The kingdom's non-oil GDP has returned to pre-pandemic levels, driven by domestic investment and easing coronavirus restrictions
Saudi Arabia is on a steady path towards economic recovery in 2021 with the growth of non-oil GDP expected to reach 2.8 percent, an increase from the 2.4 percent growth forecast made earlier this year.
It is also an improvement from the kingdom’s record GDP drop of 4.1 percent, according to the ICAEW-commissioned Economic Insight report by Oxford Economics.
Saudi Arabia’s non-oil GDP has already returned to pre-pandemic levels, and is set to continue to rebound as restrictions are lifted across the globe, and aggressive investment strategies are implemented within the country. The outlook for business conditions will continue to improve as demand strengthens, with overall GDP growth rising to 2.4 percent this year.
“There have been significant improvements in demand and business conditions in Saudi Arabia, which have been facilitated by steps taken by Saudi authorities to bring normalcy back to the kingdom, and increase employment. However, the continued travel uncertainty means that appeal for expatriate workers will be undermined, especially with rising costs of living due to higher value-added tax (VAT), and ongoing pursuit of workforce nationalisation,” said Scott Livermore, ICAEW economic advisor and chief economist at Oxford Economics.
“As vaccination drives continue across the world, and travel restrictions ease, this should start to slow the outflow of migrants and provide a further boost to Saudi Arabia’s tourism sector,” he added.
Although concerns about future Covid-19 outbreaks still linger and weigh on business optimism, activity indicators suggest that growth is gaining traction. The headline Purchasing Managers Index (PMI) rose to 55.2 in April, the highest reading since January. As more people get vaccinated and restrictions ease, higher retail sales and recreation levels are expected to bring about improvement in employment.
Domestic investment will be central to the Kingdom’s economy as the government enforces strategies in an investment drive aimed at meeting Saudi Arabia’s Vision 2030, the report indicated.
In light of weak foreign direct investment, Saudi authorities have unveiled a broad investment programme (Shareek) valued at SAR 12 trillion ($3.1 trillion) by 2030. Led by domestic entities, including the Public Investment Fund, oil company Aramco and petrochemical firm Saudi Basic Industries Corporation (SABIC), the programme is set to inject $40bn annually in 2021-22 to foster private-sector growth.
Saudi authorities have also made significant business and social reforms, implementing business-friendly measures that have helped elevate the kingdom’s position in international rankings including the World Bank’s Ease of Doing Business report. Over the past year, plans for mega-projects like Neom have also started to emerge.
Job creation is also expected to pick up in the second half of this year, with investment spending to boost jobs for locals taking pressure off the already-bloated public sector. The unemployment rate among Saudi citizens fell to 12.6 percent in the Q4 of 2020 from 14.9 percent in Q3, and recent dynamics in the labour market show more women are entering the workforce, suggesting that actions taken to meet Saudi Vision 2030 targets for female participation in the workforce are also beginning to work, according to the report.
For the oil industry, the rise in oil prices this year will bolster government funds despite a fall in oil production as part of the OPEC+ agreement. The government relies on oil sales for about half of fiscal revenues, despite moves towards diversification including introducing, and then raising, VAT. However, fiscal diversification measures are feeding through to non-oil revenues with a hefty 75 percent increase in tax income boosting non-oil revenue by 39 percent year on year in Q1 2021. The fiscal deficit is set to fall sharply to 1.5 percent of GDP from 11.2 percent in 2020 when the Covid-19 pandemic cut oil prices, the best outcome since 2013. The hydrocarbon sector is also set to benefit from higher oil production in the second half of the year.
“Saudi Arabia’s economy has long been heavily dependent on oil. Although the oil sector remains a drag on overall growth, the diversification efforts made by the Kingdom to realise Saudi Vision 2030 are well underway, and already playing a huge role in an economic rebound,” said Michael Armstrong, FCA and ICAEW Regional Director for the Middle East, Africa and South Asia (MEASA).
“As the overall business environment improves, through pro-business policies and initiatives like the investment drive, we expect this will help generate employment in the private sector,” he added.
The Economic Insight report also notes headline inflation remains elevated following the tripling of VAT in July 2020. Food inflation has stabilised, while lower migrant demand has decreased housing costs. Notwithstanding the positive growth momentum from the domestic economic recovery, price growth will drop in H2 as tax base effects take hold, and the report forecasts average inflation at 4.1 percent this year.