Dubai: Saudi Arabia sacrifices non-oil economic growth with fiscal policies designed to ensure the stability of its currency tour during a period of low crude prices, according to Goldman Sachs Group Inc.
“Maintaining the riyal pen at current levels remains a major policy priority for the Saudi authorities,” Farouk Soussa, an analyst at Goldman London, said in a report to clients. “However, in a low oil price environment, this means tightening fiscal policy, which must keep the budget deficit in check to ensure that external balances remain in line with the stability of the pen.”
Saudi Arabia divides its currency against the dollar and tends to stay locked in with the US Federal Reserve. Although pressure increased earlier this year with the collapse of crude prices, 12-month dollar forwards for the Saudi Riyal have since stabilized.
Goldman said the government’s fiscal plans are likely to help the current account return to surplus next year and ensure that the medium-term foreign exchange reserve is slightly more than 80% of the narrow monetary benchmark, M1.
But “the sharp drop in projected spending proposed over the next three years will suppress non-oil economic growth,” Soussa said, predicting that it will average 1.2% year-on-year during that period. , compared with the growth in the trend of 2.5%.
“This will result in a larger gap with the pre-Covid trend level of non-oil economic production,” Soussa said.
“As Vision 2030 sets out in detail, growth and diversification of the economy and increasing employment will require sustained efforts on the reform front, in parallel with government investment,” Soussa said. “In a low oil price environment, where spending is limited, this becomes even more the case.”
Source: Gulf News