IMF Says Saudi Slump Matched Argentina Among Worst G-20 Laggards

(Bloomberg) — Saudi Arabia’s economy had one of its steepest contractions of the past two decades after reducing oil output to support crude prices, according to the International Monetary Fund, a slump matched only by crisis-stricken Argentina among the Group of 20 nations.

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Gross domestic product slipped 1.1% last year, the IMF said in the World Economic Outlook on Tuesday, flipping its previous forecast for a small expansion. While expecting the kingdom to return to growth this year and next, its projection for Saudi Arabia saw the biggest downgrade for 2024 after Argentina in the G-20.

Seven years into Crown Prince Mohammed bin Salman’s campaign to diversify and open up the world’s largest crude exporter, the setback is a reminder of just how dependent the $1.1 trillion economy remains on the fortunes of the oil sector that accounts for about 40% of GDP.

It’s also a stark turnaround from 2022, when record crude output propelled Saudi Arabia to the fastest growth in the club of industrial and emerging economies with a surge of almost 9%. The Saudi government is forecasting much faster rebound than the IMF this year and estimates the economy narrowly avoided a contraction in 2023.

To keep a lid on supply amid persisting fears over the global economy, Saudi Arabia last year prolonged an oil production cut that’s left it pumping 9 million barrels per day, the lowest in several years.

While lurching the economy into contraction, the policy has sacrificed sales volumes for what has so far been a minimal reward in terms of higher prices, with oil last year posting its biggest annual drop since 2020.

It’s also put the government on track to run budget deficits every year out to 2026, following the first surplus in nearly a decade in 2022, as it ramps up spending. Saudi Arabia is having to delay past 2030 some of the projects launched as part of its economic transformation plan.

Still, authorities are plowing billions of dollars into an attempt to become a global supply chain hub and creating new industries like electric vehicles and pharmaceuticals to meet local demand and for export.

Saudi Arabia has been reliant on debt markets to meet its financing needs. Earlier in January, it sold $12 billion of bonds, its largest deal since 2017 and equivalent to more than half the fiscal deficit the government is projecting for this year.

Global benchmark Brent crude has averaged around $79 a barrel so far in 2024, less than the kingdom needs to balance its books, according to the IMF’s forecasts. If counting domestic spending by its wealth fund, Saudi Arabia requires oil at $108, Bloomberg Economics estimates.

The IMF said the kingdom’s slowdown will be a major drag on growth in the Middle East and Central Asia, whose revisions — including a cut of half a percentage point for this year — “are mainly attributable to Saudi Arabia and reflect temporarily lower oil production in 2024, including from unilateral cuts and cuts in line with an agreement through OPEC+.”

What Bloomberg Economics Says…

“Saudi Arabia’s post-pandemic boom is facing challenges. Oil prices haven’t been responsive to multiple production cuts from OPEC+. A war in Gaza and US elections pose political risks. And the latest data aren’t promising: non-oil growth is faltering, the unemployment rate is ticking up, and the budget is in deficit.”

— Ziad Daoud, chief emerging-markets economist. Click here to read more.

The IMF’s assessment for the Saudi economy in 2023 is lower than all but one forecast compiled by Bloomberg. The Saudi statistics agency is set on Wednesday to publish its first GDP estimate for the fourth quarter, after reporting a sharp 4.4% decline for the prior three months — the first annual contraction in more than two years.

Other major crude producers fared much better last year, according to the IMF. Iran’s economy outpaced China’s and grew 5.4%, it estimates, while Russia’s GDP expanded 3%. Oil made up 80% of Saudi exports in 2022, a figure that goes even higher if closely-related products such as chemicals and plastics are included, according to Bloomberg Economics.

Though tied with Argentina for last year’s worst performance among G-20 nations, the recession in Saudi Arabia remains largely confined to its energy industry. In the non-oil sector, the main engine of job creation, growth is expected to “remain robust,” according to the IMF.

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