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Fiscal expansion is stretching the state’s purse strings: Government spending is on the rise, with municipal services (up 116% y-o-y in 1H 2024) and public administration (up 30%) leading the charge, while state revenues took hits from falling oil prices, the World Bank said in its Fall GCC Economic Update (pdf).
The fiscal deficit is expected to hit 2.9% of GDP in 2024 and is expected to remain at 2.2% and 2.8% in 2025 and 2026. Nevertheless, Aramco’s performance-linked dividends, which stood at USD 108 bn in Q2 2024, are expected to continue mitigating larger deficits.
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Meanwhile, foreign investors are still on the fence: FDI volumes were up 14.5% q-o-q in 2Q 2024, but remained nearly flat y-o-y at SAR 36.41 bn in 1H 2024, up from SAR 36.35 bn logged during the same period last year reflecting “challenges in sustaining investor confidence” despite reforms and simplified regulations. This prompted Saudi authorities to roll out a new investment law, effective from 2025, which is designed to level the playing field for foreign investors.
What about inflation? The multilateral lender notes that inflation in Saudi and other GCC states has remained stable despite pressure from housing prices. Falling interest rates due to further rate cuts by the US Federal Reserve and an uptick in economic growth are expected to lead to higher inflation next year, but price hikes are expected to remain subdued due to the moderating effects of subsidies, fuel price ceilings, falling global food prices, and the USD peg.
ICYMI: Inflation accelerated to 1.9% y-o-y in October, hitting its highest since the start of the year. Consumer prices have been on an upward trajectory since August, with the trend largely driven by rising home rents.
Saudization is on the rise: The unemployment rate is trending down, dropping to 3.5% in the first quarter of this year from the 4.2% noted during the same period last year. Job growth is supported by the government’s Saudization program, with some 37k Saudi nationals recruited for private sector jobs in August alone. Increased employment of Saudis in the private sector is also helping to narrow the wage gap that has traditionally seen expat workers receiving substantially lower wages than similarly qualified Saudi peers. Meanwhile, expat participation in Saudi’s private sector stands at 40%, less than half the 88% rate noted for the GCC as a whole.
Water woes demand action: The World Bank sees significant challenges in terms of water availability for the Kingdom going forward, as groundwater and other renewable resources face unsustainable depletion rates. Low pricing for water utilities and inefficient use of water in agriculture and manufacturing are further compounding the Kingdom’s water stress.
