Dubai: Saudi Arabia’s economy accelerated in the first quarter, showing the world’s top oil exporter can cope with low energy prices, but growth may slow as the government faces pressure to rein in spending.
Gross domestic product (GDP), adjusted for inflation, grew 2.4 per cent from a year earlier in the first quarter, against a revised 1.6pc in the fourth quarter of 2014, the state statistics department said yesterday.
The figures indicated Saudi Arabia had offset the impact of oil’s 50pc plunge since mid-2014 with a combination of heavy state spending and a strong private sector.
“The data add to the evidence that Saudi Arabia’s economy has weathered the storm created by lower oil prices relatively well so far,” wrote Capital Economics Middle East economist Jason Tuvey.
“There are no signs that the economy is collapsing, as some had feared.”
The oil sector, which accounts for about 40pc of the economy, grew 1.8pc in the first quarter as Saudi Arabia ramped up production to gain global market share. It had shrunk 0.7pc in the fourth quarter.
The private sector expanded 3.3pc, slowing from 4.7pc but staying robust as the retail and construction industries boomed.
Monica Malik, chief economist at Abu Dhabi Commercial Bank, said other recent data and a bullish mood in the private sector suggested first-quarter growth might well be revised higher.
Nevertheless, the kingdom may find it harder to sustain growth in coming quarters if oil prices stay below $70 a barrel.
Cheap oil has created a state budget deficit which the International Monetary Fund projects at 20pc of GDP this year, equivalent to roughly $150 billion.
So far, the government has financed its spending – including lavish handouts such as a two-month bonus payment for state employees to mark the accession of King Salman – by drawing down foreign reserves at the central bank, which acts as a sovereign wealth fund.
This cannot continue indefinitely – the central bank’s net foreign assets have dropped $65bn since August to $672bn in May. The government may issue bonds, but economists also expect it to become more cautious about spending.
Malik predicted the government would “rationalise” spending next year, continuing core economic development projects but trying to ease the burden by attracting private funding.
“Next year will probably see weaker growth,” Malik said. “We’re unlikely to have the same growth in current government spending as this year.”
Tuvey predicted GDP growth would slow to around 1.5pc late this year and early next.
There are already some signs of spending cutbacks; state oil giant Saudi Aramco has curtailed some projects, while a plan to build 11 soccer stadiums around the country has largely been shelved, sources said last month.
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