Saudi economic outlook uncertain amid low oil prices, COVID-19

 Saudi Arabian economy is expected to contract 5.2% this year

The outlook for Saudi Arabia’s economy this year is uncertain, the kingdom’s central bank governor said on Wednesday, as the oil exporter navigates the effects of low oil prices and the coronavirus pandemic.

Ahmed al-Kholifey, governor of the Saudi Arabian Monetary Authority (SAMA), speaking to a virtual Euromoney event, also reaffirmed the bank’s commitment to the local currency peg to the US dollar.

The government will face a difficult balancing act in attempting to contain mounting fiscal pressures caused by the coronavirus pandemic and plunging oil prices, while offering support to citizens and businesses hurt by the resulting economic dislocation. The economy will contract by 5.2% in 2020, reflecting the severe impact of the pandemic, flagging demand for oil and the hit to the non-oil sector. Real GDP growth will resume from 2021 in line with an expected global economic recovery.

The economy will have contracted at an even sharper pace in the second quarter due to domestic lockdown measures to contain the virus and oil production curtailments agreed under OPEC+. Private consumption should have reeled notably as the suspension of living allowances and weak consumer confidence likely dragged on spending in the quarter.

Turning to Q3, the economy should be recovering somewhat as the drop in oil output eased notably in July from June. Moreover, the decline likely continued to soften in August as OPEC+ reduced production curtailment measures from their peak in May–June. However, an increase in the VAT at the start of July led to an inflation spike and weighed heavily on domestic demand, as seen through the non-oil sector PMI, which deteriorated in August after having stabilized in July.

Economic output is projected to contract notably this year due to curtailed oil production. Non-oil private sector activity will likely also decline as the pandemic weighs on the tourism sector, the VAT hike and a weaker labor market depress private consumption, and a more restrictive budget hinders the economy.

Saudi Arabia is the largest economy in the Middle East and the richest Arab country in the region. The policy of large-scale public works undertaken by the authorities, as well as foreign direct investment and the soundness of the banking and financial system, have enabled the country to become the number one regional economy and one of the largest in the world. However, the economy of Saudi Arabia is almost entirely based on oil, with GDP growth being closely linked to real oil growth.

According to the updated IMF forecasts from 14th April 2020, due to the outbreak of the COVID-19, GDP growth is expected to fall to -2.3% in 2020 and pick up to 2.9% in 2021, subject to the post-pandemic global economic recovery.

The standard of living is one of the highest in the Middle East, with a GDP per capita over USD 20,000. The country is still marked by an unemployment rate of about 12% among Saudis (6% in total), especially among young people, and a high degree of social inequality. However, the unemployment rate would be probably affected by the negative economic impact of the COVID-19 pandemic.

Saudi Arabia's crude exports fell to 6.82mn barrel per day (b/d) last year, their lowest since 2010, after hitting a three-year in 2018, as the country faces increasing competition from U.S. shale oil exports. This, combined with growing imports, brought down current account surplus to USD 34.22 billion, from USD 72.33 billion in 2018. At the same time, public debt continued to account for a larger share of GDP - at 23.2% in 2019 - on the back of stronger government spending on diversification reforms, and its share is anticipated to rise to 28.4% by 2020 and to 33.6% by 2021.

 Budget deficit is also expected to widen to 6.5% of GDP next year, from a projected rate of 4.7% for this year - as oil revenues are likely to continue to moderate. The decline in inflation was contained towards the end of 2019; nonetheless, the country was expected to have a negative inflation rate of 1.2%, against a positive rate of 2.5% in 2018. The inflation is expected to grow again to 0.9% in 2020 and 2% in 2021, according to the latest World Economic Outlook of the IMF (14th April 2020).

 The Vision 2030 reform programme, which was launched in 2016, started to restructure Saudi Arabia, not only financially (via fiscal consolidations and economic diversification) but also socially. The government has implemented plans to reform energy and water prices, after introducing value-added tax (VAT) a year earlier. It has also taken measures to increase transparency in public procurement and efficiency in government spending.

                                                                       Khalid Bhatti