Saudi Arabia expected to grow in 2021; S&P Report

By Ashika Rajan, Trainee Reporter
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The renowned global credit rating agency Standard & Poor’s (S&P) expects the Saudi Arabian economy to resume growth in 2021. 

Mr. Ravi Bhatia an analyst at S&P remarked that “we are affirming our ‘A-/A-2’ long- and short-term sovereign credit ratings on Saudi Arabia. The outlook is stable. We also forecast the current account to return to surplus and the fiscal deficit to narrow.”

The twin shocks of the pandemic and lower global oil prices and demand struck the Saudi economy hard in 2020. As financial conditions and oil markets change, and the global economy recovers from the pandemic, S&P expects the economy to begin to recover from 2021 onward.

The rating agency said that the stable outlook suggests that Saudi Arabia’s government and external net asset positions will remain sufficiently high to sustain the ratings over the next two years. Saudi Arabia’s real GDP contracted by 4.1 percent in 2020, down from 0.3 percent growth in 2019. This was due to oil production cuts combined with weakness in the non-oil economy linked to COVID-19. Saudi Arabia’s real GDP growth is projected to recover, averaging 2.3 percent between 2021 and 2024, as the global economy rebounds and oil demand and prices increase.

Oil prices

Higher oil prices in 2021 will be partly offset by lower Saudi oil output rates. The rating agency expects the authorities to continue to juggle the need to help the economy and population with the need to keep the fiscal deficit under control.

In 2020, the pandemic affected both the Saudi oil and non-oil sectors, delaying investment projects. From 2021 onwards, the government is expected to return to its ambitious investment and economic diversification policy.

With the flexibility of oil supply as global demand increases, Saudi Arabia will be able to support its economy. Saudi Arabia is the only country in the world with significant excess oil export capacity, allowing it to quickly ramp up (or down) production by about 2 million barrels per day.

Fiscal deficit outlook

Despite a mid-year dramatic increase in VAT to 15 percent from 5 percent, low oil prices increased the fiscal deficit in 2020 to 11.2 percent of GDP. In 2021-2024, the central government deficit is expected to decline to an average of 6.3 percent. S&P expects the fiscal deficit to average -3.5 percent in 2021-2024, although the Ministry of Finance is forecasting a slightly stronger consolidation to near balance by 2023.

Saudi Arabia’s budget deficit is funded by a mix of foreign and domestic debt issuance as well as asset drawdowns. According to S&P, the country’s gross debt will be about 41 percent of GDP by 2023, up from 23 percent in 2019 and none in 2014.

External accounts

Saudi Arabia’s traditionally strong external status was weighed down by a dramatic decline in oil receipts in 2020, but S&P expects it to strengthen in 2021 and beyond.

Related: Saudi Arabia strives for $420bn foreign investments in infrastructure, transportation


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