Growth recovered to 2.2% in 2018, supported by rising oil revenues and increased public spending. The outlook for 2019 remains weak due to hefty oil production cuts and volatile oil prices. The 2019 budget continues the expansionary fiscal policy adopted since 2017, while being sensitive to oil price outcomes for deficit reduction. Vision 2030 related reforms are critical for diversification and progress was made on business environment reforms. The ambitious reform agenda could pose implementation challenges for the public sector.
Growth is expected to slow only moderately to 1.7% in 2019, as higher government spending offsets the impact of oil production cuts implemented in the first half of 2019. It should then recover to over 3% in 2020 as oil production cuts are reversed, and as large infrastructure projects generate positive spillovers to private sector growth. Fiscal deficits are expected to gradually narrow; nevertheless, achieving a balanced budget by 2023 (the target for the Kingdom¡¯s Fiscal Balance Program) will be contingent on a significant rise in oil receipts or sustained fiscal consolidation.
Public finances and growth remain vulnerable to volatility in global energy prices, while turbulence in global financial markets could affect costs of financing for both the sovereign and corporates, especially given the financing needed to implement Vision 2030 initiatives. A slowdown in the global economy and related fall in oil demand would also hurt prospects for growth. On the upside, lower oil prices may increase the momentum for structural reforms under Vision 2030, and prompt the government to tackle difficult fiscal issues, such as the large and rigid spending on public sector compensation and benefits.