The International Monetary Fund has cut its economic growth forecast for Saudi Arabia’s non-oil sector this year to 0.3 per cent, underlining the depth of the slowdown in the oil-dependent kingdom following a two-year slump in crude prices.
The new numbers, released ahead of Saudi Arabia’s first-ever international bond sale, suggest that the government’s efforts to cut costs and diversify its economy away from petroleum are having less of an effect than the IMF forecast previously. Saudi Arabia generates more than 80 per cent of its official revenue from oil, according to a World Bank report in July.
The impact is cascading through the broader economy and knocking consumer confidence, causing the non-oil sector to slide into a technical recession in the last quarter of 2015 and the first three months of this year.In its latest regional outlook, the IMF forecast the Gulf state’s overall gross domestic product would expand by 1.2 per cent, its lowest level since the financial crisis of 2009, compared to 3.5 per cent last year.
The IMF had predicted in May that non-oil GDP would grow by 1.6 per cent but cut its projection to 0.3 per cent as government spending curbs continue to sap business confidence.
“[The non-oil sector] just breaks even,” said Masood Ahmed, regional director for the IMF.
Riyadh, which today began taking orders for its debut sovereign bond expecting to raise about $15bn, has been cutting spending on projects and wages as it seeks to tackle two years of wide budget deficits.
Saudi Arabia’s fiscal break-even price will drop to $79.70 a barrel this year from $92.90 in 2015, the IMF said on Wednesday, a fall of 14 per cent. In April, the IMF projected that the Saudi break-even price would decrease by 30 per cent this year, to $66.70 a barrel from $94.80.
The IMF’s revised projection could also help to explain why Saudi Arabia supported an OPEC deal last month in Algiers that will effectively force it to cut production to support oil prices, even though its regional rival Iran will be exempt from capping its output. In April, Saudi Arabia vetoed a proposed production freeze after Iran refused to take part.
Iran’s break-even price for this year will be $55.30, the IMF said, down from $60.10 in 2015. That’s lower than the $61.50 the IMF forecast for Iran in April, and much less than the fund’s revised break-even price for Saudi Arabia, showing how Iran’s more diversified economy has given it an edge over the kingdom.
Nevertheless, both countries will be hard-pressed to balance their budgets this year. Although oil prices have recovered from a 10-year low of less than $30 a barrel in January to $40-$50 a barrel, the IMF forecasts an average price this year of $43 a barrel, rising to $51 next year.