Saudi Arabia's economic recovery is expected to strengthen in the second half of 2022 thanks to oil windfalls and economic reforms to weather the twin shock of COVID-19 and the collapse in oil prices in 2020.
While successful vaccination campaigns helped the oil-rich kingdom's recovery from the pandemic, the spill overs from the Russia-Ukraine war resulted in surging oil prices that boosted economic activity in the kingdom as well as a large surplus in the first few months of 2022, according to recent research from Deutsche Bank.
All the while, inflation has remained moderate owing to the exchange rate peg and price caps.
"With oil prices trading above $100/bbl and with the latest estimates of breakeven fiscal oil prices hovering around $70 per barrel, we expect the country to record large current account and fiscal surpluses this year, leading to a significant improvement in both the fiscal and external position," Deutsche Bank Economist Samira Kalla said in a report.
"Despite a small uptick recently, inflation remains relatively low – the recent policy hike, in tandem with the Fed hiking cycle, should help contain it. Given high oil prices, Saudi Arabia could use its oil windfall to support vulnerable sectors impacted by tighter liquidity conditions," Kalla said.
A bevy of economic and social reforms under Saudi Arabia's Vision 2030 agenda, which emphasises economic diversification efforts and efforts towards net-zero carbon emissions, should help the kingdom over the medium and long term.
Soaring oil prices should help Saudi Arabia to continue with its reform agenda and expand investments for the rest of 2022.
According to the report, Saudi could play a bigger role internationally, given its current spare capacity and cheap production cost.
The country’s available spare production capacity is providing the authorities with strong political leverage, which it might be able to utilize to improve the relationship with its allies, the report noted.
The US President Biden is preparing for a trip to the kingdom this week. He has indicated that he is looking to reset strained relations with Saudi Arabia at a time when he wants increased Gulf oil supplies.
Downside risks stemming from a potential decline in global demand, a collapse in oil prices, and/or the emergence of new variants could slow down the country's progress, Deutsche Bank said in its report.
(Reporting by Seban Scaria; editing by Daniel Luiz)