Saudi Arabia: Economic outlook for 2021

ALBIN JOSEPH

The COVID-19 pandemic has taken a huge toll on the global economy, with an unprecedented crisis on all fronts, shattering the entire ecosystem.

Although 10 months have gone by ever since the virus was first reported in Wuhan, China,it is neither possible to fully quantify the repercussions of the pandemic nor to estimate the time needed for the global economy to recover.

Since the beginning of the pandemic, countries across the globe were privy to a series of developments reminiscent of the financial crisis that struck the global economy in 2008 and continued to haunt it for several years, but with a great difference in the root cause of the crisis and the higher level of uncertainty generated.

The three major business arenas that were adversely hit are demand, supply chain and confidence in the capital markets. According to the latest figures published by International Monetary Fund in its World Economic Outlook of October, the global growth for 2020 is projected at -4.4%, In fact a lesser contraction than what was forecast in June 2020. The revision reflects the positive traction that has been built up after the lockdowns were scaled back in May and June in several advanced and emerging markets.

Following the contraction in 2020 and the recovery in 2021, the level of global GDP in 2020 is expected to be at a modest 0.6% over 2019. These growth projections signify the prevalence of output gaps and high unemployment rates in both the advanced and emerging economies.

In this context, the Kingdom of Saudi Arabia was not immune from the effects of the crisis due to economic interdependence with the rest of the world in addition to its eminent global standing. In fact, the country had to tackle the double whammy of corona outbreak and falling oil prices.

Despite the adverse impact on the kingdom’s non-oil growth this year and the widening budget deficit, contrary to the initial plans, the outlook is better than what was anticipated during the first half of 2020, especially after the gradual resumption of economic activity, the sharp decline in the spread of virus and the high recovery rates.

The real GDP is expected to contract by 3.8% in 2020, whereas the full year 2021 GDP is estimated to grow by 3.2%. The increase in VAT(value added tax) from 5% to 15% would be a key lever in propelling the economic growth in the ensuing year. Apart from this, the possibility of increase in custom duties of selective items might come into effect, with an intention to mobilise additional revenue.

Based on these factors, it is estimated that the total revenue in 2020 will reach SAR: 770 billion, a decrease of 16.9% versus same period last year. The revenues for 2021 and 2022 are estimated to increase to SAR:846 billion and SAR:928 billion respectively.

The drop in Saudi Aramco’s net profit by 44.6% in the third quarter with $11.8 billion is a matter of grave concern for an economy like Saudi Arabia that thrives predominantly on oil exports. This is primarily due to the fall in demand of oil from the major oil importers such as China and India as these mammoth economies came to a virtual halt during the first three months of the pandemic outbreak.

Despite the drop in profits, Aramco has managed to maintain a cash flow of $12.4 million and declare a dividend of $18.75 million for the quarter. This shows the inherent potential of this oil giant to stand the test of the time and propel the nation’s economic growth. Oil prices are likely to rebound to the $55-60 levels during the first quarter of 2020, considering the fact that China, one of the major importers of oil, has accelerated the pace of its economic revival.

China consumes approximately 14 million barrels of oil per day, and it dropped to less than 40% during the first half of 2020 on account of the shutdown of its major factories, due to the pandemic. In view of the fact that IMF has forecast8.2% growth in China’s 2021 GDP, oil consumption would ideally revert to its original level of 14 million barrels per day in the first quarter of 2021 which in turn will impact the global oil prices positively. The Indian economy is also expected to grow at 6% in 2021, which should ideally reinstate the country’s daily oil requirement to 4.5 million barrels a day.

The positive growth forecasts of these two major oils importing nations will certainly revive the demand for oil, which in turn will have a positive impact on the oil prices, thereby enabling the kingdom to regain its lost ground at the oil export front.

While the oil market goes through its natural stabilisation process, rectifying aberrations in the demand and supply, the kingdom will continue to give impetus to the non-oil revenue generation front, in line with the Vision 2030. Although a host of projects has been envisaged under Vision 2030, NEOM and Red Sea Project would definitely take precedence in 2020, in view of its inherent potential to drive the non-oil growth.

The government’s plan to award $4 billion worth of contracts under the Red Sea project would be a great fillip to this project that is planned to develop more than 50 islands off the Red Sea coast, offering a tourism and nature reserve spread over 28,000 square kilometers.

The Red Sea development company is also planning to close a loan of $:3.7 billion from five local banks by the end of 2020 as it rams up construction on the project. Medical tourism is another sector that the Kingdom needs to relook in order to tap its underlying potential. The kingdom has an average pilgrim footfall of over three million a year that constitutes a solid base for giving a boost to this untapped segment.

Saudi Arabia has one of the state-of-the-art medical infrastructure in the MENA region. With a little bit of customisation in terms of providing advanced treatments in the fields of cardiology and oncology, the healthcare sector can definitely woo those aged pilgrims with chronic diseases to seek treatment here.

The size of the MENA (Middle East & Africa) Medical Tourism market was worth $:0.83 billion and is estimated to grow at a CAGR (compounded annual growth rate ) of 8.5% to reach $1.25 billion by 2025. Saudi Arabia could easily make deep inroads into this market by customizing its healthcare system to cater to the requirements of the pilgrims.

It is quite obvious that the pandemic has cast a shadow on the employment prospects and several business across the spectrum, but every cloud has a silver lining and kingdom is once such economy, where the silver lining would become apparent soon, as it is the investment powerhouse of the MENA region, heart of the Arab and Islamic world and the hub connecting three continents.