Riyadh - Mubasher: The Saudi economy is highly vulnerable to prolonged lower global oil prices, the Institute of International Finance (IIF) said in a recent report.

“With still glut in the oil market and the potential of recovery in oil production in Libya and the increase in production in the U.S., lower oil prices remain a possibility,” the report noted.

To assess the likely impact on the Saudi economy of lower oil prices, IIF used two scenarios for the period between 2018 and 2025.

In the baseline scenario, oil prices remain constant at $54 per barrel in real terms through 2025.

In the lower oil price scenario, IIF assumed that average oil prices would drop by $10 per barrel (pb) to $43.7 pb starting in 2018 and then remain constant in real terms through 2025.

The baseline scenario provides a relatively sustainable path.

“The fiscal deficit would narrow from 10.5% of GDP in 2017 to 3.4% by 2025. While government debt-to-GDP ratio would increase to 49% of GDP by 2025, it would remain manageable.”

“Net foreign exchange reserves, while declining, would remain adequate at $442 billion in 2025, equivalent to 18 months of imports of goods and services.”

On the other hand, in the low oil price scenario, exports and government revenues from oil would decline by about $30 billion as compared to the baseline scenario.

“The fiscal deficits would remain large, government debt-to-GDP ratio would rise to 71.1% of GDP by 2025, borrowing costs would increase, and pressure on the peg to the dollar would increase.”

“Official reserves would decline rapidly to $158bn by 2025, equivalent to only 6.4 months of imports of goods and services, compared to 28 months in 2017.”