Saudi Arabia’s balance of payments improving, says Capital Economics

Strains in Saudi Arabia’s underlying balance of payments position are beginning to ease, despite the kingdom’s current account position deteriorating at the start of this year due to lower oil prices, London-based Capital Economics said in a note.

“We expect this trend to continue over the coming quarters, which should cause speculation about a devaluation of the riyal to subside further,” the consultancy said.

Saudi Arabia posted a current account deficit of $18 billion in Q1 2016 (just under 12 percent of GDP), compared with a shortfall of $12 billion (7 percent of GDP) in the same period last year. The deterioration in the current account position was caused by a sharp narrowing in the goods trade surplus, as export receipts declined on the back of lower oil prices.

However, there were signs that the underlying balance of payments position is improving, the report said. As the government undertook fiscal austerity measures, domestic demand dropped, causing imports to fall sharply by 18.1 percent compared to a year earlier.

In addition, the “secondary income” deficit, which largely consists of remittances sent abroad by workers, narrowed from $10.4 billion in Q1 2015 to $9.9 billion in Q1 of this year.  

Moreover, net outflows of portfolio investment have also eased in recent quarters, Capital Economics noted, adding that “in fact, Saudi-based investors repatriated more investments back to the Kingdom in Q1 than they placed abroad. Similarly, net outflows of “other” investment declined.”

Meanwhile, plans to privatize major sectors in the economy could contribute to boosting direct investment inflows, even if only partially, the note said.

“Looking ahead, the current account position should improve over the coming quarters,” the consultancy added, pointing out that oil prices are expected to hit $60 per barrel by the end of 2017, which in turn will raise export receipts.

Furthermore, fiscal austerity will continue to weigh on import demand and remittances, the note said. “As a result, we expect the current account shortfall to narrow to 2.5 percent of GDP next year.”

“All told, strains in Saudi Arabia’s balance of payments position should ease further. We expect the decline in FX reserves will continue to slow and speculation of a riyal devaluation is likely to fade,” the report concluded.