2020 POISED TO BE A YEAR OF GROWTH FOR SAUDI

Saudi Arabia’s real GDP is expected to grow by 2.3% next year, as the non-oil sector expands and mega-projects boost economic activity.

The non-oil economy has been the main engine of growth over the past year or so. In the first half of 2019, non-oil GDP rose by 2.5%, led by a robust 2.9% growth in the second quarter, which has been the best period of economic growth since 2015, according to the Ministry of Finance.

“In FY2020 and the medium term, the government will continue to empower the private sector by supporting a stable economic environment and an appropriate investment climate,” according to the Ministry of Finance’s 2020 Budget Statement.

“The government also plans to upgrade the infrastructure and legislative framework as well as enhance the social protection network and private sector empowerment. The private sector is expected to increase its contribution to growth and job creation in the medium term.”

The ministry expects Saudi GDP to continue growing at a brisk pace of about 2.2% in 2021 and 2.3% a year later. This expansion will be backed by a benign inflation rate environment, which will remain in or around 2% over the next few years.

The US Federal Reserve’s focus on maintaining low interest rates is another tailwind for the Saudi economy, which will benefit from loose monetary policy.

However, the Saudi government is conscious of external factors such as slower growth expected by key trading partners, which has compelled it to prudently revise its outlook and maintain fiscal sustainability.

"Budget 2020 comes in light of a global economic climate that prevails challenges, risks and protectionist policies, which requires flexibility in managing the public finances and enhancing the ability of the economy to address these challenges and risks,” according to His Royal Highness Prince Mohammad bin Salman bin Abdulaziz Al Saud, crown prince, deputy prime minister and minister of defence.

“We aim, through this budget, to take advantage of what has been achieved from programmes and build on it, so that the balance is continued between the pace of economic growth rates and the maintaining of sustainable financial stability that ensures support for this growth,” adds the prince, who is also chairman of the Economic and Development Affairs Council.

A key target would be to focus on non-oil revenues, which are estimated to reach SAR 320 billion in 2020 – the highest ever on record. Tax revenues (SAR 200 billion), taxes on income, profits and capital gains (SAR 16 billion) and taxes on goods and services (SAR 142 billion) will contribute to the growth. “Other revenues, including oil revenues, are estimated at SAR 633 billion in FY2020, 11.3% lower than FY2019 estimates,” the ministry noted. “Oil revenues are estimated to be SAR 513 billion, compared to SAR 602 billion in 2019, 14.8% lower than FY2019 estimates.”

Total revenues will stand at SAR 833 billion in 2020, 9.1% lower than its 2019 estimates, owing to global headwinds and estimated subdued oil prices.

Total expenditure next year will stand at SAR 1,020 billion, 2.7% lower than 2019 estimates, as the government encourages private sector to take the lead in financing projects and stimulating economic activity.

“The government will continue its efforts to contain budget deficit,” the ministry noted. “In FY2020, the budget deficit is estimated to be 6.4% of GDP. The budget deficit is projected to gradually decrease to sustainable levels in the medium-term. By the end of FY2022, the budget deficit is projected to decline to 2.9% of GDP.”

During the first half of FY2019, non-oil private sector GDP registered growth of 2.9%, despite the decline in oil GDP of -1.0% during the same period due to crude oil production policies. Preliminary estimates indicate GDP growth of approximately 0.4% in 2019, led by non-oil GDP growth.

Indeed, the non-oil sector has been playing a major role in economic activity, in line with the authorities’ efforts to diversify the Saudi economy. The sector is expected to contribute just over 34% of GDP this year, compared to 9.5% at the start of the decade, the Ministry of Finance document shows.

The growth is impressive given that the government continues to rationalise spending, and is on track to spend 2.9% lower than it budgeted for 2019.

Business sentiment has also been upbeat due to economic activity in the non-oil sector.

November saw a further improvement in the health of Saudi Arabia's non-oil private sector, with the latest IHS Markit PMI data indicating a quickening of growth momentum.

“This was driven by the sharpest rise in new work since April 2015. Employment among non-oil private sector companies also rose in November, though the rate of job creation was marginal and subdued by historical standards,” the research consultancy said in its monthly reading of business sentiment.

Firms confidently raised purchasing activity, citing forecasts of strong underlying economic conditions – indeed, the degrees of optimism was the highest in April.

“This partly reflected a further pick-up in new export orders, which increased at a sharper pace than in October,” IHS said in its note.