Saudi Arabia’s economy is expected to start growing again in the second half of 2024, with a projected GDP growth of 1.7% in 2024 and 4.7% in 2025, according to research firm Credit Sights.
Preliminary government data shows that the real GDP of the oil-rich Kingdom shrank by 0.4% year-on-year in Q2 2024, mainly due to a decline in oil-related activities. In 2023, the real GDP decreased by 0.8% after a 7.5% increase in 2022.
During an interaction with Zawya, Regis Chatellier, Head of EM Sovereign Strategy at CreditSights, said, “To a large extent this recession was self-inflicted, with the authorities deliberately reducing oil production by 8.5% to support global prices–as well as the Kingdom’s public finances.”
The recession is likely at an end. The decline in real GDP was lower year-over-year in Q2 2024, compared to -1.7% in Q1 2024 and -4.3% in Q4 2023.
Saudi Arabia’s terms of trade, however, remain supportive. If crude prices stay close to $80 per barrel, the external surplus should be slightly positive this year.
The Kingdom’s sovereign USD bonds have slightly underperformed this year (+2.7% year-to-date versus +0.0% for EM IG index); they now trade 25 basis points tighter than the EM IG index.
The fiscal deficit could widen if oil prices were to decline, but CreditSights believes that the risk is limited given the global economic and geopolitical context.
“We maintain our ‘Outperform’ call on Saudi Arabia’s sovereign bonds,” Regis Chatellier added.
The risk-reward profile is quite appealing at current market levels, particularly for investments in the long end of the yield curve.