Estudos Económicos
Saudi Arabia

Saudi Arabia

Population 35.0 million
GDP 19,996 US$
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Synthesis

major macro economic indicators

  2019 2020 2021 (e) 2022 (f)
GDP growth (%) 0.3 -4.1 3.0 4.5
Inflation (yearly average, %) -2.1 3.4 3.2 2.2
Budget balance (% GDP) -4.5 -11.3 -3.1 -1.8
Current account balance (% GDP) 4.8 -2.8 4.5 4.0
Public debt (% GDP) 22.8 32.5 30.0 31.0

(e): Estimate (f): Forecast

STRENGTHS

  • Key oil producer with over 15% of the world’s proven reserves, leading role in OPEC
  • Strong financial buffers
  • Intensified economic diversification efforts within the Vision 2030 program
  • Improved diplomatic relations with neighbouring countries
  • Young population and rising inclusion of women into the workforce

WEAKNESSES

  • Economy still driven by the oil sector and fiscal spending despite diversification efforts, slow progress in reforms
  • Dependence on foreign workers
  • Persistent tensions with Iran, geopolitical uncertainties

RISK ASSESSMENT

Consolidating recovery

Hit by the fall in oil prices/demand and COVID-19 in 2020, the Saudi economy will consolidate its recovery in 2022, mainly on the back of high oil prices and increased oil 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, as the parked 3.76 million b/d supply capacity will return to the market in line with the OPEC+ agreement. Additionally, Saudi Arabia’s reference level will increase to 11.5 million b/d from 11 million b/d, which could add 500,000 b/d to its oil production from May 2022 onwards. The easing of COVID-related measures, thanks to the progress in vaccination, the low level of interest rates and correlated higher consumer lending will sustain private consumption (around 40% of GDP). However, these impacts will be mitigated by fiscal prudence and increased taxes (VAT was tripled as of 1 July 2020). In line with the easing of travel restrictions, tourism revenues (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 to grow. 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   (including Red Sea project, Neom, Amaala, Qiddiya, etc  ., in the tourism, entertainment, construction and infrastructure sectors) worth USD 7 trillion. The key financing sources will be the Public Investment Fund (PIF) and foreign investments. The government aims to attract more investments, both domestic and foreign, through privatization and partnerships. More foreign investment is expected after the government announced in 2021 that it would no longer work with foreign companies that do not have their regional headquarters located 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 expiration of the OPEC+ supply restrictions. The inflationary pressures should decline in 2022 as the impact of the tripling the VAT in 2020 - to support fiscal revenues amid falling energy prices - will fade and as the government decided to cap local energy prices. However, global increases in energy, food and transportation prices will continue to put upward pressure on headline inflation. 

 

Strong external accounts, oil prices will be eyed

High energy prices (hydrocarbon accounts for 70% of total export revenues) will feed into Saudi Arabia’s current account surplus. However, a stabilization in prices would weigh on export earnings. Moreover, any slowdown in China’s growth, the Kingdom’s key export market, would also hamper exports growth and reduce the current account surplus. On the other hand, higher domestic demand and easing of travel restrictions will result in higher demand for capital and consumer goods imports as well as outbound travelling. The Kingdom’s international reserves (USD 465 billion as of September 2021) and the net worth of USD 430 billion estimated in its sovereign wealth fund (Public Investment Fund) will allow the country to easily meet its foreign exchange (fx) denominated debt obligations . External debt (both private and public) and central government debt account each for around 30% of GDP, with public external debt representing 12% of GDP. The public debt increased by USD 6.8 billion in the third quarter of 2021, bringing total debt to USD 253 billion The kingdom is due to pay a total of USD 77.6 billion in fx-denominated maturing debt obligations between 2021 and 2025.

 
High energy prices (fiscal breakeven price expected at USD 74 per barrel in 2022, Coface forecasts oil prices at USD 75 on average in 2022) and increased oil production will also contribute to narrow the fiscal deficit. The increase in household spending will contribute as well through higher tax revenues. On the other hand, the government’s fiscal consolidation plans will drag down spending. Capital expenditure, which fell by 35% in the first half of 2021 from a year earlier, should continue to decline in 2022 as well. Wages, which account for over 50% of total expenditure, are unlikely to grow given the government’s willingness to cut spending by 5.9% in 2022.

 

Changing regional balances   amid a continuous political status quo 

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 will keep its option to normalize open. On the other hand, talks took place in Iraq between Saudi Arabia and Iran during 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 seven-year war in Yemen, where it has been battling Iran-backed 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. The kingdom will continue to see the U.S. as its security guarantor, even though it seems to want to reduce its dependence on them in terms of defense systems. Consequently, the Kingdom signed a new military cooperation agreement with Russia in September 2021.  

 

Last updated: February 2022

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