Growth to return on robust investment spending
Following the 2023 slowdown due to the unfavourable base effect, cuts in oil production, and lower energy prices, Saudi growth is due to increase in 2024, mainly driven by investment and private consumption. Decline in inflation and increased tourism revenues will support private consumption (40% of GDP). Tourism receipts are expected to rise to USD 26 billion in 2024, i.e., around 3.5% of GDP. Investment (around 30% of GDP) will be led by the government in order to achieve its ambitious Vision 2030 plan including expansion of the manufacturing sector and big-ticket projects (i.e., development of six-giga projects worth USD 7 trillion like the Red Sea project, Neom, Amaala, Qiddiya that mostly aim at establishing tourism, entertainment and technology centres etc.). The government aims to attract more private investment, both domestic and foreign, through privatisation and partnerships. More foreign investments are expected after the government announced in 2021 that it would no longer work with foreign companies that do not have their regional headquarters located in the Kingdom after 2023. Following the OPEC+ announcement in June 2023 on extending the production cuts until end-2024, Saudi officials confirmed in early September 2023 an extension of their voluntary oil output cut of 1 million barrels per day until the end of 2023. Saudi Arabia’s oil output is expected to increase around 3% in 2024 on an annual basis, after falling nearly 7% in 2023. This will sustain the contribution of net exports to growth. However, import growth is expected to accelerate as well from the previous period in line with the Kingdom’s infrastructure plans creating an import demand for capital goods, raw materials, and machines. Still, the government’s diversification efforts will increase non-oil exports, albeit from a low base. Inflation will inch down but it will hover above the 2010-2022 average of 2% on the back of robust demand for housing and tourism inflows.
Fiscal accounts still in deficit, steady current account surplus
The budget will remain in deficit in 2024 following the decline in oil production in 2023, which is expected to have increased the Kingdom’s fiscal breakeven price to USD 89 per barrel in 2023 as per the Institute of International Finance (IIF). Risks to this forecast are on the upside depending on any new cuts to the oil production. Consequently, oil revenues will remain close to 16% of GDP in 2024, down from 21% in 2022. This fall will partially compensate the improvement of non-oil revenues estimated at around 10% of GDP in 2024. The government will continue its efforts to keep fiscal spending under control through lower subsidy spending and capital expenditure by relying on the sovereign wealth fund. However, the public wage bill (around 40-45% of total fiscal expenditures) will be a key issue in reducing the budget deficit. The government is also expected to diversify its revenue resources by widening its portfolio holdings and investments abroad. The authorities aim to increase the value of the PIF’s assets to USD 1 trillion in 2025 and between USD 2-3 trillion by 2030.
The Kingdom’s international reserves (USD 440 billion in Q1 2023 or equivalent to around 20 months of imports) and the net worth of USD 700 billion estimated in its sovereign wealth fund (Public Investment Fund) will allow the country to easily meet its foreign exchange (FX) denominated debt obligations and easily maintain the peg to the US dollar.
Slow export growth due to oil production cuts (estimated at 75% of total merchandise exports in 2023), compared with faster import demand on back of diversification efforts will continue to weigh on the current account surplus. The key financing sources of the diversification will remain the Public Investment Fund (PIF) and foreign investments, which totalled USD 640 billion in 2022 or nearly 60% of GDP, out of which foreign direct investments accounted for 42%.
Improving relations across the region but risks persist
Despite the long-term regional leadership competition between Iran and Saudi Arabia, both countries decided to restore their relations in early 2023 in a deal brokered by China. Although this is a positive development for regional stability, both countries will continue to pursue divergent geopolitical and religious strategies. Accordingly, their reconciliation may only happen very gradually. Moreover, Saudi Arabia’s relations with China, the largest buyer of Saudi oil and an important supplier of much needed capital goods to the Kingdom, are expected to grow. Although these two situations pose some headwinds to the relationship with Israel and the US, the latter will continue to be a close ally to Saudi Arabia, especially on security matters, and the relationship with the former could progress. On another level, the establishment of an economic corridor between India, Saudi Arabia, and Europe, for which a memorandum of understanding (MoU) was signed was signed in September 2023, could also bring strategic and economic benefits to the Kingdom. On the other hand, rising economic competition between the United Arab Emirates and Saudi Arabia to attract more foreign investment increases the risk of cracks in OPEC. However, the Crown Prince Mohammad bin Salman’s commitment to the economic diversification agenda and foreign investments is expected to prompt healthy competition. Finally, improving ties with Turkey may create some opportunities as the Kingdom seeks to benefit from Turkish know-how in areas such as housing, infrastructure, and engineering under the Vision 2030 program. Although Saudi Arabia’s foreign policy is innovating, its strategic relation with the US is expected to remain solid.