The currency declined due to firm crude oil prices and foreign fund outflows
Saudi Arabia’s non-oil sector growth will recover to around 3.4 per cent this year compared to a rare 2.3 per cent contraction in 2020, says a report.
Ratings agency Moody’s said last year’s contraction, triggered by the coronavirus pandemic, derailed the build-up of non-oil growth momentum evident during 2019 as a result of structural reforms and some initial progress in implementing diversification projects.
Last week, the International Monetary Fund said the Arab world’s largest economy is expected to grow 2.1 per cent this year after shrinking 4.1 per cent in 2020 due to the pandemic and lower oil prices.
The forecast figure is worse than a 2.9 per cent real GDP growth estimate the IMF published in April due to a downward revision of Saudi oil GDP, now expected to contract by 0.5 per cent this year, against an earlier 1.6 per cent growth estimate.
Public finances
Moody’s said Saudi Arabia’s public finances remain highly sensitive to oil price fluctuations as oil revenues continue to account for more than a half of total revenues, although this is down from an average of more than 70 per cent in 2014-18.
“The increase in the price of crude oil to an average of $61 per barrel in January-March quarter from $44.5 a barrel in October-December period last year has led to a significant increase in government oil revenue, which — despite a six per cent cut in average daily oil production — increased 21 per cent compared to the last quarter of 2020,” the rating agency said.
“A seasonal drop in spending, which tends to be the highest in the last quarter of the year and the lowest in the first quarter of the year, also drove the fiscal improvement in the first quarter. Both of these factors have reduced the quarterly fiscal deficit to one of the lowest on record in the past six years, bested only by a $7 billion surplus in the first quarter of 2019, when the government received a large “special” dividend from the national oil company, Saudi Aramco,” Moody’s said.
Saudi Arabia announced a significant narrowing of the government budget deficit to $2 billion, or 0.3 per cent of full-year GDP, in the first quarter of this year from $29 billion in the fourth quarter and $9 billion in the first quarter of 2020.
Moody’s attributed this improvement to higher oil prices and a large seasonal drop in spending, and said the budget performance figures also reveal a structural improvement evident in the decline in the non-oil fiscal deficit to the lowest level in more than six years, a credit positive.
“The structural improvement was mainly a result of the tripling of the value added tax rate to 15 per cent last July and a nearly 50 per cent cut in capital expenditure so far this year, in line with the approved 2021 budget,” the ratings agency said.
Moody’s said the structural improvement reduces the fiscal exposure to fluctuations in global oil demand and prices. “If sustained, it will also help reverse part of the fiscal deterioration that took place last year as a result of the coronavirus shock and arrest a further significant deterioration in the government’s balance sheet,” it said.
The IMF also expects Saudi Arabia to bring down its fiscal deficit to 4.2 per cent of GDP this year from 11.3 per cent of GDP last year.
“The VAT rate increase, the removal of the cost-of-living allowances, the increased focus on the efficiency of capital spending and planned further domestic energy price reforms are all important contributors to the planned fiscal adjustment and should not be reversed or delayed,” the IMF said.
— muzaffarrizvi@khaleejtimes.com
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