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Saudi Oil Cuts May Help Economy Where It Matters Most

The International Monetary Fund reports that Saudi Arabia’s largest source of employment and corporate profits will not suffer from the oil production cuts that threaten a contraction in the $1 trillion economy, according to Bloomberg.

Amine Mati, the IMF’s mission chief for Saudi Arabia, said in an interview:

“We do a lot to de-link oil prices from private-sector activity, we do wait the non-oil growth momentum — at least for 2023 and 2024 — to continue.”

The IMF expects Saudi non-oil growth at around 5% this year, according to its latest Article IV review of the kingdom published Wednesday. The strength of the non-oil sector, which contributes about 60% to gross domestic product, can explain the intentions of Saudi officials to stick with supply curbs following a spurt in the economy last year that made it the fastest growing in the Group of 20 club of countries.

Overall GDP will grow by 2% in 2023. This estimate was made before Saudi Arabia’s decision this week to extend its supply cutback of 1 million barrels a day until December. According to Mati, the additional three-month move means the IMF will lower its latest projection for the broader economy.

Reductions made by Saudi Arabia, in cooperation with Russian export curbs, have passed quietly for the economy. This happened thanks to the government that allocated enough funding for salaries and massive infrastructure projects that has kept the budget in deficit during the first half of the year. The Saudis introduced their additional supply decreases in July, deepening reductions already made with partners in the OPEC+ alliance.

Most analysts are not as optimistic as the IMF at least about overall growth. Taking into account the latest move, Bloomberg Economics predicts a contraction of around 0.7% in Saudi Arabia’s real GDP this year.

Now that the production restraints are pushing up oil prices, the kingdom may have even more room to turn on the fiscal taps and keep the non-oil sector humming. Oil is still critical to government spending and makes up around 80% of the country’s exports despite efforts to diversify the economy by Saudi Arabia’s de facto ruler Crown Prince Mohammed bin Salman. Mohamed Abu Basha, head of macroeconomic research at EFG Hermes, said:

“The decision to extend the production cuts supports a higher oil price environment, which in turn is critical for the government to have enough money to keep funding its growth ambitions”.

According to the IMF, higher oil prices should generally offset the influence of supply reductions on Saudi Arabia’s external and fiscal accounts.

The fund also expects the kingdom’s net foreign assets to bounce back after oil giant Aramco’s dividends come through. Foreign reserves decreased by over $16 billion in July to $407 billion, in the sharpest fall since the government transferred $40 billion to its wealth fund in 2020 to invest abroad during the pandemic.

Brent oil closed at the highest since November on Tuesday, rising above $90 as the International Energy Agency estimates that global crude consumption is running at a record pace.

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