Saudi Arabia is sacrificing non-oil economic growth with fiscal policies designed to ensure the stability of its currency peg during a period of low crude prices, according to Goldman Sachs Group Inc.
“Maintaining the riyal’s peg at current levels remains a key political priority for the Saudi authorities,” Farouk Soussa, London-based analyst at Goldman, said in a report to clients. “In an environment of low oil prices, however, this means that fiscal policy will have to tighten, bringing the budget deficit under control to ensure that external balances remain consistent with the stability of the anchor.”
Saudi Arabia ties its currency to the dollar and tends to move at the same rate as the US Federal Reserve. Although the pressure intensified earlier this year with the collapse in crude prices, 12-month exchange rates for the Saudi riyal have since stabilized.
Goldman said the government’s fiscal plans are likely to help the current account return to surplus next year and ensure that over the medium term foreign exchange reserves remain at just over 80% of the narrow monetary measure, M1.
But “the sharp decline in projected spending over the next three years will depress non-oil economic growth,” Soussa said, predicting that it will average 1.2% year-on-year during this period, against trend growth. 2.5%.
“This will result in a widening gap with the level of the pre-Covid trend of non-oil economic production,” Soussa said.
The need for fiscal consolidation will make it harder to grow the non-oil private sector and achieve Saudi Arabia’s goals of diversifying the economy and boosting employment under Crown Prince Mohammed bin’s development plan Salman known as “Vision 2030”.
Goldman estimates that while around 400,000 Saudis are reaching working age each year, the average rate of private sector job creation over the past 15 years has been about half that number.
The country’s sovereign wealth fund “is not yet fully financially independent from the government, requiring injections of capital from government reserves in order to execute its investment plans.”
A rise in oil prices would improve the outlook by allowing the government to increase its spending without compromising external balances.
The Saudi budget forecast assumes oil prices of around $ 50 a barrel over the next three years, according to Goldman Sachs.
Three key areas of structural reforms in Saudi Arabia are improving the business environment, promoting foreign direct investment and increasing the efficiency of the labor market.
“As Vision 2030 is expressed in detail, growing and diversifying the economy and increasing employment will require sustained efforts on the reform front alongside government investments,” Soussa said. “In an environment of low oil prices, where spending is limited, this becomes even more the case.”