Saudi Arabia's economy to rebound after Covid-induced contraction

The Arab world's largest economy is forecast to grow 3.2% next year

The Kingdom Tower, operated by Kingdom Holding Co., left, stands alongside the King Fahd highway, illuminated by the light trails of passing traffic, in Riyadh, Saudi Arabia, on Saturday, Jan. 9, 2016. Saudi Arabian stocks led Gulf Arab markets lower after oil extended its slump from the lowest close since 2004. Photographer: Waseem Obaidi/Bloomberg
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Saudi Arabia's economy, the biggest in Arab world, is projected to expand 3.2 per cent in 2021 after a contraction this year due to the coronavirus pandemic and its impact on global oil markets, according to the kingdom's finance ministry.

The country's real gross domestic product is projected to contract 3.8 per cent in 2020, the ministry said in its 2021 pre-budget statement. However, the economy will perform better in the second half of the year despite headwinds due to its "continued efforts" to contain the pandemic, it said.

With the global economy facing a significant contraction, according to the International Monetary Fund and World Bank, the kingdom said it "was not immune from the effects of the [Covid-19] crisis due to [its] economic interdependence with the rest of the world".

"The rise of the pandemic and its impact on the global oil markets has definitely increased uncertainty, directly affecting fiscal targets and government spending," the ministry said.

The kingdom expects its budget deficit to climb to 12 per cent of GDP for the current financial year. It is set to decline to 5.1 per cent of GDP in 2021 as economic conditions improve.

Spending is set to be 7.5 per cent lower, amounting to 990 billion Saudi riyals ($264bn) in the next budget, compared to 1.07 trillion riyals this year.

The ministry expects 2020 revenue of 770bn riyals, 16.9 per cent less than the previous year. Revenue is expected to increase to 846bn riyals next year.

"The main adjustment to Saudi Arabia’s fiscal outlook relates to the current year, with significant changes to the revenue, expenditure and the fiscal deficit," Asad Khan, head of research at Jadwa Investment, said in a note to investors on Monday.

"We see the main factor in the adjustment in overall revenue primarily related to lower than anticipated oil revenue."

Oil prices have been hit hard by the spread of Covid-19 around the world, as the pandemic disrupted supply chains, brought the travel industry to a virtual standstill and countries implemented lockdowns. Opec expects oil demand to decline 9 per cent year-on-year in 2020.

Saudi Arabia is in the middle of a major economic overhaul plan, aimed at reducing its reliance on the sale of hydrocarbons for revenue.

The country has also introduced stimulus measures this year to offset the effects of the coronavirus outbreak on its economy.

These include monetary easing, with the kingdom's central bank reducing interest rates by 125 basis points to 1 per cent and providing liquidity to encourage lending to the private sector.