Higher oil prices set to enhance Saudi’s fiscal flexibility

Saudi Arabia’s economic growth will accelerate in 2019 as higher oil prices and increased crude production will provide room for a more accommodative fiscal stance, according to a report by Spain-based FocusEconomics.

The economic recovery appears to have gained steam in the third quarter (Q3) following the previous quarter's strong result, the report said, which marked the fastest growth in one-and-a-half years.

Oil prices averaged higher in Q3 than in the previous quarter, while oil production increased in the same period as Saudi Arabia tries to fill the output gap left by Iran.

As a result, it said, both growth in bank lending and foreign reserves hit a nearly two-year high in August.

Moreover, the PMI survey for the non-oil sector suggests a further improvement in Q3. However, the report noted that while economic reforms will boost business confidence, rising political noise and mounting geopolitical risks could hurt investor sentiment.

Moreover, it added, Saudi Arabia’s economic outlook remains vulnerable to oil price fluctuations, especially if oversupply concerns materialize.

FocusEconomics Consensus Forecast panelists expect growth of 2.5 percent in 2019, which is up 0.1 percentage points from last month’s projection. In 2020, growth is seen decelerating slightly to 2.3 percent.

FocusEconomics expects oil production in Saudi Arabia to average 10.60 million barrels per day (mbd) in 2019, while in 2020, it sees crude output inching up to 10.56 mbd.