Strong growth on the back of higher hydrocarbon revenues

Hit by the fall in oil prices/demand and COVID-19 in 2020, the Saudi economy will see its recovery sharply accelerate in 2022, mainly due to higher oil prices and increased production (hydrocarbon accounts for 35-40% of GDP). The Kingdom’s oil production, which stood at 9.8 million barrels per day (b/d) as of October 2021, should rise close to 12 million b/d in 2022. The easing of COVID-related measures, thanks to the progress in vaccination and higher consumer lending, will sustain private consumption (around 40% of GDP) despite higher interest rates. In line with the easing of travel restrictions, tourism revenues, including hadj pilgrims (contribution to GDP at 3% pre-COVID), are expected to rise by more than 90% YoY to USD 8 billion in 2022. Investment (22% of GDP) will continue growing, driven by elevated oil prices. The authorities seek to increase economic diversification to reduce dependence on oil and imports (“Made in Saudi”) within their 2030 Vision program, such as with the development of six-giga projects worth USD 7 trillion (including the Red Sea project, Neom, Amaala, Qiddiya, etc ., in the tourism, entertainment, construction, and infrastructure sectors). The critical financing sources will be the Public Investment Fund (PIF) and foreign investments. The government aims to attract more domestic and foreign investments through privatization and partnerships. More foreign investment is expected after the government announced in 2021 that it would no longer work with foreign companies without regional headquarters in the Kingdom after 2023. The revision in tariffs on imports from other Gulf countries could have a similar effect. Net exports (5-6% of GDP) will also contribute more to growth in line with the expiry of the OPEC+ supply restrictions and increased oil exports. The inflationary pressures should decline in 2022 as the impact of the tripling VAT in 2020 fades. Still, it will remain above historical standards due to global increases in energy, food, and transportation prices in the wake of the war in Ukraine, despite those prices being regulated. 

Rising external and fiscal surpluses

High energy prices (hydrocarbon accounts for 70% of total export revenues) and the OPEC decision to boost oil production will feed into Saudi Arabia’s current account surplus, despite a slowdown in China’s growth, the Kingdom’s key export market. On the other hand, higher domestic demand and the easing of travel restrictions will result in higher demand for capital and consumer goods imports and outbound traveling. The Kingdom’s international reserves (USD 450 billion as of April 2022) and the net worth of USD 500 billion estimated in its sovereign wealth fund (Public Investment Fund) will allow the country to quickly meet its foreign exchange (F.X.) denominated debt obligations and easily maintain the peg to the U.S. dollar. External debt stood at 31% of GDP in Q1 2022, of which 60% was private and 40% public. The Kingdom is due to pay a total of USD 77.6 billion in FX-denominated maturing debt obligations between 2021 and 2025, which is not a key challenge given the solid financial buffers.

Record high energy prices following the war in Ukraine (fiscal breakeven price estimated at USD 79 per barrel in 2022, while Coface forecasted oil prices at USD 115 per barrel on average in 2022) and increased oil production will result in a fiscal surplus. The increase in household spending will contribute as well through higher tax revenues. Although the surge in oil revenues may encourage the government to ease the fiscal consolidation, overspending is expected to be reasonable. Budgetary capital spending is expected to increase marginally from 3.7% of GDP in 2021 to 3.8% of GDP in 2022, while current expenditure should stand at 24% of GDP in 2022 compared with nearly 30% in 2021. Public debt, at 31% of GDP in Q1 2022, with 60% being domestic, will diminish its weight.

Shifting regional balances

Following the announcement of the Abraham Accords in 2020 that initiated diplomatic rapprochement between Israel, the United Arab Emirates, and Bahrain (joined later by Sudan and Morocco), it seems that Saudi Arabia, despite some signs of rapprochement, will keep its option to normalize open. Furthermore, talks took place in Iraq between Saudi Arabia and Iran in 2021, following the reduction of U.S. presence in the region and their willingness to restart nuclear negotiations with Iran. Additionally, the need for Saudi Arabia to extract itself from the seven-year war in Yemen, where it has been battling Iran-backed Houthi rebels, and Iran’s intention to build regional relations, are other reasons encouraging both countries to start a dialogue. However, no concrete outcome is likely to appear soon. Furthermore, the Kingdom will continue to see the U.S. as its security guarantor, although it wants to reduce its dependence on defense systems. Lastly, the recent rapprochement with Turkey would also help to ease regional tensions and rebuild bilateral trade ties.