Saudi Arabia’s commitment to OPEC production cuts, which were recently extended by nine months, will hurt the Kingdom’s economy this year, Jadwa Investment said in a note on Sunday.
Overall GDP growth is expected to be 0.1 percent in 2017, compared to 1.4 percent last year, due to a 1.2 percent drop in oil sector GDP, the report said.
Saudi Arabia agreed with fellow OPEC nations to cut oil output by a combined 1.2 million barrels per day in November last year, for six months starting Jan. 1, 2017.
The producer group decided to renew the agreement for another nine months, starting July 1, at its meeting last month.
“As a consequence of lower oil production, and therefore oil revenue, we have revised our 2017 budget deficit forecast to SAR 182 billion (6.9 percent of GDP),” Jadwa Investment said.
Non-oil GDP, on the other hand, will see support from government capital spending, the firm said, adding that non-oil GDP growth is forecasted at 1 percent in 2017, compared to 0.2 percent in 2016.
The positive outlook for non-oil growth follows the Kingdom’s recent sukuk issuance, and the reinstatement of allowances for public sector workers, which should help lift, or at least stabilize, consumer spending and sentiment.
Commenting on the Saudi Arabian Monetary Authority’s recent move to raise the reverse repo rate, following US Federal Reserve’s rate hike, the brokerage said it remains “confident that further Fed hikes will not significantly affect the Kingdom’s liquidity situation.”
Looking ahead, while economic indicators point to a “mild improvement,” downside risks remain.
“Aside from the risk of another sizable decline in oil prices, there are also the unknown effects of how the economy will react to electricity price hikes, and possibly gasoline and diesel price reform, later this year,” Jadwa Investment said.
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