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Irina Slav

Irina Slav

Irina is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing on the oil and gas industry.

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Saudis See Economy Shrink In Spite Of Higher Oil Prices

Saudi Arabia’s economy contracted by 1.03 percent over the second quarter of the year, after a 0.5-percent contraction in the first quarter. The pace of recession accelerated because of the country’s participation in the OPEC oil production cut and because of disappointing growth in the non-oil industries.

This is the first time the GDP of the Kingdom has contracted in two consecutive quarters since the latest financial crisis took hold, and it is happening despite government efforts—led by Crown Prince Mohammed bin Salman—to launch the Vision 2030 economic diversification program that is supposed to wean the country off crude.

For now, Saudi Arabia remains hooked on the commodity: in the second quarter, oil GDP declined by 1.8 percent, Bloomberg reported citing official statistical data. At the same time, non-oil GDP rose by a meager 0.6 percent. The figure reflects cuts in public spending prompted by the lower-for-longer oil price environment and depressed consumer spending.

The second-quarter data also suggests the government’s U-turn on austerity measures is so far failing to stimulate greater consumer spending. That’s despite a 1-percent growth in the Saudi government sector during the three-month period under review.

Analysts who spoke to Bloomberg seem to be most interested in the moderate growth rate in the non-oil sectors of the Saudi economy. One of these, Ziad Daoud from Bloomberg Intelligence, noted that the growth rate in non-oil industries is too weak to compensate for the lower oil production. Also, he said, the country’s non-oil economy is still too closely linked with oil—a link that needs to be severed if the Kingdom is to diversify successfully. Related: The Next Big Offshore Boom Is About To Happen Here

Another analyst, Abu Dhabi Commercial Bank’s chief economist Monica Malik, said the Saudi non-oil economy is stagnating despite the government’s reversal of the austerity measures, which happened in April.

In this context, the IPO of Aramco becomes even more essential for Prince Mohammed’s diversification plans. With the billions Riyadh expects it to fetch, it might be able to jumpstart the economy and shift its center away from oil.

By Irina Slav for Oilprice.com

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