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Saudi Arabia on Road to Recovery, Expected Increase in Foreign Capital- Report

Saudi Arabia on Road to Recovery, Expected Increase in Foreign Capital- Report

Monday, 22 February, 2021 - 11:30
Saudi economy expected to recover in 2021. (Asharq Al-Awsat)

An international report has revealed that Saudi Arabia is on the road to recovery, with an expected increase in investment capital.

The kingdom has managed to contain the pandemic so far thanks to measures that have curbed the spread of the virus and the number of deaths, the report noted.

Its economic recovery in 2021 will be modest, with non-oil real GDP growing by three percent in 2021, following the contraction of 2.7 percent in 2020, the Institute of International Finance (IIF) said in its report.

It added that its real GDP is expected to grow 4.2 percent in 2021 and 1.3 percent in 2022, driven by three percent non-oil growth and 9.3 percent, respectively.

The fiscal deficit will narrow to four percent of GDP in 2021, supported by fiscal consolidation and higher oil prices.

The recovery will be supported by the large projects lead by the Public Investment Fund (PIF), the report said, pointing out that the monetary policies will remain accessible until it recovers well.

It further expected a slight increase in foreign capital flows to non-resident foreigners to amount to about $47 billion, stressing that increasing potential growth requires deeper structural reforms that surpass mega national projects.

Saudi Arabia has achieved a recovery thanks to its relatively young population, a decrease in the share of GDP services, and a set of precautionary measures to curb the spread of coronavirus.

Authorities have implemented a range of measures to mitigate the economic damage, it said, including fiscal packages, loosening monetary and macro-prudential rules, and providing sufficient liquidity to the banking system.

The banking system continues to be resilient, supported by capital centers, sound primary liquidity, and central bank response, it noted, revealing that some profitability challenges in the low-interest rate environment might affect banks' ability to expand private sector credit to a large extent by reducing spending.

The report stated that the kingdom is resuming fiscal control by reducing capital spending, while the rise in oil prices, along with the recovery of non-oil revenues will reduce the fiscal deficit from 9.11 percent of GDP in 2020 to 3.4 percent during 2021.

The Central Bank’s foreign reserves are estimated at $453 billion dollars, it affirmed, surpassing the $250 billion dollars estimated to protect the riyal’s value.

“Advances in digital transformation, along with ongoing reforms, help diversify the economy away from oil and boost potential growth, which has stalled in recent years.”

In remarks to Asharq Al-Awsat, president of the Saudi Excellence Company Abdullah al-Meleihi said the output growth has been accelerating in recent months, while the Purchasing Manager’s Index (PMI) rose from 45 points in May 2020 to 56 points in January 2021, which indicates a return to pre-pandemic levels.

The oil production cuts in line with the OPEC agreement have increased inflationary pressures, which led to an increase in the value-added tax rate along with a modest increase in the prices of non-fuel commodities and an increase in the average inflation rate to 4.3 percent in 2020, Meleihi explained.

Regarding a contraction of 1.2 percent in 2020, the economist said the escalating price pressures may continue in H1 2021 due to the cost pressures resulting from the value-added tax and the rise in global commodity prices.

Inflation is expected to rise slightly to three percent, while monetary policy will remain accessible, he said.

Meleihi noted that the Central Bank intervened through a package of measures to support liquidity amounting to two percent of the GDP to back the private sector, especially small and medium enterprises, by postponing payments for existing loans and increasing lending to companies.

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