Saudi Arabia expects the hydrocarbons GDP growth to be negatively impacted by production curbs in H2, but this is likely to be largely offset by resilient non-oil sector activity, which appears to be underpinned by government and GRE investment spending, according to leading UAE bank Emirates NBD.

Overall, a modest contraction is likely in the kingdom's headline GDP growth this year of -0.5%, stated the Emirati bank in its review.

According to Emirates NBD, the preliminary GDP for Q2 showed the oil and gas sector contracting by -4.2% year-on-year as the government implemented oil production cuts. However, overall non-oil sector GDP growth remained robust at 4.9% y/y in Q2.

The private non-oil sector expanded 5.5% y/y while government services growth slowed to 2.7% y/y from 4.9% in Q1 2023. Headline GDP growth came in at 1.1% y/y in Q2, it stated.

Saudi Arabia had recorded a budget deficit of -SR8.2 billion (-$2.2 billion) in H1 2023, compared with a surplus of SR135.4 billion ($36.1 billion) in H1 2022. Revenue too declined by -8.1% y/y in the first half, entirely due to lower oil revenues.

Non-oil revenues grew 10.8% y/y as taxes in income, profit and capital gains jumped 66%. Zakaat and investment income also grew y/y in H1 2023.

Expenditure increased almost 18% y/y in H1 2023, even as budget revenue declined. Investment (capex) spending remained strong, up 67% q/q in Q2 alone and almost 37% higher than in H1 2022, it stated.

Current spending increased 16% y/y in the first half of 2023, with interest expenses, grants and social benefits as well as general spending all rising sharply compared with H1 2022, stated Emirates NBD in its review.

Public sector wage growth was up almost 6% y/y in H1 2023, double the official inflation rate, it added.

According to Emirates NBD, the oil prices are likely to rebound in H2 2023, as the government has extended its substantial 1 million barrels per day voluntary production cuts through September at least.

"Overall we expect oil revenue to the budget to be lower this year than in 2022. We have forecast a full year budget deficit of -2.3% of GDP, which we expect to be financed through debt issuance," stated the Emirati bank in its review.

Indeed, the official budget release shows all of the H1 deficit was financed through external borrowing, it added.

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