Saudi Arabia

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EcoTV Week
30/07/2021 • By Pascal DEVAUX

The year 2020 was difficult for the Saudi economy, but the outlook is positive in the short term. A twin shock hurt the economy: the Covid19 pandemic and more importantly the fall in oil prices.

We had a direct impact on fiscal revenues and on economic activity. In addition the government had to accelerate the consolidation of public finances with a negative impact on household demand. The VAT rate has tripled and some allowances have been cut.

The fiscal deficit reached a very high level at more than 11% of GDP and the economic recession has been the deepest for more than 20 years (-4.1%).

The recovery should be moderate this year (2.3%) given the rebound in oil prices and higher production in line with the OPEC+ agreement. The fiscal deficit should reach around 3% of GDP.

In the medium term, this difficult year may have had a positive consequence with the acceleration in fiscal consolidation. It is favourable to the diversification of government revenues. On the contrary, the uncertain oil outlook will continue to constrain the pace of economic reforms.

Key words: oil prices, fiscal consolidation, economic reforms

Summary: In 2020, the Saudi economy recorded a deep economic recession and a very high fiscal deficit. The economy should recover in 2021 with the rebound in oil revenues. The acceleration in fiscal consolidation will have positive consequences in the medium term, but an uncertain oil market outlook will continue to constrain economic reforms.

Saudi Arabia is the world’s largest oil producer and exporter with almost one-fifth of the word’s proven oil reserves. Benefiting from abundant and cheap energy, the industrial sector has gained a leading position, notably in the petrochemical sector. Economic activity remains linked to oil revenues. The surge in US shale oil production has challenged the leading role of Saudi Arabia in the oil market until 2019.

Public debt is increasing and is largely compensated by public external assets (roughly equivalent to GDP). The SAR peg to the USD is strong. The country faces two important challenges in the medium and long term: to create enough private sector jobs for a large and growing population, and to reduce domestic energy consumption in order to preserve the oil export capacity. A national transformation plan (Vision 2030) is expected to accelerate the pace of reform and create new economic opportunities outside the hydrocarbon sector, notably with the development of new cities and of the service sector. The sovereign fund PIF is expected to partially finance those investments. Given the economic rigidity in Saudi Arabia, especially in the employment market, and limited economic competitiveness outside its energy-intensive industries, economic diversification is expected to progress very slowly.

Saudi Arabia is a member of the Gulf Cooperation Council (GCC) and the Organisation of Petroleum Exporting Countries (OPEC).