Economic Update: Middle East Q4 2020, from Oxford Economics, commissioned by chartered accountancy body ICAEW, reported that Saudi Arabia’s oil and non-oil sectors will end the year below their 2019 growth levels.
However, while the oil sector continues to weigh down Saudi’s economy, continued public support and an improving health situation should drive growth higher in the fourth quarter of 2020, with overall GDP growth predicted to be -4% and +2.8% in 2020 and 2021, respectively.
Saudi Arabia boosted oil production in April when the OPEC+ agreement broke down, which was then subsequently cut back sharply as a new deal was agreed. According to ICAEW, oil output reduction will lead to a 4.6% year on year drop in oil sector GDP, the largest fall since 2009, followed by a 1.4% growth in 2021. The oil price slump has also weakened public finances – underpinning the 24% y/y decline in total revenue in the year to September.
Although the tripling of VAT to 15% and a hike in import duties have yielded a strong uptick in non-oil revenue—a key diversification metric under the Vision 2030 agenda—Saudi Arabia’s non-oil economy declined by 3.6% this year, the first negative outcome in over 30 years. The sharp VAT hike also pushed inflation above 6%, driven by accelerating food and beverage prices as well as transportation costs. Price increases have since moderated but are curbing domestic demand, on top of the impact of COVID-19 measures.
Despite these challenges, the Purchasing Managers’ Index (PMI) gauge moved back into expansion in September. This upward trend looks set to continue with the opening up of travel and tourism from January, which is projected to boost momentum more meaningfully in 2021 and maintain the positive trend in point of sales transactions.
On the demand side, capital spending is expected to suffer for the remainder of 2020. This is due to the struggling private sector, and reallocations in public spending from capital expenditure to COVID-19-related support and stimulus. As a result, ICAEW forecasts a drop of around 12% in private sector investment in 2020, the steepest fall in decades.
Lower investment may complicate the task of reducing unemployment. The unemployment rate among Saudi nationals soared to 15.4% in Q2, from around 12% in the preceding quarters, the second highest level in the GCC. While there is renewed impetus to replace migrant workers with Saudi nationals, this is a longer-term goal. In the short term, employment creation is unlikely to keep pace with demographic trends, therefore, the domestic unemployment rate is unlikely to fall to the targeted 10.5% in 2022.
Michael Armstrong, FCA and ICAEW Regional Director for the Middle East, Africa and South Asia (MEASA), said: “Saudi Arabia’s dependence on oil at a time of such volatility will certainly hinder its diversification efforts. How well it boosts non-oil sector activity during the coming months will determine how quickly the Kingdom is able to bounce back.
“To achieve Vision 2030 goals, improvement of the overall business environment through pro-business policies and initiatives is a must, especially addressing the high unemployment level in the private sector as this is a key area of growth in the Kingdom.”
The recent G20 summit, hosted by Saudi Arabia, identified job protection and support for labour markets both during and after the COVID-19 crisis as key pillars of global economic recovery. The near-term economic impact of the event is unlikely to be significant but is difficult to quantify economically.
