Saudi Arabia's post-COVID recovery to accelerate in second half of 2021, says IIF

Dubai: Saudi Arabia experienced limited economic and public health impact from the COVID-19 pandemic thanks to its relatively young population, low shares of services in GDP according to the latest assessment by the Institute of International Finance (IIF).

“The Saudi economy contracted by 4.1 per cent in 2020, driven by a sharp contraction in oil GDP in the context of OPEC+ oil production cuts," said Garbis Iradian, Chief Economist, Mena of IIF. "Real non-oil GDP shrank only by 2.2 per cent, a less severe drop than in many other G20 countries due to the kingdom’s relatively small services sector.”

While a range of containment measures curbed the spread of the virus and deaths, the kingdom’s vaccination programme has advanced quickly in recent months.

The recovery is expected to accelerate in the second half of this year as the second wave of the pandemic recedes, vaccines become widely available, and oil production cuts are tapered in line with the OPEC+ agreement.

Garbis Iradian, Chief Economist, Mena of IIF

Road to recovery

Saudi’s real non-oil growth is expected at 3.8 per cent in 2021 and 3.7 per cent in 2022.

High frequency indicators suggest that output growth has been accelerating in recent months. Growth in credit to the private sector is accelerating, the PMI rose for the third consecutive month to 56.4 in May, and the consumer sentiment index improved significantly.

“The recovery is expected to accelerate in the second half of this year as the second wave of the pandemic recedes, vaccines become widely available, and oil production cuts are tapered in line with the OPEC+ agreement,” said Iradian.

Saudi GDP Image Credit: IIF

While inflationary pressures are likely to remain modest this year, higher VAT rate combined with the substantial increase in global non-fuel commodity prices could keep average headline inflation slightly above 3 per cent in 2021. The 12-month inflation rate was 5.3 per cent in April 2021.

Accommodative policies

The IIF expects monetary policy to remain accommodative as SAMA (Saudi central bank) tracks the monetary policy of the US in the context of the peg to the US dollar. SAMA remains committed to the fixed exchange rate. The central bank cut its policy rates by 125 bps since March 2020 and has introduced liquidity support measures amounting to 2 per cent of GDP to support the private sector, particularly SMEs, by allowing them to defer payments on existing loans and increase lending to businesses. The Deferred Payments Programme has been ex-tended until June 30, 2021, while the Guaranteed Facility Program has been extended until March 14, 2022.

The government has been able to maintain its fiscal strength.

“The 2021 budget envisages a total government spending cut of 6 per cent, with capital spending shouldering the brunt of the cuts. However, we expect the cut to be limited to 3 per cent as oil prices are likely to average well above the assumption made in the budget,” said Iradian

The authorities expect the PIF to pick up the slack with additional spending on mega projects, raising investment spending by the PIF into the economy to $40 billion each year in 2021 and 2022. Spending on the social safety net is likely to increase above the allocation in the budget to support low-income households.

Saudi fiscal deficit Image Credit: The IIF

The fiscal deficit will narrow from 11.2 per cent of GDP in 2020 to 2.3 per cent of GDP in 2021.

The IIF projects oil revenues to increase by 38 per cent. The tripling of the VAT to 15 per cent in July of 2020 combined with recovery in domestic demand could also raise non-oil revenues by at least 9 per cent in 2021. The IIF has also revised its average Brent oil prices forecast for 2021 from $60 to $64 per barrel.

“Under this assumption, we expect the current account to shift from a deficit of 2.8 per cent of GDP in 2020 to a surplus of 3.2 per cent of GDP in 2021," said Samuel LaRussa, senior research analyst at IIF. "Our estimates show that a $10/b rise in oil prices would in-crease Saudi exports by $32 billion and improve the current account balance by 4.7 percentage points of GDP.”

Employment concerns

The recession has triggered significant job losses, with the national unemployment rate rising to 12.6 per cent in Q4 2020. Despite this, labour force participation among Saudi women is estimated to have increased by 13 percentage points to 33 per cent since 2017, including increasing by 7 percentage point during the pandemic.

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