The country is pushing its economy towards non-oil growth, but is this enough to prevent decline on the back of further oil-price fluctuations.

Heading towards 2017, the outlook by regional experts on the Saudi Arabian economy is largely positive, with Moody's revising its outlook on Saudi Arabia's banking system to stable from negative, and KPMG predicting a growth in the country’s economy into 2017.

This improved sentiment is largely due to an expected increase in government spending and easing funding pressures. The improvement in the oil price to a projected $60 per barrel later in the year, as well as the leadership’s determination to implement the National Transformation Program which includes the restructuring of many economic sectors only adds to marketplace confidence.

"Despite low oil prices, which we expect to fluctuate between $40 and $60 a barrel over the next 18 months, and cuts in oil production, the Saudi economy will gradually recover, supported by government spending. As a result Saudi banks' liquidity and funding conditions will improve. Although profitability and loan performance will continue to soften, Saudi banks will maintain robust capital and loss absorption buffers compared to regional and international peers over the outlook horizon," says Olivier Panis, a Vice President at Moody's.

According to Moody's, the operating environment for Saudi banks will recover. Whilst the rating agency expects real GDP growth to contract by -0.2 per cent in 2017, increased government spending and projects to diversify economic output will support a gradual recovery of the non-oil economy, which will grow by two per cent in 2017 versus 0.2 per cent in 2016. Consequently, Moody's expects credit growth to remain low at three per cent in 2017, but to gradually pick up from 2018. This outlook is also supported by Saudi-based business support services company, Proven, which helps small businesses and start-ups set up.

“Government spending will increase [in 2017] after the budget deficit was greatly reduced in 2016. State spending on infrastructure will increase with the aim to support economic growth and a new system of cash payments to poorer citizens will offset the impact on them as the government gradually raises domestic energy prices to reduce its subsidy burden,” said Zaid Al Mashari, CEO and Founder of Proven.

Al Mashari added that actions taken to expand the private sector and get Saudi’s into work (National Transformation programme) will also give a boost to the economy as spending increases.

The Saudi Arabian Government’s Vision 2030 strategy is also a key driver of economic confidence across the Middle East, and a positive business indicator at a time of record low oil prices.

“The growth strategy is pinned on diversifying the nation's oil-based economy. It plans on attracting direct, foreign and domestic investments, moving towards a broader, service-based economy,” said Edward Gallagher of De Boer Middle East.

Regional experts predict that the most growth will be seen in the mining, real estate, IT and logistics sectors, with huge investments already being seen in REIT’s in the country. According to reports, the size of real estate investment funds in Saudi Arabia is estimated at $10 billion.

The Saudi Arabian construction industry is also forecast for strong growth, forecast to rise at a CAGR of 7.05 per cent reaching $148 billion by 2020, according to independent figures released by the Timetrics Construction Intelligence Centre (CIC). This presents both opportunities and challenges. The result is an increasing number of major infrastructure and mega construction projects throughout the Kingdom.

Growth in the construction sector will be underpinned by increasing religious tourist numbers in Saudi Arabia, expected to rise from 17.5 million visitors recorded last year to between 25 and 30 million in 2025. The contribution of religious tourism to the non-oil sector of the country’s GDP will rise from 5.4 per cent to 5.7 per cent by the year 2020, according to a local publication by Al-Jazira Capital.

A recent report by property experts JLL also points to a hotel property construction boom in Makkah adding fuel to the fire that is the Saudi real estate investment sector. The Saudi 2030 Vision recognises the crucial role religious tourism can play in diversifying the economy away from dependence upon the oil and gas sector, with religious pilgrims currently contributing two to three per cent of Saudi's total GDP. Bearing this in mind, there are plans to roughly double the capacity of the hotel sector in Makkah to accommodate both Umrah and Hajj visitors to around 15 million and five million respectively by 2020.

"Increasing religious tourism in line with 'Saudi Vision 2030' will create huge opportunities in the retail, hotel and broader accommodation sectors in Makkah. The long term prospects for the hotel sector are extremely positive given the reliance on accommodation providers to support the global unlimited demand of religious pilgrims to Makkah. More than ever, the key to capitalising on growth of the real estate market is the strong cooperation between public and private sectors to invest in new and existing accommodation. An added benefit is the maxim of 'build it and they will come' which applies more aptly to the Makkah market than any other city in the region. In addition to increasing accommodation, the success of the Saudi Government's plans to expand the number of religious visitors also relies heavily on the ability to address transportation capacity. While there have been significant investments to improve the networks serving Makkah, many of the projects have been affected by the stringent 2016 budget," said Jamil Ghaznawi, National Director and Country Head of JLL Saudi Arabia.

While much of the Saudi economy appears buoyant, there are still some reservations. Much of the GCC’s largest economy is still based upon oil, and further downward fluctuations in the oil price and OPEC restrictions could continue to hit the country hard, especially since it has not had time to fully diversify away from its main money source.

However, the Saudi Arabian Government’s Vision 2030 strategy is a key driver of economic confidence across the Middle East, and a positive business indicator at a time of record low oil prices. The growth strategy is pinned on diversifying the nation's oil-based economy. It plans on attracting direct, foreign and domestic investments, moving towards a broader, service-based economy. If this succeeds, Saudi Arabia may be a force to be reckoned with once again.

Nabilah Annuar - CPI Financial

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