High levels of oil output drive Saudi economic growth

Saudi Arabia’s economy grew faster than projected in the second quarter of the year, as high levels of oil output continued to drive growth even as crude prices fell to new lows.

The kingdom’s economy grew by 3.8 per cent year on year in the second quarter of the year, faster than the 3.7 per cent recorded in the second quarter of 2014 – back when oil was trading at close to $110 per barrel. Growth was also faster than the 2.3 per cent recorded in the first three months of this year.

“Their headline growth figure is pretty healthy-looking because oil production volumes are still high,” said Bryan Plamondon, director for the Middle East at research firm IHS Economics. “But they’ll see a slowdown in the non-oil economy.”


Oil sector growth was at 5.1 per cent in the second quarter with crude output above 10 million barrels per day since March. Saudi oil output peaked at 10.57 million barrels per day in July, according to data from Bloomberg – the highest level in the country’s history.

However, the oil price fell to a new six-year low of $42 per barrel last Monday after a Chinese stock market rout spilt over onto commodities markets.

That has followed a dramatic decline in the fall of the price of oil to under $50 per barrel since its 2014 highs. As a result the Kingdom is set to run a fiscal deficit of 19.5 per cent this year and the IMF has cut the country’s growth forecast to 2.8 per cent for 2015.

Saudi Arabia needs a budgetary break-even price of more than $100 per barrel to balance its books, according to Deutsche Bank. Ratings agency Fitch revised the outlook on the country’s AA rating to negative last month. Observers disagree as to whether the kingdom’s strategy of continuing to produce oil at record levels aims to put low-cost US shale producers out of business, maintain its market share among Asian consumers, or both.

“Saudi’s economy is going to be able to manage this lower oil price environment – they have the financial cushion to ride this out in the near term,” Mr Plamondon said. “But if the low oil price were to last for four or five years, Saudi would have to cut spending very sharply.”

The kingdom was forced to tap bond markets for the first time in seven years this year in a bid to slow the rate at which it burnt through foreign currency reserves.

There’s also pressure on the Saudi riyal’s peg to the US dollar. The Saudi Arabian Monetary Agency, the country’s central bank, was forced to deny that it was thinking of devaluing the riyal, after currency forwards against the dollar rose on bets that an adjustment of the peg had become more likely.

The Saudi government is expected to reduce capital spending and maintain fuel subsidies over the next year.

Bloomberg reported last week that Saudi Arabia would cut infrastructure spending in its next budget in a bid to shrink its deficit. But the country’s economy relies on investment in the non-oil sector to help it diversify away from dependence on oil revenues. The non-oil sector grew at 3.1 per cent year on year in the second quarter.

Saudi media reported that the government would not cut fuel subsidies – which account for $37.2 billion of spending each year, or 4.6 per cent of GDP – until after completion of country’s main transport infrastructure projects.

abouyamourn@thenational.ae

Follow The National’s Business section on Twitter

0

Share This Post