Saudi budget plans suggest austerity is here to stay
Saudi Arabia’s preliminary 2021 budget that was released this week reinforces our view that, with oil prices likely to stay low, policymakers are not intending to row back on recent fiscal austerity.
The document revealed that the government expects the budget deficit to reach 12.0% of GDP this year, compared with a shortfall of 4.5% of GDP in 2019, driven by a slump in oil and non-oil revenues. Public debt is expected to jump from 22.8% of GDP last year to 34.4% of GDP by the end of this year.
The 2021 budget plans suggest that, despite policymakers recent assertion that they are looking at all options to boost the recovery (see here), there are no plans to reverse recent fiscal consolidation measures. Recall that the government suspended the Cost of Living Allowance in June and followed this up with a hike in the VAT rate, from 5% to 15%, in July. Capital spending is also being cut – it was down by more than 35% y/y in the first half of 2020.
Government spending is projected to fall in each of the next three years, by a total of close to 12%. Vision 2030 programmes will undergo “structural improvements” and the authorities will implement fiscal rules to “avoid pro-cyclical spending tied to oil market conditions” (although no details on these have been provided so far). Data released this week showed that the Saudi economy contracted by 7.0% y/y in Q2 (see here) and, while activity has rebounded as containment measures have been lifted, the backdrop of fiscal austerity will remain a major headwind to the recovery.
Arabtec liquidation highlights Dubai’s troubles
The collapse of the region’s largest construction firm, Arabtec, highlights the pain being inflicted by the coronavirus crisis and reinforces our fears over the debts of Dubai’s government-related entities (GREs).
According to a report by Reuters on Wednesday, shareholders in Arabtec voted to file for insolvency and enter into liquidation as “adverse market conditions” have made the company’s financial situation “untenable”. Arabtec had already reported a loss of AED794mn ($216mn) in H1. But with the decline in Dubai real estate showing no signs of easing, a quick turnaround seems to be out of reach.
The Arabtec saga follows problems at other real estate and construction firms in the Emirate; Nakheel is reportedly seeking debt refinancing, Limitless restructured its debts in March, and Drake & Scull is in a court battle with creditors. We warned in a Focus earlier this year that the crisis risked exacerbating problems of overcapacity in a number of Dubai’s key sectors and that this threatened fresh debt problems. There is, of course, a lack of transparency over the debts of Dubai’s GREs and we will be taking a fresh look at this in a future Update.
Lebanon back to square one in forming a government
Lebanon’s PM-designate Mustapha Adib resigned on Sunday after his technocratic cabinet was reportedly blocked by Hezbollah and Amal. The latest failure prompted France’s President Macron to point the finger at the two parties as being Lebanon’s problem. Hassan Nasrallah, the leader of Hezbollah, snapped back and insisted that the party should continue to play a crucial role in the government and keep control of the finance ministry. There is a growing risk that politicians go down the slippery slope of stoking sectarian tensions, leading to an even messier outcome to the current crisis.
Kuwait: new Emir faces tough challenges
Kuwaiti Emir Al-Sabah passed away on Tuesday and the country is now in a 40-day period of mourning. As we outlined in an Update, the new ruler Sheikh Nawaf al-Ahmad al-Sabah faces plenty of challenges in acceding to the throne.
The week ahead
September’s whole economy PMIs are likely to show that economic recoveries have lost steam.
Economic Diary & Forecasts
Date | Country | Release/Indicator/Event | Time (BST) | Previous* | Median* | CE Forecasts* | |
4th Oct | – | – | No Significant Data Released | – | – | – | – |
5th Oct |  | Egy | Whole Economy PMI (Sep.) | – | 49.4 | – | – |
 | Sau | Whole Economy PMI (Sep.) | – | 48.8 | – | – | |
 | UAE | Whole Economy PMI (Sep.) | – | 49.4 | – | – | |
 | Leb | Whole Economy PMI (Sep.) | – | 40.1 | – | – | |
6th Oct | – | – | No Significant Data Released | – | – | – | – |
7th Oct | – | – | No Significant Data Released | – | – | – | – |
8th Oct |  | Tun | Consumer Prices (Sep.) | – | +0.2%(+5.4%) | – | +1.1%(+6.4%) |
Selected future data releases and events | |||||||
9th Oct | | Egy | Consumer Prices (Sep.) | – | (+3.4%) | – | |
| Egy | Core Consumer Prices Sep.) | – | (+0.8%) | – | ||
 | Bah | Private Sector Credit (Aug.) | – | (+3.2%) | – | ||
 | Jor | Consumer Prices (Aug.) | – | +0.1%(-0.6%) | – | ||
13th Oct |  | OPEC | OPEC Monthly Oil Market Report | – | – | – | |
| UAE | Consumer Prices (Aug.) | – | -0.6%(-2.1%) | – | ||
14th Oct |  | Oma | Private Sector Credit (Aug. ) | – | (+5.8%) | – | |
18th Oct |  | Qat | Consumer Prices (Sep.) | – | +0.5%(-4.1%) | – | |
20th Oct | | Sau | Consumer Prices (Sep.) | – | +5.9%(+6.1%) | – | |
21st Oct | | Oma | Consumer Prices (Sep.) | – | +0.2%(-1.3%) | — | |
22nd Oct |  | Mor | Consumer Prices (Sep.) | – | +1.4%(+0.9%) | – | |
26th Oct | | UAE | Private Sector Credit (Aug.) | – | (-1.1%) | – | |
28th Oct | | Sau | Private Sector Credit (Sep.) | – | (+14.3%) | – | – |
*m/m(y/y) unless otherwise stated Sources: Bloomberg, Refinitiv, Capital Economics | |||||||
Main Economic & Market Forecasts
Table 1: GDP & Consumer Prices (% y/y) | ||||||||||||
Share of World 1 | 2008-18 Ave. | GDP | Consumer Prices | |||||||||
2018 | 2019 | 2020 | 2021 | 2022 | 2018 | 2019 | 2020 | 2021 | 2022 | |||
Saudi Arabia | 1.3 | 3.5 | 2.4 | 0.3 | -7.3 | 6.5 | 2.3 | 2.5 | -2.1 | 3.5 | 4.0 | 2.5 |
Egypt | 1.0 | 3.9 | 5.4 | 5.5 | -3.5 | 8.8 | 5.8 | 14.4 | 8.6 | 5.5 | 6.5 | 6.0 |
UAE | 0.5 | 2.8 | 1.7 | 3.0 | -10.5 | 7.8 | 4.0 | 3.1 | -1.9 | -2.3 | 2.5 | 3.0 |
Algeria | 0.5 | 2.8 | 1.5 | 0.8 | -9.0 | 1.8 | 1.5 | 4.3 | 2.0 | 3.3 | 6.0 | 6.5 |
Qatar | 0.3 | 7.4 | 1.4 | -0.4 | -2.3 | 4.5 | 5.5 | 0.3 | -0.6 | -0.5 | 1.5 | 2.5 |
Morocco | 0.2 | 3.8 | 3.0 | 2.3 | -6.8 | 7.0 | 3.8 | 1.8 | 0.7 | 0.8 | 1.8 | 2.0 |
Kuwait | 0.2 | 1.1 | 1.2 | 0.4 | -6.0 | 4.0 | 2.8 | 0.6 | 1.1 | 1.0 | 2.5 | 2.5 |
Oman | 0.1 | 4.1 | 2.0 | 0.5 | -7.3 | 4.5 | 2.0 | 0.9 | 0.1 | -0.5 | 5.0 | 1.8 |
Tunisia | 0.1 | 2.3 | 2.5 | 1.0 | -7.0 | 5.0 | 3.0 | 7.3 | 6.7 | 6.0 | 5.0 | 5.0 |
Jordan | 0.1 | 3.2 | 2.0 | 2.5 | -6.8 | 8.8 | 3.3 | 4.5 | 0.8 | 0.3 | 3.3 | 4.0 |
Lebanon | 0.1 | 3.4 | 0.2 | -3.0 | -30.0 | -13.5 | 2.5 | 6.1 | 2.9 | 99.3 | 60.0 | 6.0 |
Bahrain | 0.1 | 3.8 | 2.0 | 1.8 | -4.5 | 3.3 | 1.3 | 2.1 | 1.0 | -1.8 | 1.8 | 2.3 |
Middle East & North Africa | 4.5 | 3.7 | 2.7 | 1.9 | -6.9 | 6.1 | 3.5 | 5.1 | 1.4 | 3.9 | 5.1 | 3.8 |
Sources: Refinitiv, Capital Economics. 1) % of GDP, 2019, PPP terms (IMF estimates). | ||||||||||||
Table 2: Central Bank Policy Rates | ||||||
Policy Rate | Latest | Last Change | Next Change | Forecasts | ||
End | End | |||||
Saudi Arabia | Reverse Repo Rate | 0.50 | Down 75bp (Mar. ’20) | None on the horizon | 0.50 | 0.50 |
Egypt | Overnight Deposit Rate | 8.75 | Down 50bp (Sep. ’20) | Down 50bp (Q1 2021) | 8.75 | 7.00 |
UAE | Repo Rate | 0.75 | Down 75bp (Mar. ’20) | None on the horizon | 0.75 | 0.75 |
Algeria | Discount Rate | 3.25 | Down 50bp (Mar. ’20) | None on the horizon | 3.25 | 3.25 |
Qatar | Deposit Rate | 1.00 | Down 50bp (Mar. ‘20) | None on the horizon | 1.00 | 1.00 |
Kuwait | Discount Rate | 1.50 | Down 100bp (Mar. ’20) | None on the horizon | 1.50 | 1.50 |
Morocco | Key Rate | 1.50 | Down 50bp (Jun. ’20) | None on the horizon | 1.50 | 1.50 |
Oman | Overnight Repo rate | 0.50 | Down 100bp (Mar. ’20) | None on the horizon | 0.50 | 0.50 |
Tunisia | BCT Key Rate | 6.25 | Down 50bp (Sep. ’20) | None on the horizon | 6.25 | 6.25 |
Jordan | Overnight Deposit Rate | 1.75 | Down 100bp (Mar. ’20) | None on the horizon | 1.75 | 1.75 |
Lebanon | Repo Rate | 10.00 | Down 200bp (Dec ‘09) | None on the horizon | 10.00 | 10.00 |
Bahrain | 1-week deposit facility | 1.00 | Down 75bp (Mar. ’20) | None on the horizon | 1.00 | 1.00 |
Sources: Bloomberg, Capital Economics | ||||||
Table 3: Currencies and Stock Markets | ||||||||
Currency | Latest | Forecasts | Stock Market | Latest | Forecasts | |||
End | End | End 2020 | End | |||||
Saudi Arabia | SAR/USD | 3.7507 | 3.7500 | 3.7500 | TASI | 8,332 | 8,200 | 9,450 |
Egypt | EGP/USD | 15.71 | 17.00 | 18.00 | EGX30 | 11,042 | 12,600 | 15,200 |
UAE | AED/USD | 3.6728 | 3.6725 | 3.6725 | DFMGI | 2,263 | 2,325 | 2,800 |
Algeria | DZD/USD | 128.9 | 145.0 | 160.0 | – | – | – | – |
Qatar | QAR/USD | 3.6400 | 3.6400 | 3.6400 | QSE | 10,017 | 10,050 | 12,050 |
Kuwait | KWD/USD | 0.3060 | 0.3040 | 0.3040 | KWSE | 5,445 | 7,900 | 8,950 |
Morocco | MAD/EUR | 10.84 | 11.50 | 11.80 | MADEX | 8,122 | 11,250 | 12,750 |
Oman | OMR/USD | 0.3849 | 0.3845 | 0.3845 | MSM30 | 3,614 | 4,000 | 4,750 |
Tunisia | TND/EUR | 3.24 | 3.60 | 3.80 | TUNINDEX | 6,690 | 8,100 | 9,200 |
Jordan | JOD/USD | 0.71 | 0.71 | 0.71 | ASE | 1,585 | 2,000 | 2,050 |
Lebanon | LBP/USD | 1505.7 | 7,500 | 7,500 | BLOM | 601 | 600 | 650 |
Bahrain | BHD/USD | 0.3771 | 0.3761 | 0.3761 | BHSE | 1,432 | 1,550 | 1,850 |
Sources: Bloomberg, Capital Economics | ||||||||
James Swanston, MENA Economist, james.swanston@capitaleconoics.com