Saudi Arabia's "V" economic ecovery

The Saudi Arabian economy will contract by up to 5.2% in 2020 but will grow by 2.3% next year, according to a report by the International Institute of Finance
Logo of the Vision 2030 modernization plan, which provides for the diversification of the country's economy

AFP/FAYEZ NURELDINE  -   Logo of the Vision 2030 modernization plan, which provides for the diversification of the country's economy

The coronavirus health crisis has also hit the world economy hard. The productive stoppages and debt to cope with the pandemic will lead almost all countries in the world to suffer recessions in 2020. This is something that has already been taken on board by all politicians and economists. What all nations are looking for from 2021 is the famous "V" recovery and a rebound in the economy. Saudi Arabia is heading towards this scenario. The Saudi economy will shrink by up to 5.2 percent this year but will grow by 2.3 percent in 2021, according to the projections of the International Finance Institute. This organisation has prepared a report on the finances of the desert kingdom which was published last week and has been sent to the media.

Stimulation of the Saudi economy by the authorities during the pandemic has focused on aid for the purchase of homes, strong support for small and medium-sized enterprises and financing of non-oil exports, the document states. The central bank has introduced liquidity measures amounting to 3% of GDP to support small and medium-sized enterprises and is encouraging commercial banks to postpone private sector loan repayments by six months. Despite the efforts, the economy has suffered an 11% slump in the second quarter due to restrictions to contain COVID-19 infections after a 1% contraction in the first quarter following the start of the restrictions and the fall in oil prices due to OPEC production cuts.

Recuperación en V
PHOTO/ATALAYAR - Chart showing Saudi Arabia's "V" recovery included in the International Institute of Finance Report

Despite the adverse scenario in 2020, the pace of new COVID-19 infections has slowed and restrictions on mobility have been reduced. Economic indicators, such as the PMI, credit to the private sector and cement production, reflect that economic activity is recovering and point to a rebound. But uncertainty is the norm this year and economic data may change at any time depending on the progression of health indicators. One of the major problems the Gulf country will have to face is an unemployment rate of nearly 10 percent owing to the lack of public and private investment in 2020. The non-oil sectors need to maintain growth rates of around 3.5 percent to absorb the unemployment rate.

The country's banking system remains sound thanks to strong capitalisation, liquidity and low levels of non-performing loans, which amount to a mere two percent. Although households and companies have reduced their consumption and investment, confidence in the banking system remains very strong, with deposits growing by up to 9.4% in July. Credit to the private sector continues to rise to 13% in July, the highest since the end of 2013, driven by mortgage lending.

The strong impact of oil

Oil has been one of the economic sectors that has weakened most during the worst moments of the pandemic. The halt in economic activity and overproduction brought barrel prices in April to their lowest level in 20 years. Saudi Arabia has suffered a decline in oil exports that will have a strong impact on its public finances. If the country recorded a surplus of 5.9 percent in 2019, it will have a deficit of 1.5 percent this year despite a 12 percent fall in imports, according to forecasts in the document issued by the International Finance Institute.

This fiscal deficit will be corrected in 2020 thanks to spending cuts of almost 12% and the tripling of VAT, which as of July has come to represent 15% of each purchase. Public investment will be one of the most affected by the cuts, as was already the case in 2015 and 2016. Subsidies to public employees to cover expenses such as bills and supplies have been suspended. Analysts explain in the report that the planned wave of privatisation is expected to help the government increase its revenues. Despite this improvement, expenditures are likely to increase in the fourth quarter of the year and as a result the budget deficit could exceed $70 billion this year, equivalent to 11% of GDP.

Paseo Arabia Saudí
AFP/AMER HILABI - People walk on the promenade of the city of Jeddah (Saudi Arabia) on 21 June

Assuming that oil prices remain at $46 per barrel in 2021 and rise to $50 thereafter, the fiscal deficit will fall to 5.2% in 2021 and the budget will be balanced again in 2023. Economists predict that public debt will reach 37% this year and 42% in 2023. This is a remarkable increase considering that this indicator was only 23% of GDP in 2019.

Despite these high deficit figures, which are unusual for countries in the area, the kingdom has sufficient public assets and low debt, so deficit financing will remain feasible in the period 2020-2023, according to the International Institute of Finance document. Saudi Arabia's bond issue so far this year has amounted to $17 billion. The Saudi administration still faces many challenges in becoming more transparent and efficient, and productivity still needs to increase further, according to the analysts of the International Institute, who highlight the progress made in recent years in reforming the economy and diversifying it in the final part of the report.