IMF sees strong outlook for Saudi economy

But volatile prices bring element of uncertainty

Saudi Arabia’s economy, the largest in the Middle East, will continue to perform well in the coming few years but the outlook is shrouded with uncertainty due to a possible fall in oil prices, according to the IMF. 

In a report on its article IV consultation with the Gulf Kingdom, the International Monetary Fund said a decline in crude prices in case of lower global demand due to the Euro crisis would hit Saudi Arabia’s fiscal and current account surpluses, which had remained high over the past few years.

“The macroeconomic outlook remains very strong, but subject to an unusually large degree of uncertainty. Elevated geopolitical risks have generated higher oil prices that along with higher oil production imply continued large fiscal and external surpluses,” the Washington-based IMF said.

“But a weaker oil price scenario could materialize, for example if the pressures in the euro area lead to weaker global demand…the projected trend decline in oil prices over the medium-term will reduce the surpluses, with the fiscal balance expected to turn into a small deficit by 2017.” 

The report said elevated geopolitical risks and associated oil price volatility have increased the expected volatility of Riyadh’s external and fiscal balances. 

In response to heightened oil market uncertainty in early 2012, Saudi Arabia increased oil production (including condensates) to about10 mbd, a 30 year high, consistent with its commitment to stabilize the global oil market. 

“Combining this output uncertainty with the price uncertainty imbedded in oil derivatives contracts, uncertainty with respect to the evolution of fiscal and external balances is substantial,” the report said. 

Its forecasts showed Saudi Arabia’s current account balance could swell to as high as 26.5 percent of GDP in 2012, but would decline throughout the medium term, reaching 12 percent of GDP by 2017. 

However, it added, the risk profile suggests that the current account outcome by 2015 may range from a deficit of 3 percent of GDP to a 27 percent surplus. 

Turning to the budget, it said overall spending growth is projected to moderate somewhat to about 7 percent annually over the medium term. 

“Under the baseline scenario, the fiscal surplus is expected to narrow gradually, before turning into deficit in 2017,” it said. 

“The risk profile suggests a wide range for the fiscal balance, from a

15 percent of GDP surplus to a 12 percent of GDP deficit by 2015.”

 

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