Saudi Arabia set for ‘modest’ recovery as Covid-19 impact is limited, IIF says

The Arab world's biggest economy is set to grow 2.6 per cent in 2021, according to IMF projections

The Riyadh skyline. Saudi Arabia on Wednesday said it has raised 7.67 billion riyals through the sale of a dual-tranche sukuk. Reuters

Saudi Arabia is poised for a "modest" economic recovery in 2021, led by the non-oil sector, as the Covid-19 pandemic had only a limited health impact, according to the Institute of International Finance.

A relatively young population, low share of services in the gross domestic product and containment measures that have curbed the spread of the virus have limited the impact of Covid-19 on the kingdom, the IIF said in a report.

A "strong policy response" by the government and the Saudi Central Bank (SAMA) has placed the kingdom in a better position for economic recovery this year.

The Arab world's biggest economy is expected to grow 2.6 per cent in 2021 and 4.0 per cent in 2022, following a 3.9 per cent contraction last year, according to International Monetary Fund forecasts last month.

"The recovery will be gradual and will be supported by a rebound in domestic demand," Garbis Iradian, the institute's chief economist for the Middle East and North Africa region, said. "The ongoing recovery is expected to accelerate in the second half of this year as the second wave of the pandemic recedes, Covid-19 vaccines become widely available, and oil production cuts are tapered in line with the Opec+ agreement."

The kingdom took measures to minimise the impact of Covid-19 on its businesses and citizens. It unveiled 142 economic stimulus initiatives worth 214 billion riyals ($57bn) last year. In November, the Saudi Central Bank extended a loan deferral programme until the end of the first quarter of 2021 to assist affected businesses.

Saudi Arabia's monetary policy will remain accommodative until an economic recovery is well-established, the IIF predicts. The Saudi riyal's peg to the US dollar means the central bank tracks the monetary policy of the US, and there is consensus that the US Federal Reserve will keep interest rates on hold at least till end of this year.

The kingdom's banking system has remained resilient during the pandemic, helped by sound initial capital and liquidity positions and a "forceful response" by the central bank, according to the report.

"Bank profitability, while moderating, remains relatively high. Credit to the private sector increased by 14 per cent in December 2020, year-on-year," Mr Iradian said. "Maintaining the current healthy banking system and encouraging innovation in FinTech and digital banking will support the economic recovery and promote financial inclusion."

The IIF sees the kingdom's current account improving slightly in 2021 as oil prices pick up to an average of $52 per barrel. Its preliminary estimates, based on actual data for the first three quarters of 2020, show that its current account balance shifted to a small deficit of 2 per cent of the GDP last year as the sharp fall in oil exports more than offset a modest decline in imports of goods and services.

Under its oil price assumptions, the country's fiscal deficit would narrow to 4.3 per cent of GDP in 2021, from an estimated 11.9 per cent last year.

The institute projects the kingdom's oil revenues will increase by 18 per cent. The tripling of VAT last year combined with a recovery in domestic demand could also raise non-oil revenues by 10 per cent.

Assuming oil prices remain above $50/bbl in 2022 and beyond, the fiscal deficit will narrow to 2.8 per cent of GDP in 2022 and shift to a small surplus by 2024, the IIF said.

Saudi Arabia has made progress in its digital transformation which, combined with other structural reforms already underway, will help to diversify the economy further away from oil and boost potential growth, the report said.

The Public Investment Fund, the country's sovereign wealth fund, is seen as the main vehicle to diversify the economy from oil.

It will increase its local investments to $40bn in 2021, or 5.5 per cent of GDP, compared with $16bn in 2019.

Last month, the PIF announced a new five-year strategy through which it aims to double assets to $1.07 trillion.