ECONOMIC TRENDS

SAUDI DEFIES PANDEMIC WITH STRONG GDP AND FDI GROWTH

The Saudi economy appeared to be in the midst of a spirited recovery in the fourth quarter of 2020, with real gross domestic product rising 2.8% compared to the third quarter.

While the real GDP in the fourth quarter slipped 3.8% year on year, the contraction was expected given that 2019 was in the pre-COVID-19 era.

But the quarter-on-quarter rebound has been impressive. The economy had already grown 1.8% in the third quarter compared to the 5.2% decline in the second quarter, and the latest quarter’s expansion suggests continued recovery, according to a flash estimate by the General Authority for Statistics (GASTAT). 

GASTAT forecasts the country’s real GDP to decline 4.1% in 2020, but higher oil prices and a robust budget should improve economic indicators in 2021.

The International Monetary Fund’s (IMF) latest forecast points to a strong Saudi recovery, with GDP rising 2.6% in 2021 and 4% in 2022. The IMF also has a smaller 3.9% contraction forecast for this year, compared to GASTAT’s estimates.

The Saudi labour market is also showing promise, with unemployment falling to 14.9% in the third quarter, compared to 15.4% in the second quarter, according to the latest GASTAT data. Male unemployment rate fell 0.2% to 7.9%, while female unemployment declined 1.2% to 30.2%.

Other economic indicators also point to green shoots of recovery. The latest IHS Markit Saudi Arabia Purchasing Managers’ Index rose to 57.1 points in January, its highest reading since November 2019. A score above 50 points indicates business optimism.

“The expansion in business activity was helped by a sharp rise in new orders during January, despite the pace of growth easing slightly from December's recent high. Improving market conditions, rising online sales and greater export demand all supported the upturn,” Markit reported. “Notably, new orders from foreign clients rose to the greatest degree in almost four years.” 

The kingdom has been helped by low COVID-19 case numbers while other parts of the world have suffered a spike in infections, which risks derailing an upturn in the global economy.

"Businesses, meanwhile, hope that the roll-out of COVID-19 vaccines will bring further growth in 2021 and improve output to pre-COVID-19 levels. Around six times as many firms expect a rise in output over the next 12 months as those that forecast a decline," the Markit report noted.

As the global shock of the coronavirus slowly wore off, the third quarter saw the number of new foreign investment projects licensed in Saudi Arabia register robust activity compared to the previous quarter. With a 21% year-on-year increase and a 96% quarter-on-quarter gain, the Ministry of Investment of Saudi Arabia (MISA) issued a total of 306 licenses in the third quarter.

“Each month in Q3 witnessed a year-on-year increase, with the highest amount of foreign investment projects recorded in September. During the entire quarter, 68% of the licenses were for 100% foreign-owned projects, while the remaining 32% went to joint-ventures with Saudi companies,” MISA said in its recent report.

Indian and Egyptian companies were the leading investors in the third quarter, accounting for 30 licenses each, followed by 16 British and Lebanese companies each, and 15 Pakistani, Yemeni and Syrian investors each.

Majority of the foreign projects were in growth industries, such as emerging sectors (110 licenses), industrial and manufacturing (53), transport and logistics (35), retail and e-commerce (27) and ICT (26).

Foreign direct investment (FDI) in the first half of the year rose to USD 2.58 billion, compared to USD 2.37 billion during the same period last year.

“In the second quarter of 2020, Saudi Arabia witnessed a 15.7% year-on-year slowdown in FDI inflows after seeing its strongest period for FDI over the course of the last four years the previous quarter,” MISA said in its report.

“In Q2 FDI inflows equalled close to USD 1 billion. However, total FDI for the kingdom in the first half of 2020 was up 7.9%, compared to a 49% decrease in global FDI inflows in the same period, according to latest Saudi Central Bank and UNCTAD data.”