2020 to be a year of resilience and performance
The Saudi economy remains resilient against contagion from global economic uncertainty. The Kingdom’s economic growth is expected to pick up in 2020 as the medium-term domestic growth outlook has improved. Based on preliminary estimates, the Saudi economy in 2019 performed well. Real gross domestic product (GDP) expanded 0.4 percent despite downward pressure due to the oil output declines throughout the year.
The best gauge for the economy’s wellbeing is non-oil sector growth, which was exceptionally robust given geopolitical uncertainties. Saudi Arabia’s economy, both in terms of real non-oil GDP and real non-oil private GDP, expanded 2.9 percent, the highest since 2015. More importantly, real non-oil GDP continued to demonstrate a strong pick up in 2019, which helped fuel private-sector expansion.
Expect an improvement in the economy in the year ahead, supported by growth in the non-oil sector. Preliminary estimates for 2020 real economic growth is set to rise to 2.3 percent, with inflation reaching 2 percent from its current deflationary trend of -1 percent. In terms of economic size, the economy is expected to reach $773 billion in 2020 and $807 billion in 2021.
The balance sheet of the Kingdom’s economy is solid. Debt to GDP for 2019 is at 24 percent, the second lowest in the G20. High levels of foreign reserves and low public debt means ample fiscal space to counter an economic downturn. Debt will remain within a healthy range of 26 percent for 2020 and 28 percent in 2021.
Equally important, foreign reserve assets of the Saudi Arabian Monetary Authority reached approximately SR1.8 trillion ($489 billion), which offers a healthy cushion. Saudi Arabia’s current foreign reserves are capable of softening any external shock, and are sufficient for more than 37 months of imports.
Against lower budgeted outlays, government expenditure for 2020 is believed to be sufficient to continue supporting growth in the non-oil sector
The Kingdom has also managed a third year in a row of surplus in its current account. This has been supported by a surplus in the trade balance, although the value of total exports (both oil and non-oil) has declined.
Saudi Arabia’s 2020 budget is on target, prudent and at the same time not constraining.
For an economy in transformation, the Kingdom’s fiscal target for 2019 was undoubtedly a success. Oil revenues were volatile and dropped SR58 billion in 2019 as Brent crude averaged $64 per barrel for the same year versus $73 per barrel in 2018. Oil output has declined by an average of 3.8 percent, contributing to lower revenues. However, fiscal prudence has been exercised as expenditures for 2019 fell by the same amount as the drop in total oil revenues for 2019.
The 2020 budget is fiscally prudent but supportive. It is slightly reduced from 2019 by a mere 2.9 percent, despite a 9 percent drop in total revenues.
The infrastructure and transportation sector is slated to receive SR56 billion in additional funding in 2020, and education SR193 billion. In 2020, the municipal services sector budget is forecast to receive SR54 billion, with SR167 billion for health and social development.
Some sectors witnessed a budgetary outlay decrease, including municipal services (23.4 percent), health and social development (16.1 percent), infrastructure and transportation (16.1 percent) and public administration (9 percent). For 2020, the budget deficit is estimated to reach 6.4 percent of GDP, still lower than many consensus forecasts. In fact, earlier this year the International Monetary Fund had estimated Saudi Arabia’s 2019 fiscal deficit to reach 6.5 percent of GDP. Although higher than 2019, the 2020 deficit is still within the Kingdom’s medium-term fiscal planning range, and bound to decline to 5 percent in 2021 and 2.9 percent in 2022.
Operational expenditures in 2020 are expected to decline by 3.4 percent. Compensation of employees for 2020 will remain flat at SR504 billion, in line with fiscal consolidation efforts. Subsidies, which have long burdened the economy, will once again be reduced in 2020 by more than 22 percent as part of the Kingdom’s commitment to a more efficient economic environment.
Against lower budgeted outlays, government expenditure for 2020 is believed to be sufficient to continue supporting growth in the non-oil sector. More specifically, capital expenditure will certainly not decline but will rise, albeit conservatively, to SR173 billion in 2020 from SR172 billion in 2019.
• John Sfakianakis is the chief economist and head of research at the Gulf Research Center, and an associate fellow at Chatham House.