Riyad Capital expects the domestic economy to rebound this year and next as non-oil activity picks up at a faster pace, it said in its latest Saudi Economic Chartbook report for 2Q 2024 (pdf). The firm sees GDP growth bouncing back to a 2.3% clip in 2024 before accelerating further to 5.8% in 2025.

Where the economy currently stands: GDP shrank 1.8% y-o-y in 1Q 2024, marking the thirdconsecutive quarter that the economy has been in contraction. The downturn came on the back of a 10.6% decline in oil activity, which accounts for c. 40% of GDP (and about 75% of government revenues).

The FinMin remains more optimistic: The Finance Ministry is targeting GDP growth of 4.4% for the current fiscal year, Finance Minister Mohamed Al Jadaan said in December.

But Riyad Capital’s forecasts are on par with other outfits: The IMF revised its 2024 growth forecast for the Kingdom down to 2.6% in April, pointing to the combined effects of lower oil prices and production cuts. The Washington-based lender’s revision came on the heels of the World Bank cutting its forecast for 2024 growth to 2.5%, down from the 4.1% it had expected in January.

Fiscal policy + investments will drive non-oil growth: A “growth-oriented” fiscal policy along with increased investment spending will help enable robust growth for non-oil activities, Riyad Capital says, expecting the non-oil economy to grow 4.8% this year and 5.2% next year. Non-oil activity rose 4.4% y-o-y last year. The oil sector’s GDP contribution would be “mildly negative” this year at -2.2% but will “record substantial growth of 8.7% in 2025,” Riyad Capital said. Its forecasts come on the back of expectations of increased oil production above 10 mn barrels per day in the coming 18 months.

More budget deficits: Riyad Capital sees a budget deficit of 3.0% of GDP this year, which it expects to narrow to 1.8% next year due to the “expected expansionary fiscal policy pursued by the government in the next two years.” It sees the current account balance to grow further to 3.7% of GDP this year and 4.9% of GDP in 2025 due to projections of higher oil export revenues.

REMEMBER- The Kingdom reported its sixth consecutive quarter with a budget deficit, posting a deficit of SAR 12.4 bn in the first quarter of 2024 — four times higher than its shortfall in 1Q 2023. Officials are accepting modest fiscal deficits as the price of pursuing growth.

The outlook on inflation + interest rates: Riyad Capital expects inflation to cool to 2.0% in 2024 before it accelerates slightly to 2.4% in 2025. Price growth came in at an average rate of 2.3% last year. The US Federal Reserve is set to slash interest rates two times in the second half of this year, with four rate cuts in the cards throughout 2025, Riyad Capital suggests. Saudi Central Bank Sama would mirror rate cuts due to the currency being pegged to the USD by an overall 150 basis points by the end of 2025, the firm said.

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