We no longer forecast the Saudi economy to contract in 2017, as the elevation of Mohammed bin Salman – the architect of the country's diversification programme Vision 2030 – to Crown Prince in June 2017 and the subsequent rollback of key austerity measures have a positive impact on confidence. That said, oil production cuts and lower-for-longer oil prices will prevent an outright expansion.
However, this also signals that the government is adopting a more cautious approach towards fiscal consolidation, given the politically sensitive nature of some spending cuts and their adverse impact on growth. Combined with lower-than-expected oil revenues amid the extension of OPEC cuts and lower-for-longer prices, fiscal deficits will remain wide over the next two years.
Saudi Arabia is maintaining its efforts to attract more investment, as signalled by its inclusion in the MSCI watch list for accession in the Emerging Markets Index. This will be positive to attract foreign capital in the kingdom and diversify the economy, although much of the investment outlook depends on upcoming privatisations, notably of Saudi Aramco.
The promotion of Mohammed bin Salman to Crown Prince will bring some impetus to the implementation of Vision 2030, but this does not alter our view that the government will fall short of its stated objectives, as various hurdles remain.
Saudi Arabia's assertive foreign policy will continue over the coming years, as the kingdom is further emboldened by the realignment of US foreign policy towards Gulf monarchies. This will further increase tensions between Saudi Arabia and Iran, which compete for regional hegemony through various proxy conflicts across the region. This also poses domestic risks, as the population grows increasingly critical towards the intervention in Yemen, and as it fuels unrest in the Eastern Province.
Despite the apparent unity of the royal family over the change in succession, we believe that tensions will remain between reformist members of the family close to Mohammed bin Salman and those loyal to Mohammed bin Nayef.
Major Forecast Changes
We have revised up our real GDP growth forecast for 2017 to 0.0%, up from a contraction of 0.2% previously.
That said, we believe that the recovery will be slower than previously expected, as we forecast real growth of 1.6% in 2018, down from 1.9% previously.
Saudi Arabia will post higher fiscal deficits than previously expected, at 9.6% of GDP in 2017 and 7.4% in 2018, up from 8.8% and 5.8% previously.