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Saudi Arabia has managed to contain the pandemic so far thanks to containment measures that have curbed the spread of the virus and the number of deaths.
The kingdom's economic recovery in 2021 will be modest, with non-oil real GDP growing by 3 percent in 2021, following the contraction of 2.7 percent in 2020. The recovery will be supported by the large projects lead by the Public Investment Fund (PIF), the Institute of International Finance (IIF) said in a report.
Indicators including credit to the private sector and the Purchasing Manager’s Index (PMI), suggest that output growth has been accelerating in recent months.
Video: Saudi economy outlook: Modest recovery in 2021 with 3% non-oil GDP growth
The 3-month moving average PMI has increased from 45 in May 2020 to 56 in January 2021 (back to pre-pandemic levels).
"The ongoing recovery is expected to accelerate in the second half of this year as the second wave of the pandemic recedes, COVID-19 vaccines become widely available, and oil production cuts are tapered in line with the OPEC+ agreement," Garbis Iradian, IIF's MENA Chief Economist said.
The higher VAT rate combined with a modest increase in nonfuel commodity prices raised the average inflation to 3.4 percent in 2020 following a deflation of 2.1 percent in 2019. "Limited upward price pressures may persist in H1 2021 as VAT-induced cost pressures and higher global commodity prices remain in play. We expect inflation to remain slightly above 3 percent in 2021," Iradian said.
According to IIF, the kingdom's monetary policies will remain accommodative until the recovery is well-established. The banking system has remained relatively resilient, helped by sound initial capital and liquidity positions and flexible response by the central bank including regulatory forbearance.
However, profitability challenges in the low-interest rate environment may weigh on banks’ ability to expand private sector credit, the report said.
(Writing by Seban Scaria; editing by Daniel Luiz)
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