Additional oil production cuts will weigh on GDP growth in 2023

Saudi Arabia’s decision to deepen its voluntary production cuts by an additional 1mn b/d from July could – if sustained over the rest of the year – result in an overall contraction in GDP in 2023. While the additional production cut was only confirmed for the month of July, the option of extending it through the remainder of the year was on the table. In this scenario, overall oil production from the kingdom would be almost -9% lower than in 2022, bringing headline GDP growth down to -0.5% even as we expect the non-oil sectors to post robust growth of 4.8%. We had previously forecast headline growth of 2.1% this year. However, as production is then increased to just under 10mn b/d again in 2024, GDP growth would rebound to 4.3% next year.

Saudi Arabia: Oil production could decline by almost 9% on average in 2023

Source: Bloomberg, Emirates NBD Research

The impact on the budget is more difficult to estimate. With the additional production cut extended through the end of the year, the budget could record a deficit of -SAR 41.5bn or -1.0% of GDP, down from our previous projection of -0.1% of GDP, keeping our forecast average Brent price unchanged at USD 88/b for the time being.

However, the deeper production cut is expected to result in a tighter oil market in H2 2023, which could drive oil prices higher than we currently expect, or allow Saudi Arabia to increase production back to current levels of just under 10mn b/d before the end of the year. In this scenario the drag on both the budget and 2023 GDP growth would be smaller than in our new baseline scenario. If, for example, Saudi Arabia only maintained the additional 1mn b/d in cuts for July and August, then our forecast for headline GDP for this year would be around 0.7%, rather than -0.5%.

UAE growth forecasts unchanged for now, pending release of 2022 GDP data

For the UAE, we have left our GDP growth forecast for 2023 unchanged for the time being, pending the release of full year 2022 GDP data. The voluntary cuts announced in April remain in place and we had already factored this into our 2023 growth outlook. However, UAE oil production in the year to May (as reported by Bloomberg) had been higher than expected, mitigating some of the impact of the cuts going forward, and we have also assumed continued investment in production capacity in the oil & gas sector this year.

While there may be some downside risk to our oil and gas GDP forecast for 2023, the PMI survey data points to strong growth in the non-oil sectors year-to-date, and our 3.5% non-oil growth forecast for 2023 may be too conservative, posing some upside risk to our headline GDP estimate.

For 2024, the published required production level for the UAE is 3.219mn b/d, which implies average production of 3.08mn b/d after the voluntary cuts next year. This would mean an increase in the UAE’s overall oil production next year from estimated 2023 levels, and a subsequent boost to overall GDP growth. Again, we had already factored some growth in oil and gas output into our 2024 UAE GDP forecast of 3.7%, and this is unchanged for the time being.