Saudi Arabia’s economic reforms are going well, the International Monetary Fund (IMF) said after annual consultations with authorities, urging the government not to boost spending in line with climbing oil prices.

“Saudi Arabia is making good progress in implementing its ambitious reform programme under Vision 2030,” Tim Callen, head of an IMF team which held talks with Saudi officials over 12 days last month, said in a statement.

He predicted economic growth would start picking up this year, after gross domestic product (GDP) shrank last year for the first time since 2009.

“The government remains committed to wide-ranging economic and social reforms to transform the economy away from its traditional reliance on oil and to create a more dynamic private sector that creates jobs for the growing working-age population.”

On April 24, the government unveiled its privatisation programme, which is intended to generate around $10 billion in non-oil revenues by 2020.

ECONOMIC GROWTH

Daimler, last May won an order from Riyadh for 600 Mercedes-Benz Citaro buses

IMF joins a number of research firms, rating agencies and economists forecasting increased growth for the kingdom’s economy.

“Saudi Arabia’s economy is expected to emerge from recession this year on the back of higher oil prices, renewed public spending following years of harsh austerity and healthy global growth,” said FocusEconomics in its latest report FocusEconomics Consensus Forecast Middle East & North Africa.

FocusEconomics Consensus Forecast panelists expect growth of 1.5 per cent in 2018, which is down 0.1 percentage points from last month’s projection. In 2019, growth is seen picking up pace to 2.3 per cent.

BMI Research said the Saudi Arabian economy is poised to grow by 1.6 per cent this year amid a rebound in oil prices and an easing of fiscal austerity.

Private sector activity, however, will regain traction at a slower pace as the introduction of VAT weighs on business confidence in the first half of the year.

“The Saudi economy will recover in 2018, as continued gains in oil prices support the government’s move towards a more expansionary fiscal policy in turn boosting consumption in the kingdom,” BMI said in a report.

“Beyond the short-term headwinds posed by the introduction of VAT, business activity will also strengthen.”

The research firm, a unit of Fitch Group, noted that government’s shift towards a more expansionary fiscal policy will be a key driver of growth over the coming quarters, boosting both government and private consumption.

S&P Global Ratings affirmed Saudi Arabia’s credit rating in April with a stable outlook on the expectation that economic growth will accelerate in 2018 as the world’s biggest oil exporter continues to boost spending.

Alkhabeer Capital, the Jeddah-based asset manager specialising in alternative investments said Saudi Arabia’s economic growth will reach 1.8 and 2.3 per cent in 2018 and 2019 respectively, with both estimates being slightly higher than what the IMF predicted earlier this year.

According to its report titled ‘Saudi Arabia: Thinking Out of the Box and Reshaping the Economy’, growth is expected to strengthen beyond 2019 if the government is able to manage the short-term inflationary pressure and continue its investment-focused policies.

Ahmed Saud Ghouth, Alkhabeer Capital’s chief executive officer, said:  “The government is creating a platform for a brighter economic future. There is also a larger picture of the economic transformation that is still unfolding in light of the recent developments. Investors must increase their investment diversification and think over the long term. Long-term investments will ensure sustainable returns for investors in light of the opportunities that are still arising.”

In the report, Alkhabeer Capital predicting an uptick in growth from 2019 onwards.  It sees inflation to rise to over 5 per cent this year, while highlighting government plans to mitigate near-term negative impacts through a series of measures, including the Citizens Account Program, along with additional payments to state employees, pensioners and soldiers. Alkhabeer believes that by directing government expenditure to investment rather than consumption, the fiscal reforms initiated by the kingdom will prove positive over the long-term.

The report also analyses the kingdom’s strategy that aims to improve the skill sets of Saudi citizens, create more employment opportun ities for them and reduce the dependence on expatriates, highlighting efforts in that area such as updating the Nitaqat system. Alkhabeer posits that even a 10 per cent shift over time in employment towards Saudis could help solve the unemployment problem.

Alkhabeer expects the non-oil sector to play a significant role in the country’s growth narrative over the coming years. The key sectors that will play a major role in this growth narrative are construction, retail, entertainment, education, healthcare and tourism.

Amongst additional key takeaways, the report confirms that the mega development projects underway have the potential to make the kingdom a regional tourism and entertainment destination. It takes into perspective large-scale projects and initiatives such as a recent agreement with SoftBank to build the world’s largest solar plant, conceptualising ‘NEOM’, the 10,230-sq-m transnational city and economic zone, and the leisure city in Al Qidiya.

BUSINESS FRIENDLY

While making its new economic strategy the core of the change, Riyadh is also introducing measures to improve the speed and ease of doing business in the kingdom.

Saudi Arabia wants to be in the top 20 countries measured by “ease of doing business” by 2020, the head of the Kingdom’s investment promotion agency, the Saudi Arabian General Investment Authority (SAGIA) said.

Ibrahim Al Omar, SAGIA governor, said that there were a lot of reforms that would have to be accomplished if it were to achieve top 20 status as measured annually by the World Bank, which put the kingdom at number 92 in the world out of 190 countries.

But he said that there was a “great interest” among international investors to get more involved in business in the kingdom and reforms were being pushed through fast.

“We are a model for the whole world in how to improve the business environment”, he said, highlighting the new arbitration and insolvency laws, the efficiency of the kingdom’s ports, and the ease and speed of getting a business visa.

“There has been some negative feedback on the insolvency laws, but they are a protection tool for any business. It will give you the opportunity to reschedule your liabilities,” Al Omar said.

He said there were risks perceived by international investors because of the limited clarity and awareness of reforms in the kingdom. “It is hard to communicate when we’re going so fast,” he said.

Al Omarsaid that SAGIA was setting up an online portal listing all potential deals on offer.

MANUFACTURING BOOST

Meanwhile, in order to cut imports and boost manufacturing, Saudi Arabia aims to build buses and operate toll roads.

The kingdom has held preliminary discussions with foreign firms about manufacturing buses locally and plans to convert part of its highway system into toll roads to help make its transport system more efficient, the transport minister said.

“We are developing the public transport system with a lot of buses, so we want to see how we can leverage this to develop domestic industry,” Nabeel Al Amudi said in an interview to Reuters.

The kingdom, which does not have a significant auto manufacturing industry, is spending billions of dollars to expand public transport systems in the capital Riyadh and other big cities, and has imported thousands of buses in the last few years.

Last May, German vehicle maker Daimler received an order from Riyadh for 600 Mercedes-Benz Citaro buses, the largest order for the vehicles in the history of its bus division. China Yuchai International last month announced the delivery of 800 buses to Saudi Arabia.

Producing the vehicles locally would allow Saudi Arabia to save on import costs while creating jobs and expanding domestic industry — key goals of an economic reform program designed to reduce the economy’s dependence on oil exports.

The reform programme features plans to have the private sector operate much of the kingdom’s transport infrastructure, including airports and sea ports, with the government keeping a role as regulator.