Analyzing the Potential Contraction of Saudi Economy in 2022 Due to Extended Oil Cuts

Analysts are predicting that Saudi Arabia may experience an economic contraction in 2023 as a result of its decision to extend crude production cuts, demonstrating its continued heavy reliance on oil despite slow progress in diversifying its economy. The announcement by Riyadh to extend a voluntary oil output cut of 1 million barrels per day until the end of 2023 sent oil prices above $90, but they remain below the average prices of around $100 per barrel witnessed last year. The decline in oil production and revenue this year could lead to the first contraction in Saudi Arabia’s economy since 2020, although a significant dividend from state oil producer Saudi Aramco is expected to provide some financial cushion.

The decision to cut oil output for another three months will result in a 9% decrease in production in 2023, making it the largest production drop in nearly 15 years for OPEC’s de facto leader. Analysts have revised their GDP growth forecasts for Saudi Arabia, with Chief Economist Monica Malik now projecting a contraction of 0.5% this year, and Analyst Justin Alexander suggesting that non-oil growth would need to average around 5% to maintain overall growth. Various leading indicators, such as the purchasing managers’ index (PMI), have pointed to a modest slowdown, making a small real GDP contraction more likely.

In 2022, the Saudi economy experienced a growth rate of 8.7% and generated a fiscal surplus of 2.5% of GDP, mainly driven by rising oil prices. However, the government has forecast a surplus of 0.4% of GDP for this year, a figure that some economists view as overly optimistic. Saudi Aramco, which is majority-owned by the government, announced last month that it would pay a near $10 billion dividend to its shareholders in the third quarter. This extra payout, along with its expected base dividend for 2022 and 2023, is expected to help support public finances. Nevertheless, economists believe that the government’s deficit for this year could reach 1.5% of GDP, significantly deviating from the budget estimate of a surplus. The Saudi finance ministry has not yet commented on these projections.

While growth in the non-oil economy remains strong for the time being, driven in part by the Public Investment Fund’s (PIF) significant spending on various sectors, there are concerns about the pace of reforms and their ability to reduce reliance on hydrocarbons. PIF has continued its aggressive investment strategy, acquiring assets in global sports, tourism, entertainment, and electric vehicle companies. Reports suggest that up to $50 billion worth of new Aramco shares could be listed on the Riyadh bourse before the end of the year, potentially generating substantial funds for major projects. PIF’s funding primarily comes from capital injections, asset transfers, debt, and earnings from investments. However, the fund reported a loss of $15.6 billion in 2022, primarily due to its investment in SoftBank Vision Fund I and a wider market downturn, particularly in the tech sector. Despite these challenges, experts believe that Aramco will continue to be a key source of revenue for Saudi Arabia as it looks to attract foreign direct investment and diversify its economy.