Saudi economic slowdown to continue in 2016
Saudi Gazette - 10 February, 2016
http://www.gulfinthemedia.com/index.php?id=773806&news_type=Economy&lang=en

The Saudi economy will continue to slow in 2016, as the private sector
gradually adjusts to the new norm of fiscal deficits and lower spending
announced by the government, Jadwa Investment has predicted in a report.

The report comments on the reduction in the level of spending outlined in
the 2016 Saudi budget: “This move underscores the government’s determination
and ability to support economic activity despite the prevailing subdued oil
pricing environment.” According to the report, as oil prices fall
year-on-year, the fiscal deficit will remain in double digits, but that the
government is expected to gradually diversify its revenue base and
consolidate its spending.

The report added that price increases for domestic energy products mentioned
in the budget is a welcome move that points to the start of a new trend of
reform in domestic economy policymaking. The report further presents an
energy price reform model in order to determine the long-term economic
gains/losses resulting from such reforms. The energy price reform model
compares three different price scenarios with pre-2016 domestic prices ($
10pb) from 2016-2035. The report found that “the recent reform to prices
will enable the government to increase its domestic oil revenues, on
average, by an additional $ 18 billion per year for the period 2016-2035,
rising from $ 7 billion in 2016 to $ 36 billion in 2035.”

The pace of the slowdown will likely moderate this year as the private
sector gradually adjusts to the new norm of fiscal deficits and lower
spending by the government, Jadwa said.

The report attributed a slower increase in credit and money supply growth in
the Kingdom to a psychological response to domestic and external factors,
and added “rising domestic energy prices will be the major source for
inflationary pressure in 2016.” It predicts an accelerating trend in
inflationary pressures, leading to an average headline inflation rate of
3.9.”

The report also noted that whilethe dollar/riyal peg will remain under
speculative pressure during 2016, there is no risk to the peg that has been
in place for 30 years and which, as the IMF has pointed out, is appropriate
for the structure of the economy.

Further, it said that the current period of low oil prices is set to remain
throughout 2016, pulled down primarily by persistently high oil supply. The
report added “we expect Saudi oil production in 2016 to remain unchanged,
year-on-year, at 10.2 mpbd. Saudi’s current strategy of maintaining market
share will result in lower levels of oil revenues in the short-term, but
will benefit it in a few years’ time.”