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Saudi GDP projected to contract 5.2 per cent in 2020

Saudi GDP projected to contract 5.2 per cent in 2020

Dubai: Saudi Arabia’s economy plunged by about 11 per cent in the second quarter of 2020 year on year, according to the latest estimates by the Instituter of International Finance (IIF), the global association of the financial industry.

The sharp contraction follows a 1 decline in GDP in the first quarter 2020, fueled by pandemic-related restrictions on economic activity and the fall in crude oil production in the context of the OPEC+ production cut agreement.

We expect the economy to contract by 5.2 per cent in 2020 followed by a growth of 2.3 per cent in 2021, driven mainly by the non-oil private sector.

- Garbis Iradian, Chief Economist, MENA, IIF.

The IIF projects an overall GDP contraction in excess of 5 per cent this year.

“We expect the economy to contract by 5.2 per cent in 2020 followed by a growth of 2.3 per cent in 2021, driven mainly by the non-oil private sector,” said Garbis Iradian, Chief Economist, MENA, IIF.

Saudi GDP
The IIF forecasts Saudi economy to contract by 5.2 per cent in 2020 followed by a growth of 2.3 per cent in 2021. Image Credit: IIF

H2 rebound

The IIF economists forecast a strong rebound in the second half of 2020 supported by various stimulus measures focused on boosting residential housing loans, sup-porting SMEs, and non-oil export financing.

“We expect a robust rebound in H2 as the pace of new COVID-19 infections has slowed and lockdown restrictions have eased. High frequency indicators (PMI, credit to private sector, point of sale transactions, and cement out-put) suggest that a sizeable rebound is already underway. However, the depth of contraction in 2020 and the speed of recovery in 2021 is subject to a high degree of uncertainty,” said Iradian

Monetary easing

Monetary easing could limit the economic fallout from the COVID-19 and the plunge in oil prices, the IIF said. The repo rate has been reduced by 125 bps to 1 per cent, and SAMA (the Saudi central bank) has introduced liquidity support measures amounting to 3 per cent of GDP to support the private sector, particularly SMEs, which may be less equipped to tackle large temporary shocks. SAMA has also put mechanisms in place to encourage commercial banks to postpone private sector loan repayments for six months.

Despite the fiscal and monetary support, the IIF expects the national unemployment rate to remain high in the coming years in the absence of stronger recovery in public investment. Our projections indicate that the nonoil economy need to grow by at least 3.5 per cent to absorb the number of national entrants to the labour force.

Sound banking system

With strong capitalization, adequate liquidity, and low non-performing loans (NPLs) (around 2% of total loans) the banking system remains strong. While households and firms have reduced their consumption and investment, respectively, confidence in the banking system remains strong, with deposits growing by 9.4 per cent in July, and the ratio of foreign currency deposits in total deposits declining. Credit to the private sector continues to increase to 13 per cent in July, the highest since late 2013, driven by mortgages.

Fiscal and external position

The IIF forecasts the Kingdom’s external position to remain strong despite the small current account deficit.

“Lower oil exports will weigh on the current account, which we expect to shift from a surplus of 5.9 per cent of GDP in 2019 to a deficit of 1.5 per cent in 2020 despite a projected 12 per cent fall in imports,” said Iradian.

Saudi current account
The IIF forecasts the Kingdom’s external position to remain strong despite the small current account deficit. Image Credit: IIF

Resident capital outflows, while declining slightly to $99 billion, will continue to exceed nonresident capital inflows ($63 billion in 2020). As a result, official reserves will decline by $54 billion to $445 billion by end-2020, equivalent to 28 months of imports of goods and services. More than half of the decline in official reserves is due to SAMA’s transfers of FX to the Public Investment Fund (PIF). The PIF, with estimated assets of about $330 billion, is aggressively buying stakes in global companies, particularly blue chips.

Saudi fiscal deficit
Saudi Arabia';s fiscal deficit is projected to narrow substantially beyond 2020, supported by cuts in spending and tripling of the VAT rate. Image Credit: IIF

The fiscal deficit is projected to narrow substantially beyond 2020, supported by cuts in spending and tripling of the VAT rate. We are encouraged by the resumption of fiscal consolidation despite the deep recession, and we expect government spending to be reduced by at least 12% this year. Public in-vestment will likely shoulder the brunt of the cuts in spending, as was the case in 2015 and 2016.