Oil sector to remain a drag on Saudi growth in 2024

Oil sector is likely to remain a drag on Saudi Arabia’s GDP growth in 2024, while non-oil sector is expected to see a growth of 4%, supported by both consumption and investment, says a report.

Private consumption is expected to remain strong supported by continued migration to the kingdom as well as relatively low inflation, says the Emirates NBD report.

“We expect government spending (both consumption and investment) to increase at a slower pace in 2024 than the 9.5% growth in 2023 budget spending. However, we don’t expect a tightening in fiscal policy as the ambitious diversification targets will require significant further investment in the coming years,” says the report written by Khatija Haque, Head of Research & Chief Economist, Emirates NBD.

Estimates from MEED projects at the start of 2024 show a significant increase in expected cash flow disbursed for both government and private sector on projects in the kingdom this year and a further increase in 2025, which we expect to support non-oil GDP growth this year and next, said the report.

Net exports are likely to remain a drag on growth in 2024 however, with oil exports expected to decline further on weaker global growth, and import demand forecast to remain strong with ongoing domestic investment. The report expects non-oil GDP growth of 4% again in 2024, partially offset by at -4% contraction in oil and gas GDP, yielding headline GDP growth of 0.7% in 2024.

2023 shows sharp decline
GDP growth in Saudi Arabia slowed sharply in the first three quarters of 2023 to just 0.2% y/y, down from 10% y/y in the same period 2022.

This was largely due to a – 6.5% y/y contraction in hydrocarbon GDP on the back of oil production cuts, but non-oil GDP growth also slowed to average 3.5% in January -September, the report said

Trade and hospitality, and transport and storage sectors saw the fastest growth in the first three quarters of 2023, along with construction and social and personal services. For the year as a whole, the report estimates non-oil growth of 4%, which was likely offset by a -8.5% contraction in oil and gas GDP, resulting in headline GDP contracting by around -1.3% in 2023.

The expenditure breakdown of GDP shows private consumption spending grew 5.3% y/y in the first three quarters of 2023, slightly stronger than in the same period the previous year, while government consumption spending grew 6.3% y/y over the same period. Investment was also a key driver of non-oil growth with GFCF up 6.2% y/y in Jan-Sep, although this was much slower than investment growth over the same period in 2022. Net exports were the main drag on GDP last year, as exports contracted -5.5% while imports grew 7.8%, it said.

Budget deficit to widen this year
Official estimates put the 2023 budget balance at -2.0% of GDP, broadly in line with Emirates NBD Research’s forecast of -1.9% of GDP. Revenues declined by an estimated -5.5% last year on lower oil prices and production, while expenditure grew by almost 10% y/y, largely driven by a 41% increase in capital (investment) spending in the budget.

For 2024, the report expects oil prices to average $82.5/b, similar to 2023. However with Saudi Arabia now extending its 1 million b/d voluntary production cut at least through March 2024 and only gradually recovering thereafter, the volume of oil sold is expected to decline by around -4% from average 2023 levels, weighing on budget revenue. While the published budget shows a forecast -1.8% decline in budget revenues in 2023, the report estimates a steeper -6.4% decline in topline revenue this year. At the same time, it forecasts 2.0% growth in total expenditure, compared with a -1.9% decline in the official budget. Consequently, the budget deficit is expected to widen to -4.3% of GDP this year, versus the official estimate of -1.9% of GDP, the report said.

“The 2024 budget document is not explicit about the breakdown of oil and non-oil revenues, nor the assumed level of oil production. Based on our expectations for lower oil production this year relative to 2023, we estimate the break-even oil price for the budget at approximately $104/b, up from around $87/b in 2022 and $97/b in 2023.

The stock of public debt rose to SAR1,024 billion in 2023 according to the 2024 budget statement, or 26.1% of GDP, up from 23.8% of GDP in 2022. Public debt remains relatively low and there is scope for additional borrowing to finance the budget deficit in 2024. Indeed the government has already issued USD 12bn in bonds in January as yields have fallen to levels last seen in summer 2023.

CPI inflation in the kingdom slowed to 1.7% y/y in November from 3.3% in December 2022. CPI averaged 2.4% in the year to November 2023, only slightly lower than the 2.5% average in 2022. The main driver was higher housing costs, up 8% y/y in 2023, while most other categories saw inflation slow relative to 2022.

The report expects housing to remain the key source of inflation in 2024 also, along with services prices such as for hospitality and recreation. It retains a 2.5% forecast for average inflation in 2024.

Money and credit
Private sector credit growth continued to exceed money supply growth in November 2023, although the difference is not as large as it was for most of 2021 and 2022. Private sector credit grew 9.8% y/y in November, up from 9.4% in October, while broad money supply grew 7.4% y/y, down from 8.8% in October. Money supply growth has been driven by quasi money (mainly longer-term SAR deposits), which have grown almost 30% on average in 2023, while M1 contracted by -2.3% y/y.

The relatively tight liquidity conditions in the Saudi financial system are reflected in the widening of the 3m SAIBOR spread over SOFR, which ended the year at around 100bp. Spreads have tightened a bit since the start of this year but remain wider than the average since 2018.

“To the extent that we expect investment in strategic sectors and mega-projects to continue in 2024, demand for credit is likely to remain strong. With oil-related liquidity likely to remain constrained, overall banking sector liquidity is expected to remain tight,” it said.

Net foreign assets at SAMA declined modestly last year, reaching $418 billion at the end of November, down from $441 billion at the end of 2022. This was largely matched by a decline in government and related deposits at the central bank over the same period. The budget deficit in 2024 is likley to be financed by debt issuance rather than drawing down reserves, the report added.