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publication April 16, 2020

Saudi Arabia's Economic Update — April 2020

An oil refinery is lit up by lights in Saudi Arabia.

Download Saudi Arabia report: English


The contracting oil sector led to sluggish growth in 2019, despite strong performance of non-oil sectors. The outlook for 2020 remains very weak in the wake of COVID-19 and oil supply shocks. Medium-term fiscal balances are estimated to continue in deficit— risking the ability in realizing Vision 2030 fiscal targets. Vision 2030 related reforms are critical for diversification, and progress was made on business environment reforms. COVID-19 response includes preservation of gains made in job creation for nationals in the private sector.

Growth stalled in 2019, driven largely by the deliberate oil production cuts in excess of those required under OPEC+ agreement, and lower oil prices. Overall, the economy grew by 0.3% in 2019 despite strong performance of non-oil sectors supported by private consumption and investments. The stronger non-oil sector offset the headwinds from oil, with December headline inflation recording a positive reading for the first time in a year.

Growth will initially pivot to higher oil production as announced in March 2020, pending further agreement with OPEC+ and G20 countries. Weaker growth is anticipated in the non-oil sectors reflecting low domestic demand as COVID-19 closures and suspensions disrupt critical sectors in the economy; these effects are assumed to be concentrated within 2020. Despite indicated spending cuts to weather the fall in oil receipts, the fiscal deficit is expected to widen in 2020. COVID-19 related health spending will be prioritized, for example a commitment to free treatment for all residents (not only nationals). The deficit narrows afterwards as oil prices moderately recover to levels well below consensus assumptions at the start of the year.

There are two major downside risks, both of which are materializing at the same time. First, the recent lapse of OPEC+ agreement places further downward pressure on oil prices as several main players reported plans of increased production, sometimes with huge discounts, to an existing sizeable market surplus. Saudi Arabia is participating in efforts to stabilize prices, through existing production coordination mechanisms (OPEC+) and the G20. Second, the continually downgraded global growth outlook due to COVID-19 and its impact on energy demand and hydrocarbon earnings. Moreover, limited information on the extent and duration of the outbreak makes it difficult to evaluate the indirect channels of impact in the economy, e.g. value chains and tradable sectors; preventive measures taken by the authorities, e.g. travel restrictions and the suspension of work for public and private sectors; or potential austerity measures in response to declining revenues.