Emerging

A difficult economic transition

rd  
Eco Emerging // 3 quarter 2021  
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SAUDI ARABIA  
A DIFFICULT ECONOMIC TRANSITION  
The Saudi economy took a double hit in 2020: the consequences of the Covid-19 pandemic amplified the recessionary  
impact of falling oil prices and production. In addition to the economic consequences, these two exogenous shocks  
have had negative consequences for the reform process, and particularly for the dynamism of the private sector.  
The recovery expected in 2021 will be timid, due to a further slowdown in oil activity. Budget deficits are likely to  
persist over the medium term, resulting in an increase in government debt. Macroeconomic imbalances remain  
moderate, but the continued dependence on oil in the context of economic transition remains a significant source of  
vulnerability.  
A DOUBLE SHOCK TO THE ECONOMY IN 2020  
FORECASTS  
In 2020, the Saudi economy was hit by the drop in oil prices and by  
restrictions in response to the pandemic. Moreover, the fall in oil  
revenues forced the authorities to adopt fiscal measures that tended to  
accentuate the economic slowdown. Thus, the tripling of the VAT rate  
from 5% to 15% and the reduction in allowances partly offset the  
fall in oil revenues, but also affected household consumption, which  
represents 55% of GDP. Private consumption was down by 6.4% over  
2
019  
2020  
2021e  
2022e  
Real GDP growth (%)  
0.3  
-1.2  
-4.5  
23  
-4.1  
3.4  
2.3  
2.9  
-3.1  
32  
4.5  
2.7  
-2.5  
35  
Inflation (CPI, year average, %)  
Central. Gov. balance / GDP (%)  
Central. Gov. debt / GDP (%)  
Current account balance / GDP (%)  
External debt / GDP (%)  
-11.2  
32  
2
1
020. Investment, which represents around a quarter of GDP, fell by  
4% given the drop in public investment and the cyclically low level of  
4.8  
23  
-2.1  
30  
2.4  
30  
1.9  
32  
capital expenditure in the oil industry. Lastly, export volumes dropped  
1%, the biggest fall in twenty years, due to lower hydrocarbon exports.  
In net terms, this fall in exports was offset by the more than 25%  
collapse in imports as domestic demand dropped.  
Forex reserves (USD bn)  
500  
27  
454  
30  
452  
446  
1
Forex reserves, in months of imports  
29  
28  
e: ESTIMATES & FORECASTS  
TABLE 1  
SOURCE: BNP PARIBAS GROUP ECONOMIC RESEARCH  
From a sector point of view, the quota policy established by OPEC+  
producers (the OPEC members and Russia), and the overcompliance  
of Saudi Arabia with the quota of production, reduced oil GDP (around  
CONTRIBUTION TO GDP GROWTH  
4
0% of total GDP) by 6.7% over the course of 2020. Crude oil production  
was 6% lower in 2020, at 9.2 million barrels per day (mb/d) on average.  
Non-oil GDP contracted by 2.3%. Overall, GDP fell by 4.1%.  
Net exports  
Public consumption  
Real GDP  
Investment  
Private consumption  
5 pp / %  
1
1
0
5
0
5
POOR CONDITIONS FOR REFORM  
The double shock from oil prices and the pandemic had a particular  
impact on the Saudi economy given that the country is engaged in  
an ambitious economic development and diversification plan. This  
plan relies on two conditions: it needs substantial financial resources,  
and requires the development of the non-oil private sector in order to  
create jobs for Saudi nationals. The Public Investment Fund (PIF) is  
financing the plan, particularly its major infrastructure programmes,  
in the absence of significant foreign investment (since 2016, inflows  
of foreign direct investment have only averaged some 0.7% of GDP).  
A prudent recourse to borrowing, coupled with expected receipts from  
privatisations, should guarantee the PIF’s financing for the short term  
at least.  
-
-
10  
2
008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020  
CHART 1  
SOURCE: MINISTRY OF FINANCE, BNP PARIBAS  
As far as the second condition is concerned, the uncertainty from the  
pandemic has increased caution amongst economic agents. Since 2016,  
and the start of what has proved to be a lasting drop in oil revenues,  
private-sector activity has slowed down. It grew by an average of only  
level. Against this background, the Saudi authorities have favoured a  
top-down approach to accelerate reforms, with substantial investment  
in infrastructure (new cities, transport, etc.) and a stepping up of  
measures to increase the Saudisation of the labour market.  
0
2
.8% between 2016 and 2020, compared to 5.9% between 2011 and  
015. The ability of the private sector to record a sustained growth  
A TIMID RECOVERY EXPECTED IN 2021  
remains closely tied to the oil economy, with the uncertainty created by  
the pandemic representing an additional drag on the process.  
In Q1 2021, real GDP contracted by 3% year-on-year, due in particular  
At the same time, the medium- and long-term outlook for big oil to the drop in oil production. Over the full year, oil GDP is again likely  
producers has become more uncertain, given the common willingness to be down, probably by around 1%. Over the course of the first quarter,  
to move towards the decarbonisation of economic activity at the global Saudi Arabia voluntarily cut its oil production by 1 mb/d above what  
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3rd quarter 2021  
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was required under the OPEC+ agreement. The country’s production  
quota increased in the second quarter and is set to rise further over the  
rest of the year. Crude oil production is likely to average around 9 mb/d  
in 2021. This scenario remains dependent on the cohesion between  
the members of the cartel, on global demand that is vulnerable to any  
resurgence in the pandemic and on the relative stability of output from  
producers outside the OPEC+ agreement.  
GOVERNMENT DEBT  
% of GDP  
3
5
Government external debt  
Government domestic debt  
Interest as % of total revenue (RHS)  
1
4
2
0
30  
1
1
8
6
4
2
0
25  
20  
15  
When it comes to non-oil sectors, the outlook is positive, with a  
4
.7% growth expected in 2021, but with a high degree of uncertainty.  
Advanced indicators of economic activity (cement production, opening  
of letters of credit and withdrawals of cash) have moved in the right  
direction since the start of the year, but are very volatile. Household  
consumption grew by 1.3% y/y in Q1 2021, and is likely to benefit from a  
significant base effect in Q2. Daily mobility indicators moved back above  
their pre-pandemic levels about a month ago. Even so, current trends  
in the pandemic also give cause for caution. We estimate that less than  
10  
5
0
3
0% of the total population has been fully vaccinated. Meanwhile, a  
2
011 2012 2013 2014 2015 2016 2017 2018 2019 2020  
second wave of infections is now under way (the number of new daily  
infections is currently some 30% of the peak seen in June 2020). For the  
time being, most of the restrictions related to the pandemic have been  
lifted, but given the circumstances, a recovery in household spending  
remains uncertain.  
CHART 2  
SOURCE: MINISTRY OF FINANCE, BNP PARIBAS  
The significant increase in oil prices expected this year is likely to help  
boost public spending, particularly investment, and feed growth in  
non-oil GDP. The PIF has drawn up a plan lasting until 2025, for annual  
investment into the Saudi economy of SR150 bn (equivalent to 5.7% of  
deficit) and on the domestic market. For the latter market, the govern-  
ment issues sukuks (debt securities that are sharia compliant) with  
long maturities of up to thirty years. The debt-financed share of the  
deficit looks set to grow, given the government’s limited reserves at the  
central bank, low borrowing costs and the willingness to develop the  
domestic debt market. Under our central scenario, government debt is  
projected to reach 35% of GDP in 2023.  
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020 GDP). Real GDP is likely to grow by around 2.3% in 2021.  
A PERSISTENT BUDGET DEFICIT  
Due to the drop in oil prices and the need to support the economy (with Macroeconomic risks remain moderate in the medium term, but there  
measures equivalent to 2.7% of GDP), the government recorded a very are some pressures on the public finances. The government’s net  
high budget deficit of 11.2% of GDP in 2020. Revenue from taxes on asset position has been deteriorating slowly but steadily since 2015;  
goods and services (around 18% of total fiscal receipts) benefited from the global drive to tackle climate change is weighing on prospects in  
the increase in the VAT rate, but this was not enough to offset the fall the oil industry; and the introduction of economic reforms increases  
in oil revenue (down 31% y/y) – which remains the main determinant financing requirements and maintains the dependence on oil revenue  
of fiscal performance (accounting for some 60% of total receipts). The in the short term.  
government has announced spending cuts of around 6% for 2021. The  
cuts in investment have been made possible by the transfer of a part  
of this expenditure to the PIF, but we remain cautious regarding current  
Completed on 5 July 2021  
spending cuts against a background of rising consumer prices (with  
expected inflation of 2.9% in 2021) and the possible persistence of the  
pandemic. Even if oil prices increase significantly this year, they are  
likely to remain below the price that would balance the budget (the  
fiscal breakeven oil price). The total deficit for 2021 is projected at  
Pascal DEVAUX  
pascal.devaux@bnpparibas.com  
3
.1% of GDP.  
Over the medium term, the limits on diversification of fiscal receipts  
and the increase in spending will probably mean that the fiscal breake-  
ven price stays in a range from USD65 to USD70 per barrel, resulting in  
continued small fiscal deficits.  
A MODEST INCREASE IN GOVERNMENT DEBT  
Given the repeated large fiscal deficits since 2015 (averaging 10.6% of  
GDP), government debt has increased rapidly, but remains moderate  
(
32% of GDP at end-2020). Currently, around 40% of the budget deficit  
is financed from government resources held at the central bank. These  
currently stand at around 18% of GDP. The remainder is financed by  
issuing debt on international markets (financing around 15% of the  
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QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
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