With a nominal GDP of 653 billion dollars in 2015 and a weight of 1,5% of world GDP, as reported by the
Intesa Sanpaolo Study Centre,
Saudi Arabia is the largest economy in the Gulf Cooperation Council group. Like the other partners in the region,
in recent years it has tried to pursue a policy of relative diversification of the structure of the economy, aimed at reducing dependence on the energy sector.
The development in this direction primarily concerned transport and communication services, followed by manufacturing, utilities, retail, hospitality and finance.
Nevertheless, the economy continues to depend heavily on the hydrocarbon sector, which contributed 43,4% of GDP in 2015 and, in the five-year period 2010-2014, on average 86% of exports and 92% of tax revenues (percentages reduced respectively to 77% and 73% in 2015 following the drop in hydrocarbon prices). The country's main manufacturing industries, specifically petrochemicals and metalworking, are energy-intensive, and almost all electricity is generated by thermal power plants.
Last year, local oil consumption was 3,9% of the world's share, i.e. much higher than the weight of GDP. In 2015, known oil reserves amounted to 267 billion barrels, second only to those of Venezuela, those of gas to 8.300 billion cubic meters, third in the world after Iran and Russia. Among the Gulf oil markets, Saudi Arabia is at the bottom of the rankings Doing Business of the World Bank, while it ranks second in the assessment by the World Economic Forum on the conditions of competitiveness, even if the score regarding education and the efficiency of markets, especially the labor one, is relatively low. Despite this, according to the United Nations, Saudi Arabia has a very high degree of human development, comparable to that of advanced economies.
In 2015, GDP increased by 3,5% in real terms, compared to 3,6% in 2014 and an average growth of 5% in the five-year period 2011-2015. Last year the dynamics of the hydrocarbon part accelerated to 4%, up from 2,1% in 2014, while the rest of the economy recorded a slower pace (+3,1% from +4,9%). This slowdown was mainly due to manufacturing, which in any case grew (+5,8% thanks mainly to refining) more than the rest of the economy, and by sales and transport services.
However,
the growth in real terms of the hydrocarbons part has not been matched by growth in financial terms as well, so much so that the negative impact on the economy of the decline in hydrocarbon revenues is expected to manifest itself to a much larger extent this year. At the same time,
cuts in public spending, which mainly concern non-priority public works, and increases in fuel prices and public utility service tariffs have the consequence of curbing demand. And the government's demand for funds to cover its deficit has a crowding-out effect on credit to the private sector. The confidence index of the non-oil private sector, while expanding (equal to 54,8 in May 2016), reached its lowest level in the first few months of 2016.
Declining optimism about the economy's outlook is holding back sales, employment and investment spending in the non-hydrocarbon part of the economy, expected to grow further in real terms this year, albeit at less than half the pace recorded in 2015 (1,8% against 4%, considering that extraction is approaching maximum capacity). Analysts forecast GDP growth of 1,2% for this year (+1,8% for hydrocarbons, +1% for the rest of the economy) and 1,9% in 2017 (+1,5% % hydrocarbons, +2,1% the rest).
Inflation remained subdued throughout 2015, with the trend rate which closed last year at 2,3%, from 2,4% in December 2014. The increases in fuel prices, where transport costs account for 10,4% in the index, tariffs public utility services (housing costs account for 20,5%) and tobacco taxes brought the trend rate to 4,2% last April. The effects of these increases on the index are expected to subside slowly in the final months of 2016, with the forecast trend below 4%, and more decisively in 2017, with the trend expected to be around 1% at the end of next year.
Last year Saudi Arabia recorded its first current account deficit ($53,5 billion, or 8,1% of GDP) since 1998. In 2015 the trade surplus narrowed to 47,3 billion from 184 billion in 2014 following the collapse in exports caused by the 46% decrease in the average price of oil. However, imports fell only slightly. The income account surplus, driven by income from overseas activities, fell from $16,5bn to $15,7bn, while the transfer account deficit (mainly remittances from migrant workers) rose to $40,7bn. Projecting current oil prices through the remainder of 2016, the average price for the whole year would register a drop of just over 12% compared to 2015, partly offset by the higher quantities exported. Export earnings are therefore expected to decline further, albeit more contained than in 2015. On the other hand, the slowdown in domestic demand will lead to a wider slowdown in imports. Echo then that in 2016 the current deficit is expected to be around 55 billion (8,3% of GDP). In 2015, the financial account deficit, largely determined by residents' investments abroad, decreased from 57,4 billion to 42 billion. At the end of April 2016, foreign currency assets fell further, to 515 billion: in the same month, the Government obtained a currency loan of 10 billion from a consortium of banks and is now considering an issue of securities in foreign currency, with the aim to contain the drain on foreign exchange reserves. At the end of 2015 Saudi Arabia had a net financial position of 703,5 billion; to assets in foreign currency, 63 billion of foreign exchange reserves and gold are added to the available balance.
In the last year,
Saudi Arabian currency sovereign debt has been subject to rating cuts by major agencies, while remaining a non-speculative investment. Last October, the rating agency S&P upgraded its rating from AA- to A+, Fitch from AA to AA in April this year, Moody's from Aa3 to A1 in May 2016.
The less positive rating of the agencies reflects the deterioration of the fiscal and external position and the uncertain growth prospects. The agencies, while acknowledging the validity of the
“Vision 2030” plan aimed at reducing dependence on oil and creating jobs, underline its generic nature, the risks for social stability of reforms, especially those aimed at reducing subsidies and broadening the tax base, and the probable political resistance to change in a society and of a dynasty that is historically very traditionalist. Despite these developments and the expected further decline in the funds set aside in Sovereign Wealth Funds to finance the expected double-digit public deficit over the next two years,
however, the country's financial position is judged to be solid and the interest in foreign currency issues and possible privatizations will probably be high.
