Saudi Arabia's Economic Growth Slows Due to Oil Cuts and Price Drops Impacting Revenues

Saudi Arabia's Economy Slows as Crude Output Cuts and Oil Price Drop Take Effect

Economic Slowdown in Riyadh

Saudi Arabia's economy experienced a slowdown in the second quarter due to significant crude output cuts and a drop in oil prices. According to the Saudi General Authority for Statistics, Riyadh's GDP expanded by only 1.1% in the second quarter, compared to 3.8% in the previous quarter and 11.2% during the same period in 2022. The non-oil sector, which is the focus of Saudi Arabia's economic diversification program, grew by 5.5% in the second quarter. However, the hydrocarbon-reliant Riyadh suffered a 4.2% loss in non-oil GDP, primarily due to lower global crude prices and voluntary oil production cuts.

Impact of Oil and Commodities

The Saudi economy was heavily dependent on oil exports, and the decline in oil prices had a significant impact. Oil prices had surged last year, but they have remained below $80 per barrel due to macroeconomic concerns, decreased demand, and China's slow recovery from Covid-19 restrictions. Consequently, the Saudi economy received less support from commodities in the first half of this year. The expiring Brent futures contract with September delivery traded at $84.89 per barrel, reflecting a slight decrease from the previous settlement.

Voluntary Production Cuts

In addition to the drop in oil prices, Saudi Arabia is voluntarily implementing production cuts as part of the agreement made by members of OPEC and its allies, known as OPEC+. Some OPEC+ countries are reducing their output by 1.66 million barrels per day until the end of 2024. Saudi Arabia, being a leading member, has further lowered its output by 1 million barrels per day in July and August. Russia, another major player in the global oil market, is also reducing its crude exports by 500,000 barrels per day in the coming month.

Growth Projection Downgrade

The International Monetary Fund (IMF) previously recognized Riyadh as the fastest-growing economy in the G20 for 2022, with an overall expansion of 8.7% that year. However, the IMF recently revised its GDP growth projections for Saudi Arabia, foreseeing a slowdown in the country's economic growth. The IMF expects Riyadh's GDP to grow by only 1.9% in 2023. This downgrade is attributed to the production cuts announced by Saudi Arabia as part of the OPEC+ agreement. Nevertheless, private investment and the implementation of "gigaprojects" are expected to continue supporting strong non-oil GDP growth.

Impact on the Region

The slowdown in Saudi Arabia's economy is expected to have a ripple effect on the overall performance of the Middle East and Central Asian region. The IMF has revised its growth projection for the region, expecting it to reach only 2.5% this year, down from 5.4% in 2022. This indicates the interconnectedness of regional economies and the susceptibility of countries in the region to fluctuations in the oil market.

Conclusion: The Impact on New Businesses in Saudi Arabia

The recent economic slowdown in Saudi Arabia, driven by crude output cuts and a drop in oil prices, may have significant implications for new businesses looking to establish themselves in the country. As the Saudi economy heavily relies on oil exports, the decline in oil prices has had a substantial impact. With oil prices remaining below $80 per barrel, the support provided by commodities has decreased significantly. This creates a challenging environment for new businesses, particularly those operating in sectors directly tied to oil or dependent on a strong oil-driven economy. Moreover, Saudi Arabia's voluntary production cuts, part of the OPEC+ agreement, have further affected the economy. The reduction in oil output limits opportunities for businesses looking to capitalize on the traditional oil industry. New ventures in the energy sector may face difficulties as the production cuts have directly impacted the availability of resources and market demand. The revised GDP growth projections by the IMF also indicate a potential slowdown in Saudi Arabia's overall economic growth. While private investment and non-oil sectors have shown resilience, new businesses may need to carefully consider their strategies and diversify beyond oil-related industries to mitigate the impact of these changes. Furthermore, the interconnectedness of regional economies in the Middle East and Central Asian region means that the slowdown in Saudi Arabia's economy can have a ripple effect. This implies that new businesses operating in neighboring countries may also face challenges due to the economic fluctuations in the region. To successfully navigate these challenges, new businesses in Saudi Arabia should consider diversifying their operations, targeting sectors with strong growth potential outside of oil and embracing the country's economic diversification program. Adapting to the changing economic landscape and leveraging government initiatives promoting non-oil sectors can help businesses remain resilient and find opportunities for growth even in the face of economic slowdowns. Article First Published at: https://www.cnbc.com/2023/07/31/saudi-arabias-economic-growth-slows-as-oil-cuts-price-drops-bite.html