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Saudi Arabia’s economic recovery from COVID will accelerate in the second half of 2021, says IIF

Dubai: Saudi Arabia has a limited impact on the COVID-19 pandemic on economic and public health due to its relatively young population, low services in GDP according to the latest rating by the Institute of International Finance (IIF). ‘The contraction in 2020 was less severe than in advanced and emerging economies. The Saudi economy shrank by 4.1 percent in 2020, driven by a sharp contraction in GDP in oil in the context of OPEC +’s oil production cuts. Real GDP outside oil shrank by only 2.2 percent, a less severe decline than in many other G20 countries due to the relatively small services sector of the kingdom, ‘says Garbis Iradian, chief economist, Mena of IIF. While a series of controls have limited the spread of the virus and the number of deaths, the kingdom’s vaccination program has progressed very rapidly over the past few months.

Road to recovery

Saudi Arabia’s real non-oil growth is expected at 3.8 percent in 2021 and 3.7 percent in 2022. High frequency indicators indicate that production growth has accelerated in recent months. Private sector credit growth accelerated, the PMI rose to 56.4 in May for the third consecutive month, 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 subsides, vaccines become widely available and oil production declines under the OPEC + agreement,” Iradian said. While inflationary pressures are likely to remain modest this year, the higher VAT rate coupled with the significant rise in global non-fuel prices could keep average headline inflation slightly above 3 percent in 2021. The 12-month inflation rate was 5.3 percent in April 2021

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Accommodation policies

The IIF expects monetary policy to remain accommodative, as SAMA (Saudi central bank) follows US monetary policy in the context of the peg to the US dollar. SAMA remains committed to the fixed exchange rate. The central bank has lowered its interest rates by 125 basis points since March 2020 and has introduced liquidity support measures of 2 percent of GDP to support the private sector, especially SMEs, by postponing payments on existing loans and increasing loans to businesses. The deferred payment program has been extended until 30 June 2021, while the guarantee facility program has been extended until 14 March 2022. The government was able to maintain its fiscal strength. ‘The budget for 2021 envisages a total cut of the government at 6 percent, with capital expenditure having the largest cut. However, we expect the reduction to be limited to 3 percent, as oil prices are likely to be above average in the budget assumption, ”said Iradian. The authorities expect the PIF to pick up the slack with additional spending on mega-projects, which will increase the investment spending by the PIF in the economy in 2021 and 2022 to $ 40 billion. Expenditure on the social safety net is likely to increase above the budget allocation to support low-income households. The fiscal deficit will decrease from 11.2 percent of GDP in 2020 to 2.3 percent of GDP in 2021. The IIF plans to increase oil revenues by 38 percent. Triple the VAT to 15 percent in July 2020, coupled with the recovery in domestic demand, could also increase non-oil revenues by at least 9 percent in 2021. The IIF also revised its average Brent oil price forecast for 2021 from $ 60 to $ 64 a barrel. “Under this assumption, we expect the current account to shift from a deficit of 2.8 percent of GDP in 2020 to a surplus of 3.2 percent of GDP in 2021. Our estimates show that an increase in oil prices of $ 10 per billion will increase Saudi exports by $ 32 billion and improve the current account balance by 4.7 percentage points of GDP, ”said Samuel LaRussa, senior research analyst at IIF.

Concerns about employment

The recession caused significant job losses, with the national unemployment rate rising to 12.6 percent in the fourth quarter of 2020. Despite this, labor force participation among Saudi women is estimated to have increased by 13 percentage points to 33 percent since 2017, including an increase of 7 percentage points during the pandemic.