S&P strongly rates Saudi economy with stable outlook

A recent report issued by S&P Global Ratings has affirmed Saudi Arabia’s credit rating at A- / A-2 with a stable outlook. It forecast that the economy will return to positive growth this year, and that the fiscal deficit will narrow as the global economy emerges from the coronavirus disease (COVID-19) pandemic.

The stable outlook for the economy is based on S&P expectations that the Saudi government and external net asset positions over the next two years will remain strong. S&P said the Saudi economy was hit hard by the pandemic, and by lower global oil prices and demand in 2020. But it believes that the economy will start to rebound from 2021 as international conditions and oil markets improve, and as the global economy emerges from the pandemic.

The combined effect of oil production cuts and weakness in the non-oil economy tied to COVID-19 caused Saudi Arabia’s real gross domestic product (GDP) to contract by 4.1 percent in 2020. S&P considers this the biggest contraction since 1987, but it is broadly in line with other G20 economies, almost all of which have been hit badly by the pandemic.

Despite these difficulties facing the Saudi economy in 2020, S&P expects real GDP growth to rebound, averaging 2.3 percent over 2021-2024 as the global economy recovers and oil demand and prices pick up.

Regarding the Kingdom’s ambitious Vision 2030 reform plan announced in 2016, S&P said there have been significant achievements in terms of social reforms and increased freedoms for women, but less success in creating jobs and transforming the private sector into an engine of growth.

I believe that S&P has fairly addressed the difficulties that the Saudi economy went through last year due to the pandemic. I also believe that S&P’s optimism for the future outlook of the Kingdom’s economy is not too far away from what Saudi official sources have projected. The General Authority for Statistics has released data indicating that real GDP declined by 4 percent in the first half of 2020, as real oil GDP witnessed a decline of 4.9 percent due to the significant reduction in oil production in the second quarter of 2020, in compliance with the OPEC+ agreement.

Consequently, it was predicted that real GDP would decline by 3.7 percent in 2020. But it is projected that real GDP will grow by 3.2 percent, driven by the assumption that economic activity will continue to recover.

 

• Talat Zaki Hafiz is an economist, financial analyst, and board member of the Saudi Financial Association. Twitter: @TalatHafiz