Pandemic brings Saudi Arabia’s ‘whatever it takes’ moment

Probably for the first time in their careers, economic experts do not know what is going to happen next. Faced with the unprecedented shock of the coronavirus pandemic, analysts at the big global financial institutions and international banks are scratching their heads.

There will be a recovery as more economies open up — on that they are agreed — but will it be a V-shaped recovery or a more gradual U-shape? The real pessimists are looking for an L, where the horizontal extends far into the distance. They are unsure of the timing of the recovery too.

There are still many unknowns about the disease. Will it weaken in the warmer northern hemisphere summer? Will there be a resurgence in the winter, as previous pandemics have shown? Will infection give you immunity, or will it come back to ravage us again and again?

The Bank of America recently published a piece by analysts showing that the dispersion of forecasts for quarterly growth in gross domestic product is the greatest since the 1960s. In layman’s terms, that means nobody has much of a clue where the global economy is heading — except that it is downward.

The International Monetary Fund last week put the official seal on it, forecasting a global contraction of 3 percent. That makes a near 6 percent downward swing over 12 months, the biggest decline since the Great Depression of the 1930s.

In comparison to the rest of the world, Saudi Arabia has lots of capacity to take on debt to fuel the recovery and the ongoing diversification strategy

Frank Kane

In the face of that collapse in global economic activity, policymakers have two clear historical precedents. They can retreat back into isolationism, protectionism and austerity, like they did in the 1930s, or they can employ the techniques of wholescale fiscal and monetary intervention, like they did during the more recent global financial crisis.

Given the fractious state of geopolitics today, the first option cannot be entirely ruled out, but so far at least, the thrust has been more 2009 than 1929. The “virtual” G20 Summit staged from Riyadh a couple of weeks ago noted that the aggregate amount of government intervention — monetary and fiscal — in response to the pandemic had reached $5 trillion. It is probably likely to have gone up by another couple of trillion since then.

The Bank of America was in no doubt which direction policymakers should take. “Targeted measures stink of miserly austerity; only indiscriminate, abundant largesse can ‘flatten the curve’ of personal and corporate bankruptcies,” it said.

Where does Saudi Arabia — contending with a collapse in global oil demand at the same time as the economic shock of the pandemic — stand on the austerity-versus-largesse scale? There were signs of a return to the default position of austerity in the early reaction to the pandemic, with the budgets of some government departments cut by varying amounts and a slowdown in new project funding.

Since those early days, the Kingdom has more fully grasped the reality of the pandemic’s fallout, with multibillion-riyal packages devoted to private sector support and vital financial input for the health sector. These commitments bring the Kingdom more in line with the level of fiscal support pledged by other G20 members.

The big question is what contingencies the Kingdom can put in place in the event that the more pessimistic forecasts come to pass. It still has vast financial reserves in place, though these will fall as long as low oil prices continue.

In comparison to the rest of the world, Saudi Arabia has lots of capacity to take on debt to fuel the recovery and the ongoing diversification strategy. The debt profile of every economy in the world is going to be utterly transformed by the pandemic, so the Kingdom is not alone in this.

Some regional economics experts think the pandemic is a once-in-a-lifetime event that requires unprecedented intervention. Tarek Fadlallah, CEO of Nomura Asset Management in the Middle East, said: “This is the ‘rainy day,’ the ‘whatever it takes’ moment.”

• Frank Kane is an award-winning business journalist based in Dubai.

Twitter: @frankkanedubai