Saudi Arabia less prone to EM contagion: IIF

Higher oil prices, the peg to the US Dollar, large public foreign assets, and low public debt make Saudi Arabia less prone to EM (emerging market) contagion, the Institute of International Finance (IIF) said in a recent report.

IIF’s ‘2019 Outlook on MENA’ said the fiscal situation is now also on a firmer footing. The kingdom has implemented substantial fiscal adjustments in recent years, which focused mostly on cuts to capital expenditure.

“Higher oil prices, combined with additional non-oil government revenue and cuts in fuel subsidies, should more than offset the 20 percent increase in government spending and narrow the fiscal deficit from 9.1 percent of GDP in 2017 to 4.4 percent in 2018,” the report said.

IIF expects the current account surplus to widen from $15 billion in 2017 to $78 billion (9.9 percent of GDP) in 2018. However, official reserves are likely to increase by only $30 billion (to $526 billion by end-2018) as net capital outflows will remain large.

However, IIF maintained that deeper structural reforms are needed to strengthen the business climate and improve competitiveness to support diversification and job creation.

“It will be crucial to avoid complacency in the context of the partial recovery in oil prices. The case for widespread fundamental structural reforms remains strong as bureaucratic barriers, lack of transparency, inefficiencies, and an unpredictable business environment still represent major impediments to achieve sustained and balanced growth,” it noted.

IIF noted that Saudi Arabia is benefiting from additional oil revenue, which is allowing for a loosening of the fiscal stance following three years of consolidation.

After a contraction of 0.9 percent in 2017, IIF expects real GDP growth to recover to 2.2 percent in 2018, reflecting higher oil production and a substantial fiscal stimulus from increased spending.

On the expenditure side, it said, growth will be driven by public consumption and investment.