It’s the economy, stupid

For those still thunderstruck by Opec reaching an accord last week, allow the IMF to show you the workings. Its latest World Economic Outlook makes clear why economics trumped politics in Algiers.

The IMF’s view on the Saudi economy will make for worrying reading in Riyadh. Growth is expected to slow to 1.2pc in 2016 from 3.5pc in 2015, and is forecast at 2pc in 2017. The IMF pinned the slowdown on the fiscal consolidation taking place in the region – it projects similar headwinds for the other members of the Gulf Co-operation Council — Kuwait, the UAE, Qatar, Bahrain and Oman.

The Saudi government has embarked on an austerity programme to curb public spending, which is the main engine of the economy. Salaries, bonuses and benefits will be cut as of the beginning of this month. Energy subsidies have already been reduced.

This is happening as a direct response to lower oil prices. The extent of Riyadh’s reliance on its crude is evident in the latest report from Saudi-based bank Jadwa. Oil revenues will be 92.6pc of all Saudi government income this year. The government’s budget deficit is expected to shrink, but this is only because Riyadh has been borrowing and drawing on its prized foreign assets, and these will fall by 14pc this year, Jadwa estimates, after a similar drop in 2015. A deal on crude production was no longer the sole desire of Opec’s ailing periphery.

Contrast all this with a more buoyant Iran. After barely growing last year, the Iranian economy is forecast to expand by 4.5pc and 4.1pc for this year and next year, respectively. The IMF attributes this stellar turnaround to an increase in oil production, and said greater benefits could follow should Iran fully integrate into the global financial system. With Iran having seemingly won an exemption from any Opec austerity, no wonder oil minister Bijan Namdar Zanganeh has the air of a man whose horse came in.

Bank Citi said Saudi Arabia’s change of tack appears to be “a tweaking of its 2014 strategy with a bit of revenue maximization that also takes advantage of its oil demand seasonality”. The bank calls this a gamble, but it seems to be a necessary one at a time of unprecedented financial uncertainty in Riyadh.

“When Saudi Arabia embarked on the new oil policy back in 2014 it seemed plausible that the Kingdom’s potent combination of low-cost reserves, large financial cushion and small population left it well placed to outlast both US shale producers and Iran in a low oil price world. The reality is that shale has survived,” Citi says.

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