Saudi Arabia balances economics and safety

The region’s largest economy has the most to gain, or lose, depending on how quickly the Covid-19 pandemic is contained and oil prices stabilise, and how it adapts its fiscal policies to changing trends.

Plunging oil prices in the first quarter of the year triggered a SR34.1bn ($9bn) deficit in Saudi Arabia’s budget, which was mostly covered by external and domestic borrowing.

Full-year budget deficit is estimated to exceed SR350bn, nearly twice the figure projected in December of SR187bn, and equivalent to 12 per cent of expected nominal GDP.

The IMF said it estimates the kingdom’s 2020 real GDP to contract by 2.28 per cent, down from a forecasted growth of 2.18 per cent, before rebounding in 2021

The kingdom has outlined drastic measures to plug in the major budget gap.

In May, the finance ministry announced $100bn in spending cuts and a three-fold increase in VAT, previously set at 5 per cent, starting on 1 July. The government further suspended the monthly SR1,000 cost-of-living allowance starting from 1 June.

Saudi Arabia also turned to the international bond market, with a $7bn issuance, and recently closed a SR5.75bn bond issuance as part of the government’s riyal-denominated sukuk programme.

The IMF said it estimates the kingdom’s 2020 real GDP to contract by 2.28 per cent, down from a forecasted growth of 2.18 per cent, before rebounding in 2021.

In May, ratings agency Moody’s downgraded the country outlook from stable to negative, citing the kingdom’s dwindling reserves, which are at their lowest in a decade. However, other ratings agencies have retained a stable outlook for the kingdom due to a “low public debt level and strong fiscal and external balance sheets”.

The kingdom’s public debt stood at slightly more than 23 per cent of GDP in 2019 and is expected to rise by five percentage points this year. However, even at 28 per cent, Saudi Arabia will still have one of the lowest debt-to-GDP ratio in the region, alongside the UAE and Kuwait.

Reopening the economy

With over 700 deaths arising from more than 100,000 confirmed cases of Covid-19 as of early June, Saudi Arabia has already started its three-phased plan to reopen its economy. Domestic flights resumed on 31 May and the nationwide curfew is expected to end on 21 June, except in Mecca.

The plan includes reopening 90,000 mosques, although Hajj and Umrah pilgrimages – the main source of tourism receipts –remain suspended.

The dominant expectation is that the combination of oil production cuts stabilising prices and the containment of Covid-19 restoring demand, together with government spending cuts and fiscal reforms including asset sales, will help the region’s largest economy weather the rough economic environment.

However, the austerity measures also mean the delivery of more than $400bn-worth of planned projects is expected to be delayed or staggered, although such delays are not unique in the kingdom.