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After a deep contraction in 2020, Saudi Arabia’s economy is on a recovery path as new COVID-19 cases have stabilized at manageable levels, global conditions improve, and the national vaccination program gains momentum. Improvement in oil prices and easing of containment measures will strengthen medium-term fiscal and external positions. A resurgence of COVID-19 infections and renewed downward pressure on oil prices are key downside risks to the outlook. Further fiscal austerity measures would also act as a headwind to the recovery.
Recent Developments
Saudi Arabia has faced a compound challenge of coping directly with the pandemic and with the indirect oil market implications of the pandemic. Daily infections had been on a downward trajectory from their peak in June 2020 (4400 cases) to early January 2021 (100 cases); yet by mid-February new and more transmissible variants of the virus crept up, forcing partial reinstatement of travel bans. Meanwhile, the national vaccination program rollout started in mid-Dec 2020, ahead of many countries in the region, with the aim of inoculating at least 70% of the population by the end of 2021. The vaccination rate, currently standing at 7 doses per 100 people, is increasing rapidly, but still too low to give sizable immunity. On the other hand, the Kingdom has navigated extraordinary volatility in the oil market, using the OPEC+ structure and its own carefully calibrated production adjustments to keep the supply in line with the gradual global relaxation of containment measures.
Outlook
The economy is expected to grow by 2.4% in 2021, driven by a more accelerated pick-up in global energy demand and prices and Saudi oil production level closer to its OPEC+ original commitment, resulting in oil sector growth of 0.5 percent. As the vaccination program gains more momentum and COVID-related restrictions are eased, non-oil sectors will continue their growth trajectory, estimated to reach 3.5% in 2021 and reflecting stronger private consumption, gradual resumption of religious tourism, and higher domestic capital spending signaled through PIF’s five-year strategy (2021-2025). Medium-term growth is expected to reach 3.3% while headline inflation in 2021 is expected to drop, as VAT-driven impact on inflation dissipates.