The economic recovery should be sustained in 2022 due to the sharp increase in hydrocarbon production following the OPEC+ agreements and due to stronger growth in household consumption. The current oil trend is favourable to public finances, while the process of fiscal consolidation and revenue diversification is expected to continue. It has already led to a significant reduction in the fiscal breakeven oil price and therefore less exposure to oil market volatility. In the meantime, tensions have emerged on the interbank market and have required an injection of liquidity by the central bank. The fast growth in bank lending and less pro-cyclical management of budget surpluses have forced banks to use external resources, and therefore to reduce their net external assets, in order to finance their activity.
Strong rebound in activity
ECONOMIC FORECASTSEconomic growth is expected to reach 7.4% in 2022, mainly thanks to the increase in oil production. After a year of near stability in 2021 (+0.2%), the gradual increase in production quotas agreed by OPEC+ (OPEC member countries and Russia) should lead oil GDP (around 40% of total GDP) to grow by 14% in 2022. The increase in hydrocarbon production is also driven by the need to at least partially compensate for the reduction in Russian production. As a producer with most of the spare production capacity in the cartel, Saudi Arabia is the main contributor to the increase in production quotas.
Non-oil GDP is expected to grow by around 3.7% in 2022, driven mainly by household consumption. It is benefiting from the improving labour market and moderate inflation pressure. The unemployment rate has been steadily falling since 2020 and reached 10.1% of the labour force in Q1 2022. There has been a significant increase in women’s employment since the implementation of favourable policies. Women’s participation in the labour force grew from 19% in 2017 to 36% in 2021. Furthermore, the end of travel restrictions linked to the pandemic and the economic recovery in non-oil sectors should support the return of expatriates (the number of which had fallen by 4.6% in 2021). The increase in household credit (+17% year-on-year in December 2021) also drives private consumption.
The role of public expenditure in economic growth is changing. The government wants to reduce its very pro-cyclical nature, which has tended to favour overheating of the economy during periods of high oil incomes. Thus, despite favourable oil market and therefore rising budgetary income, budgetary expenditure should only rise moderately.
From a sector-based perspective, activity should be driven by services (particularly leisure, in the broad sense) and construction, supported by the Vision 2030 development programme, which aims to diversify the economy and develop infrastructure.
In 2023, economic growth should reach 3.3%, given the small increase in oil production (+2.2%). Non-oil growth is expected to strengthen to 4.1%.
Moderate inflation
Like most Gulf countries, inflation pressures should remain moderate in 2022. Consumer price inflation has stabilised at an annual rate of 2.2% in May 2022. Food prices were the main driver of inflation (+4.6% in May), while energy prices were virtually stable (+0.15%) thanks to continued government subsidies. In June 2021, the government introduced a cap on the increase in gasoline prices; it has borne the cost of any rise since then (the price of Brent rose by around 45% during this period). Rents (21% of the price index) have risen since March but only very slightly (+0.5% in May). More generally, the appreciation of the US dollar (to which the riyal is pegged) against major currencies is an important factor in moderating inflation.
Fiscal surpluses and reforms
SAUDI ARABIA: FISCAL BALANCEIn 2022, the Saudi public finances are expected to post their first surplus since 2013. Changes in the global oil market between 2015 and 2019 and the impact of the pandemic on activity in 2020 have weighed heavily on oil budget revenues. The budget deficit averaged 9.9% of GDP between 2015 and 2020. After an almost balanced budget in 2021, the increase in oil income should lead to a surplus of 10.8% of GDP in 2022. Assuming oil prices remain high in 2023, the surplus is expected to reach 8.5% of GDP.
The difficult period from 2015 to 2020 had a positive impact on public finances by forcing the government to take measures of fiscal consolidation and revenue diversification. The introduction of VAT in 2018 and the increase of its rate to 15% in 2020 had a strong impact on diversification. The share of taxes on goods and services increased from 7% of total fiscal income in 2017 to 26% in 2021. In addition, budgetary discipline has improved noticeably with the implementation of a medium-term fiscal stability program. Government spending should be equivalent to around 32% of GDP in the period 2021–2023 compared to an average of 37% in the period 2015–2020. Current expenditure is expected to rise slightly, while capital expenditure is expected to continue to fall.
