Real GDP growth in KSA to bounce back in 2017

Real GDP growth in KSA is expected to slow to 1.2% in 2016, but recover to 2% in 2017 as the pace of fiscal consolidation eases and to settle around 2.25 to 2.5% over the medium-term. Inflation has risen in recent months to over 4% as energy and water prices have been increased, and is expected to ease to 2% in 2017.

The observations were made by the Executive Board of the International Monetary Fund (IMF), which concluded an Article IV Consultation* with KSA on July 18, 2016. The board noted that bank deposits have declined, but growth of credit to the private sector remains strong. Capital buffers are high, non-performing loans (NPLs) low, and banks are well provisioned against loan losses.

Based on current policies, the IMF says that the fiscal deficit is projected to narrow to 13% of GDP in 2016. Non-oil revenues are expected to increase, while spending restraint, particularly on the capital side, will result in a substantial reduction in expenditure.

KSA has begun a fundamental policy shift to respond to low oil prices. The government has introduced a series of reforms over the past year and has recently set out plans for a bold and ambitious transformation of the Saudi Arabian economy in Vision 2030 and the National Transformation Program. Diversifying the economy, creating jobs for nationals in the private sector, and implementing a gradual, but sizable and sustained fiscal consolidation to reach budget balance in five years are key policy priorities.

Executive Directors** noted that KSA faces important challenges stemming from the decline in oil prices. They welcomed the authorities’ timely response, which, supported by sizeable fiscal buffers and a strong and resilient financial system, has maintained macroeconomic growth and stability. Nonetheless, the fiscal and current account balances have moved into deficit and growth is starting to slow. Directors highlighted the need for continued fiscal adjustment and reforms to strengthen and transform the Saudi Arabian economy. In this regard, they commended the authorities’ bold reform plans.

Directors welcomed the ambitious reform goals announced by the authorities in Vision 2030 and the National Transformation Program, and underscored the importance of clear prioritisation and sequencing of the planned reforms to reduce implementation risks and give the economy time to adjust. They supported the authorities’ plan to increase the role of the private sector in the economy by focusing on privatisation and public-private partnerships, improve the business environment, develop local capital markets, encourage foreign direct investment (FDI), and support small and medium enterprises. Directors noted that continued labor market and education reforms are needed to encourage private sector employment of Saudi nationals and increase labour force participation of women.

Directors agreed that a gradual but sizable and sustained fiscal consolidation is needed, and welcomed the adjustment under way. They generally agreed that balancing the budget over the medium term is an appropriate goal and encouraged the authorities to develop a credible medium-term plan to achieve this objective. They supported expenditure and revenue reforms, including continued gradual adjustment of energy prices with compensation for lower-income households, introduction of a VAT and excise taxes, containment of the government wage bill, and improved public investment management and spending efficiency. They recommended accompanying these measures with growth-enhancing structural reforms.

Directors emphasised the importance of developing a medium-term fiscal framework and strengthening the annual budget process, with better integration of the Public Investment Fund and Aramco into the budget. They encouraged the authorities to take an integrated asset-liability management approach to financing the fiscal deficit. They noted that government debt issuance would help establish a risk-free yield curve and support the development of domestic debt markets.

Directors noted that reforms have helped strengthen the financial system, and the banking sector is well positioned to weather lower oil prices and slower growth. They encouraged the authorities to continue to closely monitor credit quality, strengthen the macro-prudential framework, and finalise the framework for bank resolution and liquidity provision. They also recommended strengthening the liquidity forecasting and management frameworks of the central bank.

Directors agreed that the exchange rate peg to the US dollar is the best option for Saudi Arabia given the current structure of its economy, and emphasised that a continued fiscal adjustment is needed to support the peg. They saw merit in reviewing the peg periodically to ensure it remains appropriate, given the desired evolution of the economy away from its current reliance on oil.

Directors welcomed the improvements in economic statistics, but noted that further work is needed to fill remaining data gaps. Publication of more detailed budget data and updates would enhance transparency. Directors encouraged the authorities to subscribe to the Fund’s Special Data Dissemination Standard.

*Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

**At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarises the views of Executive Directors, and this summary is transmitted to the country's authorities. Read an explanation of qualifiers used in summings up.

Bahrain joins Cruise Arabia Alliance

Bahrain has become the latest country to confirm its commitment to the Cruise Arabia Alliance, which now has membership from the UAE emirates Abu Dhabi, Dubai, and Sharjah, as well as Qatar and Oman. The alliance encourages its members to share best practices and ensure a region-wide level of service and standards offered to both the cruise lines and their passengers.

The announcement was made at the Seatrade Middle East Cruise Forum, which was held in Doha, Qatar and hosted by Qatar Tourism Authority (QTA). The announcement was made in conjunction with Bahrain announcing it would be complementing the 2015/2016 cruise season with 68,000 passengers and 32 calls from major cruise lines.

The QTA also stated that Qatar is expecting a three-fold increase in passengers next season. Thirty cruise ships will be bringing up to 50,000 passengers to Doha between October 2016 and April 2017 - up from the eight calls scheduled this season.

Hassan Al Ibrahim, QTA’s Chief Tourism Development Officer, said: “Qatar places huge importance on the cruise industry, both to diversify the tourism sector and Qatar’s overall economy. There are long-term plans to upgrade the country’s infrastructure, all of which will enable us to tap into the potential of cruise tourism by developing Qatar’s ports.

“We are building our infrastructure and human capital; we have a new destination brand that consolidates the industry’s efforts to attract more visitors; and, we are diversifying and enhancing the products and services across the entire industry.

“For our part, QTA is working with partners across the public and private sectors, to plan, regulate, develop and promote the tourism sector, with the aim of achieving growth that is both exponential and sustainable.”

He added: “QTA is committed to providing at least 6,000 rooms on cruise ships for the 2022 FIFA World Cup competition - in the redeveloped Doha Port – reinforcing cruise tourism as one of our most exciting and enduring legacies.”

The Forum confirmed that the Arabian Gulf is now the third most popular winter cruising destination with one million cruise passenger visits expected in GCC countries during the 2015 to 2016 season.

Chris Hayman, Chairman of Seatrade, organisers of the Forum, said: “Over the two days of the Forum, we have repeatedly heard from tourism and ports authorities across the region that the cruise industry has been identified as a crucial area for growth in the coming years and that many see this sector as an engine for sustainable development of their economies, and as an important pillar that supports efforts to limit dependence on natural energy resources as a driver of GDP.”

To achieve this, Hayman highlighted the significance of the Cruise Arabia alliance which is committed to its members working together with the common goal of growing cruise tourism and tackling the challenges faced, whilst taking advantage of the opportunities that will arise in the coming years.

Amongst the challenges discussed is the importance of each destination to create shore excursions that are diverse and offer unique onshore opportunities for cruise line passengers. The question of obtaining visas was also flagged as a challenge but was felt that each destination was developing wider flexibility and this had been well addressed since the last Forum in 2015. Security was also highlighted as a potential challenge as perceptions of passengers unfamiliar with the region had been influenced by international media coverage. However, it was felt that passengers who have visited the Arabian Gulf for themselves understand that it is a safe area with tight security, and can be ambassadors in promoting the region.