JEDDAH — The Kingdom of Saudi Arabia will face a moderate business cycle during 2015 and 2016, growing around 3% in real terms, the National Commercial Bank said in its “Saudi Economic Review” this month. “ Our assumptions centered on lesser contribution from the oil sector and moderation in the non-oil sector,” it noted. In 2015, the macroeconomic projections were based on an average Arabian Light crude oil price of $65/bbl and an average daily crude oil production level of 9.8 MMBD. Accordingly, this projected decline in oil prices will result in lower oil revenues, which will weigh negatively on the fiscal and current accounts that will register deficits of 11.7% and 3% out of GDP, respectively. Real GDP growth is expected to rise by 3.4%, due mainly to an expected growth in non-oil sector by 5.1%, driven by the private sector that will compensate for the insignificant contribution of oil. The key beneficiaries in 2015 will remain to be the trade, construction and manufacturing sectors, growing at 7%, 6% and 6%, respectively. The projections for the three sectors are supported by the recent royal decrees, buoyant activity in the projects' market and resilient business confidence. Notably, the series of royal decrees announced in January and April 2015 will provide favorable stimulus to the non-oil private sector, especially from the bonus payment of two salaries to all public sector employees. Ostensibly, the report said, the next five years might prove to be a challenging time for the Kingdom on the back of rangebound oil prices and slower growth in crude production, given the increased possibility of oversupply from OPEC and non-OPEC. The inflection toward fiscal deficits will weigh negatively on net foreign assets going forward, a situation that have materialized with the government drawing down around $45.5 billion in 2015 YTD. Chinese growth prospects, Federal Reserve monetary policy direction, Iran's nuclear deal with the West are the most notable events that can pose risks to our crude oil prices and production forecasts whether to the upside or downside given the inherent volatility of oil markets. All is quiet on the monetary policy front, the report noted. Monetary policy in Saudi Arabia is exhibiting a high degree of stability and predictability compared to most emerging markets that suffer from structural deficiencies, which entangled their monetary policy in a balancing act between supporting economic growth and defending currencies. SAMA is mainly concerned these days with price stability and money supply dynamics. On a near-term note, with the Fed expected to raise its target funds rate by the end of the year and gradually thereafter, SAMA will follow suit by increasing the repo and reverse repo rates for the first time since 2009. Yet, it is our opinion that raising the reverse repo and repo rate will not tighten monetary conditions given the ample liquidity, evident from the 3- month interbank market that fell from around 96 bps in 2014 to as low as 77bps in 2Q 2015. — SG
