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Saudis Fear Overheating Economy Could Slow Diversification from Oil

The world's largest crude oil exporter, Saudi Arabia, is looking to prevent its economy from overheating and driving inflation higher as it aims to boost growth in its non-oil sector.

Allowing more time to implement the massive investment projects under the Vision 2030 plan to diversify the oil-dependent economy could be a wise move, Saudi Finance Minister Mohammed Al-Jadaan said this week.

"If you don't allow your economy to catch up with your projects, basically what will happen is you'll import a lot more," the minister said at the Qatar Economic Forum in Doha on Tuesday, as carried by Bloomberg.

Riyadh Looking to Avoid Overheating its Economy

The Kingdom has to be careful not to reach the point where the economy will hit the limits of its capacity to meet demand from the government and individuals, Al-Jadaan said.  

This point, commonly referred to as an overheated economy, leads to high inflation and leakage. In economics, one example of leakage is higher volumes of imported goods because they transfer income earned in one country to another country.

If Saudi Arabia doesn't allow its economy to catch up with its billions-dollar-priced huge investment projects, it may end up lacking the manufacturing and other capacity to support its plans, Al-Jadaan noted.

"So giving it more time is actually wise," he said at the Qatar Economic Forum, Powered by Bloomberg.

"It's not actually the funding that is the constraint," the minister added. "It's actually the economic leakage."

Some Vision 2030 Projects Could Be Delayed

Saudi Arabia has started to admit in recent months that it would prioritize some projects that are part of Crown Prince Mohammed bin Salman's Vision 2030 plan while possibly delaying others.

At the end of last year, Saudi Arabia acknowledged for the first time that some of the projects of its Vision 2030 plan to diversify its economy away from oil are being delayed to avoid pressures on the economy. Related: Existing Foreign Oil Producers in Venezuela May Get Licenses Despite Sanctions

The Kingdom needs more time to "build factories, build even sufficient human resources," minister Al-Jadaan said in December.

"The delay or rather the extension of some projects will serve the economy," he told Bloomberg at the time.

"There are strategies that have been postponed and there are strategies that will be financed after 2030," Al-Jadaan told Bloomberg without specifying which projects are being delayed.

The Crown Prince "might be finally ready to have some tough conversations" about which projects could be accelerated and which can wait to be developed, a source familiar with the thinking of Saudi Arabia's sovereign wealth fund, the Public Investment Fund, told the Financial Times this month.

Conservative Oil Income Forecasts

Despite possible discussions about recalibrating the timing of the expensive projects, Saudi Arabia remains optimistic that it could pull off the Vision 2030 plan to have its non-oil economy grow with tourism and technology.

The Kingdom has seen its non-oil sector grow steadily in recent years, with more income from non-oil activities, Al-Jadaan said at the forum in Qatar this week.  

This increased income for the state, coupled with a conservative forecast about revenues from oil, would help Saudi Arabia with the plans for funding the many futuristic projects of Vision 2030, he added. 

"We are very conservative in our projections and therefore our plans on how the oil revenue will cover that expenditure," the minister noted.

The non-oil sector and government activities grew in the first quarter of 2024, but a 10.6% decline in oil activities - as the Saudis are limiting oil production at 9 million barrels per day (bpd) - dragged down the Kingdom's GDP by 1.8% compared to the same period of 2023, Saudi Arabia's General Authority for Statistics said earlier this month. This decrease was primarily driven by a 10.6% decline in oil activities. At the same time, non-oil activities increased by 2.8%, and government activities grew by 2.0% on an annual basis in Q1 2024.

The seasonally adjusted real GDP rose by 1.3% in the first quarter this year compared to the fourth quarter of 2023, driven by a 2.4% increase in oil activities, along with 0.5% growth in non-oil activities.

Revenues for the state from the oil sector went up by 2% year-on-year in the first quarter, while non-oil revenues increased at a faster pace, 9%, to drive an overall 4% rise in total budget revenues, official data showed in early May.

Saudi Arabia, however, booked a budget deficit in Q1 2024, due to rising expenditures which outpaced government revenues.

Separately, inflation in the Kingdom is holding steady and below global levels, potentially giving assurances to Saudi Arabia's officials and financiers that the economy is not nearing the point of tipping into overdrive.  

The annual inflation rate in Saudi Arabia was 1.6% in April 2024, the same as the annual inflation rate in March. The Consumer Price Index (CPI) inched up by 0.3% in April compared to March 2024.

Saudi officials have finally started to acknowledge that some expensive futuristic projects may have to wait longer for development, to avoid roiling the economy of the world's top crude oil exporter, which could have an impact on the global oil market and economy.

By Tsvetana Paraskova for Oilprice.com

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Tsvetana Paraskova

Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews.  More