Shpper at the Al Yasmin mall in Jeddah, Saudi Arabia. The Saudi economy is forecast to return to growth trajectory in 202, credit rating agency Standard & Poor’s said while affirming the Kingdom’s credit rating. Image Credit: Bloomberg

Dubai: The Saudi economy is forecast to return to growth trajectory in 2021, credit rating agency Standard & Poor’s said while affirming the Kingdom’s credit rating.

“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,” Ravi Bhatia said an analyst at S&P.

In 2020, the Saudi economy was hit hard by the twin shocks of the pandemic and lower global oil prices and demand. S&P expects the economy will start to rebound from 2021 onward as global conditions and oil markets improve and as the global economy emerges from the pandemic.

The rating agency said stable outlook indicates that Saudi Arabia's government and external net asset positions over the next two years will remain sufficiently strong to support the ratings.

Oil production cuts, combined with weakness in the non-oil economy tied to COVID-19 caused Saudi Arabia's real GDP to contract by 4.1 per cent in 2020 down from 0.3 per cent growth in 2019. As the global economy rebounds and oil demand and prices pick up, S&P expects Saudi Arabia's real GDP growth to rebound, averaging 2.3 per cent over 2021-2024.

Oil prices

In 2021, higher oil prices will be partially counter balanced by lower Saudi oil production volumes. The rating agency expects the authorities to continue to grapple with a trade-off between the need to provide support to the economy and population, and containing the fiscal deficit.

The pandemic weighed on both the Saudi oil and non-oil sectors in 2020, and delayed investment projects. However, the government expected to revert to its ambitious investment and economic diversification strategy from 2021 onward.

Oil supply flexibility Saudi has will help its economy as the global demand situation improves. Saudi Arabia is the only country in the world that maintains large excess oil export capacity and therefore able to ramp up (or down) production by around 2 mb/d within days.

“Alongside its large production capacity and its leadership role in the global OPEC and oil markets, this provides it with some supply-side pricing power and fiscal flexibility that is not available to other oil producers,” said Bhatia.

Fiscal deficit outlook

Low oil prices widened the fiscal deficit sharply in 2020 to 11.2 per cent of GDP despite a mid-year sharp rise in VAT to 15 per cent from 5 per cent. The central government deficit is forecast to fall to an average of 6.3 per cent in 2021-2024.

Although the Ministry of Finance forecasts a significantly stronger consolidation to near balance by 2023 S&P estimatesFiscal deficit to average -3.5 per cent in 2021-2024.

Saudi Arabia's budget deficit is financed by a combination of external and domestic debt issuance and drawdowns from its existing stock of assets. S&P forecasts that it will report gross debt of about 41 per cent of GDP by 2023, up from 23 per cent in 2019 and practically zero in 2014.

External accounts

The sharp fall in oil receipts weighed on Saudi Arabia's traditionally robust external position in 2020, but S&P expects it to improve in 2021 and beyond.

“We estimate that the current account balance fell into a deficit of 2.3 per cent of GDP in 2020, compared with a surplus of 6 per cent in 2019. In 2021, we expect the current account to revert to a surplus of 4.8 per cent and average 3.8 per cent of GDP in 2021-2024,” said Bhatia.