Saudi Arabia's Economic Outlook
Saudi Arabia is the largest economy in the Middle East and North Africa (MENA) region and has the world’s second-largest proven petroleum reserves. The Saudi economy has historically been dependent on oil revenues, but since 2015 it has been undergoing significant structural reforms to diversify its economy and reduce its dependency on oil. The Saudi government has ambitious plans to transform the economy and has made considerable progress in recent years through its Saudi Vision 2030 reform program.
The Saudi economy is projected to grow at a moderate to rapid pace in the coming years, supported by higher oil production, infrastructure investment, and continued reform implementation. In this article, we will explore some of the factors that will drive Saudi Arabia's economic growth in the coming years.
KSA's Economic Projection
While much of the world is still reeling economically from the pandemic, Saudi Arabia is projected to see growth in its gross domestic product (GDP) this year. The International Monetary Fund (IMF) is forecasting that the kingdom's GDP will grow by 7.6% in 2022, making it one of the fastest-growing economies in the world. However, the forecast for next year will be significantly lower, at 3.7%. There are also several complex global factors that could impact Saudi Arabia's economic growth in the coming years as detailed below.
Higher Oil Prices
The recent increase in oil prices has contributed to the growth forecast for 2022. Saudi Arabia is one of the world's leading oil exporters, and the price of oil is a critical factor in the Kingdom's GDP. Even with ongoing economic diversification, oil revenue still accounts for 46% of the Kingdom's total GDP. The close relationship between oil and the Saudi economy means that any changes in oil prices can have a significant impact on GDP projections and growth.
Although oil prices did experience a reduction from their notable highs during the summer of 2022, they are still hovering at a relative high. Depending on multiple global factors, oil prices could continue to remain at elevated levels, resulting in higher-than-expected GDP growth.
The Fall of the British Pound
When the new British Prime Minister announced her mini-budget in early October 2022, financial markets were caught off guard by her decision to grant wide-ranging tax cuts. The move sent shockwaves through global markets and led to a sharp decline in the value of the British pound.
The fall in the value of the pound is likely to have a positive impact on Saudi Arabia's economy. The Kingdom is a major trading partner of the UK, and the decline in the value of the pound means that the Saudi riyal will go further when buying British goods.
The Influence of the Dollar
The Saudi Riyal is tied to the US dollar, which means it will appreciate in value as the dollar strengthens. Currently, the US dollar has been experiencing a period of strength, driven by the American government's hawkish fiscal approach. The dollar is likely to continue to grow in the short-term, as the US Federal Reserve is expected to raise interest rates late in 2022.
As a USD-pegged currency, the Saudi Riyal will strengthen along with the dollar. This means that the Riyal will go further during international trade, enabling Saudi businesses to purchase more goods and services at a better rate.
Inflation in Saudi Arabia
So far in 2022, inflation in Saudi Arabia has averaged around 3%. This was lower than the country's historical average of approximately 3.5%. Despite skyrocketing inflation rates across much of the world, the Kingdom's monetary policy has been successful in keeping inflation low, and this doesn't appear likely to change in the near future. This is good news for businesses and consumers alike, as it means that prices are unlikely to rise sharply in the coming months.
Although Saudi Arabia's economy is projected to grow at a slower rate in 2023, the country is still in a strong position. With inflation under control and the current energy sector windfall, the Kingdom is set to perform well in the coming years. Saudi businesses and consumers can remain confident in the country's future prospects and continue to enjoy a period of economic stability and rapid growth.