Low Oil Prices Slam Saudi Economy

Subdued crude sales are stunting Saudi growth, threatening the kingdom’s foreign investment push and investor interest in an Aramco IPO

By Rory Jones in Dubai andDavid Hodari in London, WSJ

A sluggish Saudi economy could suppress the appetite among foreign investors for plowing money into projects envisioned by Saudi Crown Prince Mohammed bin Salman, left. Photo: Yuri Kadobnov/Pool/Reuters

Saudi officials have pulled back oil production to less than 10 million barrels a day in an attempt to push crude prices to $80 a barrel. But global trade tensions and burgeoning U.S. production have offset their actions, keeping prices closer to $60 a barrel.

Economists have notched down estimates for economic growth this year for the world’s biggest exporter of petroleum. A median forecast of 10 economists predicts Saudi Arabia’s gross domestic product will grow 1.4% this year, down from an estimate of 2.2% at the end of last year, according to FactSet. The International Monetary Fund is slightly more bullish: In July it said economic output would grow 1.9%.

“You get quite a big drag from the oil sector over the course of this year,” said William Jackson, an economist at London-based Capital Economics, which sees Saudi growth this year of just 0.3%.

The health of the Saudi economy has become more important to global investors and government officials in recent years, as the kingdom opens its financial system to the outside world. A downturn could threaten its own investment activity, which has included big stakes in companies like TeslaInc., and temper investors’ interest in putting money into Saudi Arabia.

The Saudi stock market has fallen more than 14% since the beginning of May, despite its inclusion that month into the MSCI Inc. emerging market index, which spurred billions of dollars of passive investment from international investors.

Analysts warn that a proposed initial public offering—revived last month—of Aramco, the national oil company, will be worth less if oil prices remain at current levels and the kingdom keeps tapping the company for cash to balance its budget. The company paid the kingdom a $20 billion special dividend in the first half of this year despite a 12% fall in profits because of low prices. Bankers last week pitched to arrange an Aramco listing.

Saudi Arabia “came out aggressively with the IPO news in a period of stock-market and oil-price weakness,” said Richard Fullarton, founder and chief investment officer at London’s Matilda Capital Management. “Maybe they need the cash.”

Representatives of Aramco and the Saudi Finance Ministry didn’t respond to requests for comment.

Saudi Finance Minister Mohammed al Jadaan, in a half-year budget-performance report last month, said the government was managing a balancing act: It is trying to implement projects to boost economic growth and improve the standard of living for Saudi citizens, he said, while at the same time executing fiscal reforms and seeking to control growing public debt.

The government in July introduced 24-hour business hours to boost spending and encourage shops to hire more; Saudi investment bank NCB Capital estimated the move would raise GDP by up to 0.3 percentage points this year.

The Saudi sovereign-wealth fund also plans multibillion-dollar real-estate projects to boost the tourism, retail and entertainment industries.

A sluggish Saudi economy could suppress the appetite among foreign investors for plowing money into the big projects envisioned by Saudi Crown Prince Mohammed bin Salman. Saudi Arabia’s oil-price problems come just as the country is launching a series of economic reforms that would have been fiscally painful even in flush times.

A move to get more Saudis working has resulted in large-scale deportations of foreign workers, damping consumer spending. Sales transactions and cash withdrawals across the kingdom fell in June, compared with a year earlier, and non-oil exports have trended down in almost every month this year, according to Saudi central-bank data.

Efforts to jump-start the non-oil economy haven’t yet taken flight. Foreign-direct investment increased in the past six quarters, hitting $1.25 billion in the first three months of this year. But it remains reliant on the oil sector and low compared with the peak of $10.3 billion in the fourth quarter of 2008. Unemployment is 12.5%.

Oil prices remain the biggest catalyst for Saudi growth. The government forecasts it will run a deficit this year of 131 billion Saudi riyals ($35 billion), or roughly 4.2% of GDP. To balance the budget, Saudi Arabia requires oil prices at $85 per barrel, the IMF estimates.

The Saudis made a concerted push to nudge oil prices up in 2018, targeting $80 a barrel and largely succeeding.

Their efforts hit a wall this year, however, as the trade war between the U.S. and China has lowered estimates of oil demand in Asia, Saudi Arabia’s biggest market. American oil production has also surged, keeping the world amply supplied and weighing prices down.

The lower prices aren’t going away, according to the International Energy Agency and banks, which have slashed oil-price estimates. Morgan Stanley recently predicted $60-a-barrel Brent crude and $55-a-barrel West Texas Intermediate crude, two benchmark prices for oil, through the end of 2020.

To meet spending needs, the Saudi government plans to raise another $30 billion in public debt this year. Even with that extra money, the kingdom doesn’t have enough cash to cover its expenditures, economists say.

Analysts say Saudi Arabia and the Organization for the Petroleum Exporting Countries, the oil cartel the kingdom leads, might also have to consider further production cuts to maintain oil prices at the current levels near $60. Those could be agreed on at an OPEC meeting in December.

Write to Rory Jones at rory.jones@wsj.com and David Hodari at David.Hodari@dowjones.com