjoyed when oil prices traded well over $100 per barrel between 2011 to much of 2014.
"Oil earnings at a price of $50 per barrel do not open the way for economic recovery, but rather for a slower rate of decline," Simon Williams, economist at HSBC Bank Plc, wrote in a report.
The Saudi economy has fared better than that of other oil exporters, such as Venezuela and Nigeria, thanks to its impressive cache of reserves. However, growth slowed to 3.4 percent last year from an average annual growth of 4.3 percent over the past decade, according to data from the International Monetary Fund.
"We expect average 2.5 percent in 2017-18," SCB said, based on a forecast of "flattish" oil production of around 10.2 million barrels per day during 2016-18. "We expect the impact of reforms on inflation to peak this year and to gradually decline thereafter."
Good decisions, bad times
HSBC said Saudi Arabia was making "good decisions" but during "bad times".
"Saudi Arabia must now seek to reform under the pressure of a slump in oil receipts that has led to a sharp slowdown in growth, record fiscal and current account shortfalls, a squeeze in liquidity and a run of rating downgrades," Williams said.
"Reform will get harder, not easier, as it moves ahead and losses to real living standards accumulate, presenting a serious test of the resilience of the institutions of the Saudi state."
Ratings agencies and Moody's and Standard & Poor's have both downgraded Saudi Arabia's ratings in recent months.
The kingdom still has room to manoeuvre. Saudi Arabia's reserves have diminished from a high of $732 billion in 2014 to around $581.3 billion at present, but they grew $600 million for the first time in 16 months in May, according to Jadwa Investment.
The country is expected to rely on debt for the next few years to manage growth, but that is unlikely to weigh on the country's finances since its gross external debt as a percentage of GDP stood at just 14 percent last year.
Growing urgency
The government would need to implement more efficient public spending programmes and encourage the contribution of private sector and foreign investment to offset the decline in public expenditure.
"While some of the NTP targets may prove ambitious, they mark a clear departure from past practice in setting the policy agenda. The NTP sets clear objectives with lines of responsibility delineated, aiming for institutional reform and transparency," said Jardaneh.
Saudi Arabia has already unveiled a number of reforms, including full foreign ownership of retail and wholesale operations, and moves to further open up the Tadawul stock market to foreign investment. In addition, a tax on idle land should spur the construction sector and encourage private real estate developers to enter the fray.
"The growing urgency surrounding Saudi Arabia's structural reform programme also offers encouraging evidence that policymakers both recognise the scale of the long-term challenges they face, and are ready to take steps toward addressing them," HSBC noted.
But it warned that while an upturn in crude oil prices should help alleviate the pressure on government finances, it may weaken resolve to pursue reforms.
