Saudi Arabia: Staff Report for the 2015 Article IV Consultation

The global oil market environment has changed substantially over the past year with oil prices dropping by close to 50 percent. Based on historical experience, the large oil price decline is expected to affect the macroeconomy and the financial sector. Meanwhile, demographic pressures to provide jobs and housing for a rapidly growing and young population continue.


The global oil market environment has changed substantially over the past year with oil prices dropping by close to 50 percent. Based on historical experience, the large oil price decline is expected to affect the macroeconomy and the financial sector. Meanwhile, demographic pressures to provide jobs and housing for a rapidly growing and young population continue.


1. While activity has slowed in recent years, Saudi Arabia has been one of the strongest growing economies in the G-20 (Figure 1). Over the past decade, rising oil prices and production resulted in large external and fiscal surpluses. The economy benefited from strong government spending, boosting private sector activity, while government deposits in the banking system increased to nearly 56 percent of GDP and government debt declined to about 1½ percent of GDP by end-2014 (Table 1). Inflation has been moderate and human and social development indicators have improved considerably.

Figure 1.
Figure 1.

Saudi Arabia and G-20 Comparators: Selected Economic Indicators, 2010–14 Averages

Citation: IMF Staff Country Reports 2015, 251; 10.5089/9781513551111.002.A001

Source: IMF World Economic Outlook.
Table 1.

Saudi Arabia: Selected Economic Indicators, 2011–20

article image
Sources: Saudi Arabian authorities; and IMF staff estimates and projections.Note: Latest data as of July 2, 2015.

Includes production from the Neutral Zone.

Includes refined products.

Next 12 months.

For 2015, data is latest available.

2. Power transferred to King Salman following the death of King Abdullah in January. A reorganization of government has occurred under the new administration with numerous committees being abolished and two ministries being merged. Two new high-level councils have been created to streamline policymaking—the Council of Economic and Development Affairs and the Council for Political and Security Affairs. In March 2015, Saudi Arabia spearheaded a regional coalition that began military operations in Yemen.

3. Oil prices have fallen by close to 50 percent since mid-2014. The price decline appears to have been driven partly by demand weakness, but more importantly by supply factors (particularly rising oil production in the U.S., and continued high levels of OPEC output). In contrast to earlier periods of sharp oil price declines (1981–86, 1998–99 and 2008–09), Saudi Arabia has not cut its production. Indeed, production increased to 10.4 mb/d in June.

Historical Oil Price Declines and Changes in Production

article image
Source: EIA except for 2014–15 (IEA)

Based on monthly production volumes.

Based on daily prices except for 1981-86 (monthly averages).

Note: Forthe firstthree episodes, peak production is the highest level of production achieved prior to the identified episode of declining oil prices, while the trough represents the lowest level of production during the period, and the difference between the peak and trough months is the change in production. For the 2014-15 episode, July 2014 is set as the start of the episode and changes in production are calculated relative to July 2014 using latest available IEA monthly production data.

4. Managing demographic pressures from a rapidly growing and young population is a key challenge for policymakers. The Saudi labor force has been growing by over 5 percent a year. Within the labor market, Saudi nationals are employed primarily in the public sector, while the private sector relies on low-wage, low-skilled expatriate labor. Going forward, providing attractive private sector jobs to Saudi youth will require diversification of the economy into high-productivity activities and ensuring that Saudi youth have the requisite skills for these positions. Labor market reforms together with investments in affordable housing to help younger people and the less well-off population enter the housing market are key elements of the government’s policy agenda. Progress has been made in implementing many of the recommendations made in the 2014 Article IV consultation, except in the fiscal area.

Status of Staff Recommendations Made During the 2014 Article IV Consultation

article image

Macro-Financial Developments, Outlook, Risks, and Spillovers

A. Recent Macro-Financial Developments and Outlook

5. Economic and financial developments are interwoven with the oil cycle in Saudi Arabia. Past episodes of large oil price declines have been associated with a strong impact on macroeconomic and financial sector outcomes (Figure 2). Lower oil revenues have led to weaker fiscal and external positions, a drop in equity prices as markets anticipate the impact of lower oil prices on the corporate sector, and generally slower government spending growth. In turn, slower government spending has led to weaker non-oil activity, tighter banking sector liquidity, lower credit growth, and weaker bank balance sheets, with the drop in equity prices also having some wealth effects. The size and duration of the oil price decline have been important in determining its economic impact, as have the size of available buffers. So while in 2008–09, the government was able to maintain spending given the strong fiscal position, in 1998–99 it was not. And as the 1980s showed, even large buffers can be eroded if the price drop is sustained. The dependence of the economy on oil has remained high despite efforts at diversification—although there has been some progress in recent years in developing non-oil exports, these are concentrated in petrochemicals and are also exposed to oil price movements.

Figure 2.
Figure 2.

Oil Price Slumps Through the Years—How They Impact Saudi Arabia

Citation: IMF Staff Country Reports 2015, 251; 10.5089/9781513551111.002.A001

Source: IMF staff estimates.Note: The trough year for oil revenues, time t=0, corresponds to 1982, 1998 and 2009 for the “1980s,”“1990s” and “2000s” events respectively.

Saudi Arabia: Dependence on Oil, 1980–15

(percent share)

article image
Sources: Country authorities, Haver and IMF staff estimates.

6. The decline in oil prices since mid-2014 has substantially lowered export and fiscal revenues, resulting in a fiscal deficit and a narrowing of the current account surplus in 2014. Owing to the oil price decline, government revenues dropped, while government spending grew by 14.7 percent in 2014. A central government deficit of 3.4 percent of GDP was recorded in 2014, compared to a surplus of 5.8 percent of GDP in 2013, while the general government balance also moved into deficit (Tables 2-3, Figure 3). Nevertheless, government debt remained very low and deposits with the banking system stood at 56 percent of GDP at end-2014. In 2015Q1, the fiscal deficit widened owing to the impact of the fiscal packages that were announced in January and April (totaling about SR 100 billion or 4.2 percent of GDP) and financial assistance to neighboring countries. The external position was also affected by the oil price (and petrochemical price) fall, and the current account surplus declined from 18.2 percent of GDP in 2013 to 10.9 percent of GDP in 2014 (Table 4, Figure 4).

Table 2.

Saudi Arabia: Budgetary Central Government Operations, 2011–20

article image
Sources: Ministry of Finance; and IMF staff projections.

Including the extra month salary according to Hijri calendar in 2012, 2015, and 2018.

Reallocation of 70 b SAR from purchases of goods and services to capital expenditures, reflecting the capital expenditures on Mecca and Medina expansion projects.

Includes subsidies for social and sports clubs, private education, private hospitals, and other agricultural subsidies.

Zakat charity transfers, social welfare payments and Hafiz Job-seekers allowance.

Capital expenditures financed by earmarked funds in previous years in the Budget Surplus Fund.

The structural balance is calculated using a 5-year backward oil price rule and a 3-year average of oil export volume.

Table 3.

Saudi Arabia: Fiscal Operations of the General Government, 2009–14

(Percent of GDP)

article image
Sources: Ministry of Finance; PPA; GOSI; PIF; and IMF staff estimates.
Figure 3.
Figure 3.

Fiscal Developments

Citation: IMF Staff Country Reports 2015, 251; 10.5089/9781513551111.002.A001

Sources: Country authorities; and IMF staff calculations.1Real expenditures are deflated by the CPI.2The sustainable level of fiscal spending from the oil wealth is defined as an annuity constant in real per capita terms. The shaded area represents the sustainable level of fiscal spending conditional on oil prices remaining within $25 per barrel of the baseline.3Structural revenues are estimated by assuming that the long-term oil price is the average oil price from past five years. Long-term oil output is computed as a three year moving average including the current year. The structural balance is then computed as structural revenues less total expenditures.
Table 4.

Saudi Arabia: Balance of Payments, 2011–20

(US$ billion)

article image
Sources: Saudi Arabian Monetary Agency; and IMF staff estimates and projections.

Represents the return on NFA of SAMA, AGIs, and private sector.

Imports of goods and services over the next 12 months excluding imports for transit trade.

The average price of all oil exports, including refined products.

Figure 4.
Figure 4.

External Sector Developments

Citation: IMF Staff Country Reports 2015, 251; 10.5089/9781513551111.002.A001

Sources: Country authorities; IMF staff calculations; Bloomberg; Haver.

Estimated Cost of January and April 2015 Fiscal Packages

article image

Annual permanent impact.

7. Deposit inflows to banks and private sector credit growth have slowed. Bank deposit growth slowed to 10 percent (y-o-y) in May, down from an average of 13½ percent in 2014, while private sector credit growth was about 9½ percent, down from an average of 12½ percent. Corporate balance sheets are generally in good shape (Box 1), but corporate profits have fallen, led by the petrochemicals sector. The exchange rate initially came under modest downward pressure, but this has abated. Equity markets declined in 2014H2, but have partially recovered since the beginning of the year as oil prices have stabilized and in anticipation of the opening of the market to qualified foreign investors (which took place on June 15). No data is available to assess the position of household balance sheets.

8. Real GDP growth has slowed since 2014 and inflation has eased. Following a strong start, real GDP growth slowed during the course of 2014, reflecting a decline in oil production and weakening non-oil output growth. For the year as a whole, growth was 3.5 percent, up from 2.7 percent in 2013 with non-oil growth of 5 percent, in part reflecting the continued strength in government spending (Figure 5). Real GDP growth in 2015Q1 increased to 2.4 percent (y/y) from 1.6 percent (y/y) in 2014Q4 due to higher oil output, but remained much weaker than the 6.4 percent growth in 2014Q1. Inflation was 2.2 percent in June 2015 compared to 2.7 percent in May 2014, with the decline largely due to global food price trends and the effective appreciation of the exchange rate (Figure 6).

Figure 5.
Figure 5.

Growth and Employment

Citation: IMF Staff Country Reports 2015, 251; 10.5089/9781513551111.002.A001

Sources: Country authorities; Markit; Joint Oil Data Initiative (JODI); and IMF staff calculations.
Figure 6.
Figure 6.

Inflation and Asset Price Developments

Citation: IMF Staff Country Reports 2015, 251; 10.5089/9781513551111.002.A001

Sources: Country authorities; Haver Analytics; Markit; Bloomberg; Jones Lang LaSalle; and IMF staff calculations.1/ Contribution to headline CPI inflation.

Real GDP Growth, 2012– Q1 2015

(Y-o-y percent change)

Citation: IMF Staff Country Reports 2015, 251; 10.5089/9781513551111.002.A001

Sources: Country authorities; and IMF staff calculations.

9. Employment growth was strong in 2014, but the unemployment rate for nationals remained high. Employment grew by 3.2 percent in 2014, with Saudi employment growing by 4.4 percent and non-Saudi by 2.2 percent. Nevertheless, the unemployment rate for nationals stood at 11.7 percent at end-2014, unchanged from a year earlier. The Gini coefficient which was published by CDSI with the 2013 Household Income and Expenditure Survey stood at 45.9 in 2013, down from 51.3 in 2007.1

10. Looking forward, the decline in oil prices is expected to have a continuing impact on economic and financial developments. In particular:

  • Growth is expected to slow to 2.8 percent this year, and then further to 2.4 percent in 2016. The recent increase in oil production is expected to boost oil GDP growth to 2.4 percent this year, before it slows in 2016. Non-oil private sector growth is projected at 3.4 percent in 2015 and 3.8 percent in 2016. Over the medium-term, growth is expected to settle around 3 percent. Oil GDP is projected to grow by around 1.5 percent a year from 2017–20, driven by domestic consumption, while non-oil growth is expected to be around 4¼–4½ percent, lower than the average non-oil growth of close to 7 percent during 2009–13. However, given the likely slowing of government spending, this outcome will depend on private sector growth becoming more self-sustaining as a result of the ongoing reforms. Without a reform dividend, non-oil private sector growth could be about 1 percentage point a year lower because of weaker government spending, translating into lower overall growth of about 0.4 percentage points a year.

  • A large fiscal deficit is projected in 2015, and only a partial narrowing is expected over the medium-term. Government spending is projected by staff to increase by about 5 percent this year as some slowdown in capital spending offsets increased current expenditures, although the cost of military operations in Yemen is uncertain at this juncture. Together with a large drop in revenues, this expenditure path is expected to result in a fiscal deficit of about 19½ percent of GDP in 2015, with the non-oil primary deficit increasing to 64.7 percent of non-oil GDP. Over the medium term, government expenditure growth is expected to slow as the one-off spending this year ends, a number of the large ongoing infrastructure projects are completed, some planned capital projects are postponed, and spending on goods and services is more tightly controlled. With the partial recovery of oil prices, this expenditure path will result in the fiscal deficit narrowing to 9½ percent of GDP by 2020. Government deposits with the banking system would be run-down to about 12 percent of GDP, and debt would increase to 33½ percent of GDP by 2020 (the assumption is that the government uses a combination of debt and deposits to finance the fiscal deficits).

  • The financial sector will be affected by lower oil prices and slower private non-oil growth (Table 5, Figure 7). Saudi banks mainly depend on domestic deposits, with the role of market funding being limited by a loan-to-deposit ratio of 85 percent. Reduced oil inflows and slower government spending growth will slow deposit growth which in turn will weaken credit supply, albeit the impact will be moderated by the high liquidity held by banks (Table 6). As corporate profits are affected, NPLs will likely rise (Box 2), although the more subdued nature of this credit cycle compared to past cycles—owing to SAMA’s stepped up regulation and supervision of banks—should mean the impact on asset quality is limited. The reduced supply of credit and weaker bank and corporate balance sheets will have feedback effects on growth.

  • Inflation should remain subdued. Inflation is expected to pick up modestly as food prices start rising, but rent pressures may ease as housing supply increases, and inflation is projected at just below 3 percent in the medium-term.

  • The current account is projected to move into a deficit of about 1 percent of GDP in 2015 as export receipts fall, but should return to surplus during 2016–20. Portfolio outflows are expected to decline as domestic liquidity tightens, while portfolio inflows will likely increase with the opening of the equity market to foreign investors. SAMA’s NFA have fallen by $52 billion since the beginning of 2015, and are expected to continue to decline over the medium-term.

Table 5.

Saudi Arabia: Monetary Survey, 2010–16

article image
Sources: Saudi Arabian Monetary Agency (SAMA); and IMF staff estimates.