Saudi Arabia: Risk Assessment
Country Risk Rating
Business Climate Rating
- Key oil producer of OPEC, vast proven oil reserves
- Large financial resources
- Economic diversification and reform efforts to attract foreign investments
- Growing population fueling domestic demand
- Rising government support for tourism
- High dependence on hydrocarbon despite economic diversification efforts
- Exposure to volatility in energy prices
- Dependence on foreign labor
- Weakness in the non-oil sector exacerbated by COVID-19
Growth expected to be sluggish
After being hit by the negative impacts of the COVID-19 pandemic and low oil prices in 2020, Saudi Arabia’s economy is expected to expand in 2021. Growth will be driven mostly by the recovery in energy prices and the uptick in the non-oil economy thanks to the easing of most of the COVID-19 related restrictive measures. The loosening of the OPEC+ output cuts will help the Kingdom’s oil production volume to grow by around 2% to 3% in 2021 after falling to 8.8 million barrels per day (bpd) in the third quarter of 2020, from nearly 10 million bpd in 2019. However, growth will remain tepid mainly due to the fiscal consolidation that will be key for domestic demand. Although the government introduced a fiscal stimulus package amounting to 2.8% of GDP in March 2020, current spending has been rationalized and more non-oil revenue will be collected in order to relieve part of the pressure on public finances. This will weigh on the growth performance as government expenditure accounts for nearly one quarter of GDP. It will also slow down the economic diversification process within Vision 2030, which is mostly based on public spending. Furthermore, lower consumer confidence and the tripling of the value-added tax (VAT) from 5% to 15% will restrain domestic demand. However, the construction and retail sectors are expected to recover slightly thanks to increased mobility and government support that encourages home ownership. Nevertheless, unless there is a recovery in global tourism and travel, global demand for oil is expected to remain sluggish, which will put downward pressure on growth. This will also keep business confidence low and weigh on private investment. Therefore, investment, which had contracted for the three quarters leading to Q2 2020 on an annual basis, will remain low.
More vulnerable fiscal dynamics despite strong foreign assets
The COVID-19 pandemic and, consequently, the drastic plunge in oil prices have resulted in an extreme widening of the budget deficit in 2020. The budget deficit is expected to remain wide in 2021, as oil revenues represent more than half of total fiscal revenues. Nevertheless, the implementation of fiscal consolidation measures in order to collect more non-oil revenues and reduce expenditure (i.e. tripling of the VAT, cuts in some public investments, suspension of cost-of-living allowances, etc.) will help to reduce the deficit. As oil prices are expected to increase only moderately, the fiscal policy should remain tight in the upcoming period. The deficit is expected to be financed mostly through debt issuance on the domestic market. Part of the deficit can be covered through foreign exchange reserves, which stand at nearly USD 450 billion (almost 30 months of imports). The central bank’s reserves were affected by a transfer of USD 40 billion to the Public Investment Fund (PIF) in March and April 2020. The government debt will inch up due to the wider budget deficit, but will remain manageable compared to the national output.
The current account balance will also remain in deficit due to a moderate increase in price and demand for oil, which accounts for around 70% of the Kingdom’s total merchandise exports. After falling by 23% in the first half of 2020, non-oil exports (mostly plastic and chemicals) are expected to rise on the back of the recovery in global growth. However, tourism revenues (around 2% of GDP) will need more time due to the COVID-19 pandemic’s conditions. Therefore, the current account deficit will only shrink. On the other hand, while imports will increase gradually, the fiscal consolidation will weigh on import demand for capital and consumer goods. The financial account should remain partly in deficit due to the resident capital outflows (estimated at around USD 80 billion) backed by increased regional tensions, low oil prices and slow economic growth.
Political status quo is expected to continue amid rising challenges
During his campaign program, U.S. President Joe Biden stated that his administration will aim to strengthen and extend the nuclear deal with Iran (seen as a threat to regional stability by the Kingdom), which is a complicated topic that will take time to be solved. He also said he would terminate the support for the war in Yemen, where the Saudi-led military coalition has been confronting the Iran-backed Houthis for years. Nonetheless, Saudi Arabia will continue to remain as a critical partner for the U.S. in the region. With the end of the three-year blockade imposed by Saudi Arabia and three other countries on Qatar in January 2021, any normalization with Turkey would ease regional tensions. On the domestic front, the fiscal consolidation based on cutting social subsidies and increasing taxes will drag down household income, making the conservation of living standards costlier for people. Despite possible social discontent, no political instability is expected in the near-term.