SAUDI SEES BIG ECONOMIC GAINS FROM NON-OIL PRIVATE SECTOR

Saudi Arabia’s economy is expected to contract at a much lower pace this year than its regional peers, highlighting its resilience.

Saudi GDP is seen declining 2.9% in 2020, outperforming the wider MENA’s 3.1% contraction, according to the International Monetary Fund (IMF).

Next year, the kingdom’s economy will expand 2.9%, although that could be revised as oil prices rise and the government proceeds with its Saudi Vision 2030 programme.

The kingdom’s oil economy is expected to grow 3.3% and the non-oil sector will expand 2.7% next year.

The Ministry of Finance’s own estimates suggest real GDP growth of 3.2% on the back of improved economic activity and higher trade due to easing of lockdown measures.

“This comes alongside other government initiatives that support fiscal stability, and the persistent effort by the government to implement medium and long-term structural reforms aimed at achieving economic diversification and fiscal sustainability within the framework of the Saudi Vision 2030,” the ministry said in its pre-budget statement.

The ministry also expects the private sector to play a greater role in developing investment opportunities and participate in infrastructure projects.

“The Public Investment Fund and other development funds have an important role in implementing mega and developmental projects that support economic activities and create job opportunities,” the ministry said, suggesting the sovereign wealth fund will remain active next year.

Fitch Ratings has lauded the government’s efforts to undertake a number of structural fiscal measures to counter the effects of the virus, demonstrating its commitment to fiscal consolidation.

“As the coronavirus crisis subsides, we expect these measures to improve the government's non-oil primary deficit to 25% of non-oil GDP, from about 36% of non-oil GDP in 2019-2020 and 57% in 2014. It cut about 4% of GDP in spending from its budget this year to make room for about 5%-6% of GDP in additional coronavirus-related expenditures,” Fitch said in its report.

The measures being taken by the Saudi government on both supporting the economy while it was in deep freeze and now the economic recovery, would ensure the country’s GDP will steadily expand, growing 3.4% in 2022 and 3.5% in 2023, the ministry forecasts.

The government expects its total revenues generated to steadily rise to SAR 928 billion, compared to SAR 770 billion this year, an average annual increase of 6.4%.

At the same time, total expenditure during the period will contract to SAR 941 billion in 2023, compared to just over SAR 1 trillion this year.

The pull back in spending will ensure the budget deficit will contract to just around SAR 13 billion in 2023, or 0.4% of GDP, versus SAR 298 billion in 2020 (12% of GDP).

“The government will also continue to assess developments and take appropriate fiscal policies to raise fiscal performance and ensure fiscal sustainability in the medium and long-terms,” the ministry added.

The focus on controlling the budget deficit will support efforts to enhance the spending efficiency and to achieve the goals of fiscal discipline in parallel with continuing to support and “empower the private sector through the role of the National Development Fund (NDF) and the Public Investment Fund in developing promising sectors in the Saudi economy, and contributing to creating jobs and attractive investment opportunities.”

Efficient spending will allow the government to focus on job-creating projects that will stimulate the domestic economy and provide contract work to local producers and service providers.

“Plans include continuing to spend on mega projects and VRPs (vision realization programmes), including the Housing Program and the Quality of Life Program,” the ministry said. “In addition, private sector development programmes envisaged to continue through stimulus packages in 2021 and shall provide more opportunities for the private sector to participate in investment projects and infrastructure development projects.”

Despite the focus on diversification, the Saudi economy will still react to crude oil prices. The Saudi government and its counterparts in OPEC and other allies have played an instrumental role in managing crude prices that have now jumped to above USD 50 per barrel.

OPEC’s latest outlook suggests oil demand will grow 5.90 million barrels per day (bpd) to reach 95.89 million bpd, although the outlook is uncertain given the unclear impact of COVID-19.

“The solid (global) economic recovery coupled with the low baseline of 2020 will support oil demand growth next year,” OPEC said in its report. “Transportation and industrial sectors are projected to lead oil demand growth in 2021.”

Institutional investors are also more positive on the oil complex outlook in the new year.

“Hedge funds and other money managers turned more positive on the outlook of oil prices over November amid prospects of improving global oil demand fundamentals in coming months,” OPEC said in its latest report.