The Saudi economy in 2016 – Jadwa

Attached is the February 2016 Jadwa report on the Saudi economy.  Key elements:

Key observations for this report are as follows:

· 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.

· As oil prices fall year-on-year in 2016, the fiscal deficit will remain in double digits, but the government will push to gradually diversify its revenue base and consolidate its spending.

· The price increases in domestic energy is one area where the government will gain additional revenue. The most recent rise in domestic energy prices represents a trend towards a broader reform in domestic economic policymaking, and will likely be followed by similar actions during the next few years.

· Comparing different domestic energy price level scenarios with pre-2016 prices, we forecast the government can 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.

· We expect rising domestic energy prices to be the major source for inflationary pressure in 2016 with an accelerating trend in inflationary pressures, leading to an average headline inflation rate of 3.9 percent in 2016.

· Whilst the 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.

· The current period of low oil prices is set to remain throughout 2016, pulled down primarily by persistently high oil supply. We expect Saudi oil production in 2016 to remain unchanged, year-on-year, at 10.2 mbpd. Saudi Arabia’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.

· Despite the lower level of spending outlined in the 2016 Saudi budget we expect the government to continue supporting economic activity despite the prevailing subdued oil price environment.

For more detailed commentary and statistical analysis, please refer to the full version of the report (see attached).

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Attached is the latest edition of the 2016 report on the Saudi economy from Jadwa Investment which we hope you will find a useful update.