SAUDI: IMF forecasts are optimistic - we expect slower growth and larger deficits

GULF COUNTRIES - In Brief 22 Jul 2019 by Rory Fyfe

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The IMF just completed its annual Article IV consultation in the Kingdom. We have a broadly similar assessment of recent economic performance, but the IMF 2019 forecasts for both non-oil real GDP growth and the fiscal deficit are a little optimistic. In the longer term, we also see slower growth and larger fiscal deficits, versus the IMF, leading to regular public debt issuance.The Saudi economy has performed well in the first half of 2019, driven largely by higher oil prices and a mini-stimulus from the government, with higher wages and cash allowances driving consumption (see our recent article on Q1 GDP here). We expect real GDP growth in the non-oil economy to accelerate to 2.6% for 2019 (from 2.2% in 2018) based on higher government spending and easier financial conditions, with firmer equity markets, lower interest rates and higher real income growth. The IMF is more optimistic with forecast growth of 2.9% in the non-oil economy, but this looks too high, based on the data that has already come in. Taking Q1 growth of 2.1% as well as current and leading indicators to forecast growth for Q2-Q3, implies growth would need to be 3% in Q4 2019 to reach the IMF projection. We don’t see any catalyst for growth this high and the IMF doesn’t mention one. The IMF forecasts would require an unusually high fiscal multiplier. We forecast overall growth of 0.6% in 2019 as Saudi Arabia’s oil production remains low in an effort to support prices in line with the OPEC-mandated production cuts, leading to a contraction of 1.9% in the oil sector in 2019. We expect a fiscal deficit of 9% of GDP as a result of the recent growth stimulus, up from 6% in 2018. In comparison, the IMF expe...