Saudi Arabia…The journey of economic transformation continues to achieve its goals

Saudi Arabia’s journey of economic renaissance continues to achieve its targets, as the Crown Prince Mohammed bin Salman said recently.

These achievements come under the directives of the Custodian of the Two Holy Mosques King Salman bin Abdulaziz Al Saud.

The recently announced budget for 2022 came as confirmation of the results achieved from economic and financial reforms aimed at promoting economic growth and financial sustainability towards a vibrant society, a thriving economy, and an ambitious nation.

According to Crown Prince Mohammed bin Salman, the government is committed in the 2022 budget to the planned spending in the medium term, which was previously announced during the past year, and we also expect to achieve budget surpluses in 2022.

This will be done by developing the financial planning process and raising the efficiency of spending in addition to developing various and more stable sources of government revenues, which supports the objectives of the Financial Sustainability Program, which seeks to complete the march towards enhancing economic stability and sustainability in the medium and long term.

The Crown Prince stressed that the economic recovery, initiatives and policies of financial control, and the development of public financial management and its efficiency contributed to continuing to reduce the budget deficit while maintaining the achievement of the main goals of the Saudi Vision 2030.

Saudi deficit in 2021 is expected to record about 2.7% of the GDP compared to 11.2 % in 2020, affected by the pandemic. This is expected to reverse to a surplus of 2.5% of GDP in 2022. These surpluses will be used to increase government reserves to meet the needs of the coronavirus pandemic, strengthen the Kingdom’s financial position, and raise its capabilities to confront global shocks and crises.

The economic and structural reforms that have been implemented since the launch of the Kingdom’s Vision 2030 have contributed to reducing the negative effects associated with the pandemic. Until the end of the third quarter of 2021, the Kingdom achieved high real GDP growth rates for the non-oil sector, which amounted to about 5.4%, driven by the growth of the private sector by about 7%. Pre-pandemic levels and this growth was also accompanied by a decrease in unemployment rates among citizens from 12.6% at the end of last year to 11.3% in the middle of the year as a result of the increase in job opportunities available to citizens.

Great opportunities for investors in the regions

The Crown Prince stressed the importance of the role of the private sector as a major and vital partner in development. The government is implementing several major initiatives that will contribute to strengthening the role of the private sector. These initiatives include the National Investment Strategy and Partner Program in addition to the Public Investment Fund program. This will give investors a chance to participate in many sectors and different regions within the Kingdom, and it is planned that the total spending in the Kingdom will reach SAR 27 trillion until 2030, including investments of the Public Investment Fund, the private sector, government spending and private consumption, and this also supports the ongoing reforms undertaken by the government.

The investment fund contributed to local and international achievements

The Crown Prince commended the objectives of the Public Investment Fund program in achieving the goals of the Kingdom’s Vision 2030. The fund which acts as the Kingdom’s local and foreign investment arm contributes to diversifying the economy and sources of income.

This in turn supports and complements the efforts undertaken by the government to diversify the economy, and has contributed to achieving clear impact and achievements at the local and global levels in pursuit of its ambitions in the medium term.

The fund and its subsidiaries are contributing to the non-oil domestic product, and raising the proportion of local content in its investments and its subsidiaries by up to 60%. It should be noted that the Fund invested locally more than SAR 84 billion in 2021, and plans additional local investments of more than SAR 150 billion in 2022. The total local investments of the PIF will reach SAR 3 trillion by 2030, compared to a local investment of SAR 11.2 billion in 2016.

Success in addressing the pandemic has proven the strength of the Saudi economy

The government’s success in confronting the pandemic and limiting its economic and social effects proves the strength of the Kingdom’s economy in facing urgent challenges. The Kingdom along with international organizations are working to confront the crisis.

Saudi Arabia has played a major role in stabilizing energy markets, while at the same time leading the next green era, through the Green Saudi Initiative and the Green Middle East Initiative launched by the Crown Prince. The Kingdom will also continue during the coming year and in the medium and long term to increase the attractiveness of the Kingdom’s economy as a base for local and foreign investments, and diversify the economy by developing promising sectors such as tourism, technology, industry and mining.

Financial reforms enhance the Kingdom’s position in the global financial markets

The financial reforms that have been implemented in Saudi Arabia have kept the Kingdom’s public debt at one of the lowest rates in the world. The volume of public debt is about SAR 938 billion at the end of 2021. The size of the Saudi economy exceeds SAR 3.1 trillion, so the public debt to GDP ratio fell to 30.2% in 2021, down from 34% in 2020.

During the current year, the National Debt Management Center raised SAR 125 billion during 2021, including the issuance of local debt instruments, or Sukuk in Saudi riyals, with a total of SAR 75.4 billion, issued monthly within the annual borrowing plan. This contributed to securing financing needs in the Kingdom’s domestic debt, by increasing the investor base in government securities.

The National Debt Management Center has also succeeded in collecting financing from international issuances totalling SAR 49.1 billion, including SAR 11.4 billion financing through the Export Credit Agency, and international issuances of Sukuk and dollar bonds with a total amount of about SAR 31 billion, in addition to issuing Europe-denominated bonds equivalent to SAR 6.8 billion.

The centre aims to contribute to achieving public financial sustainability by continuing to follow a diversified financing policy between debt issuance and withdrawal from government deposits and the state’s general reserve to finance the budget deficit. Even after the deficit is fully paid, the Ministry of Finance aims to develop a sustainable fiscal policy and enhance the Kingdom’s position regionally and internationally in the debt markets, increasing the base of financiers and investors.

Among the achievements this year, apart from issuing debt, is the signing of an agreement between the Ministry of Finance and The National Debt Management Center and AlRajhi Bank to appoint AlRajhi as a primary dealer in government local debt securities. The National Debt Management Center was crowned with two Global Capital Bond Awards for the year 2021 as the best sovereign issuer of debt instruments in the Middle East, and the best issuer of debt instruments in emerging markets, for the second time in a row.

IMF raises Saudi economic growth forecast to 2.8% in 2021, 4.8% in 2022 led by non-oil recovery

Saudi Arabia’s economy proved resilient and managed to cushion the negative impacts of the COVID-19 pandemic with strong policy buffers and reform momentum, the International Monetary Fund (IMF) said in its Economic Prospects and Policy Challenges for the GCC Countries -2021 report.

The report indicated that Saudi authorities responded quickly and decisively to the crisis with a range of fiscal, financial, and employment support programs that helped cushion the impact of the

pandemic on the private sector.

The measures were gradually eased in the second half of 2020, however, Saudi Central Bank (SAMA) maintained its borrower support policy.

The report indicated that Saudi Arabia rebounded strongly after COVID-19 restrictions were eased, with high-frequency indicators pointing to a resilient non-oil recovery. Other GCC countries experienced second waves of virus outbreaks, which either delayed reopening schedules or resulted in renewed containment measures. Countries (Bahrain, Qatar, UAE) that have a larger share of contact-intensive sectors in non-oil GDP are experiencing slower non-oil recoveries this year. In particular, hard-hit sectors such as wholesale and retail trade, restaurants, hotels, finance and real estate account for around 34-36% of non-oil GDP in Bahrain, Qatar, and UAE, compared to 26% in Saudi Arabia.

The IMF raised its forecast of the Saudi economy overall growth to 2.8% up from the 2.4% expected earlier. The fund expects economic growth to rise to 4.8% in 2022, over the medium-term, growth is expected to accelerate as the economic reform agenda begins to pay dividends.

Non-oil GDP is projected to grow by 4.7% in Saudi Arabia in 2021 and by around 3% in Bahrain, Kuwait and UAE. Non-oil growth is projected to be 1.5% in Oman and 2%in Qatar.

In an earlier report, the IMF expected average annual inflation to hover around 3.2% in 2021, while credit to the private sector will remain strong, boosted by programs to encourage mortgage and SME lending.

The decline in oil revenues by around 30% led to an increase in fiscal deficit widened in 2020 to 11.3% of GDP, however, the impact was offset by an increase in non-oil revenues.

Saudi expenditures witnessed a limited increase, as the removal of cost of living allowances in June 2020 and lower capital spending largely offset COVID-19 related spending and another one-off spending.

IMF report applauded the Saudi reform momentum, citing the rapid increase in labour market participation of Saudi females and reforms to the Kafala sponsorship system for expatriate workers, which positively impacted growth, productivity, and household incomes.

Moreover, the Kingdom launched a program to codify legal practices and the privatization program which deepened the domestic capital markets. Also, the reforms for e-government and to harness the potential of digitalization, and the support to SMEs and entrepreneurs are all important to support a more diversified and inclusive recovery.

In their assessment, IMF Executive Directors commended the authorities for their quick and decisive policy response, stressing that the remaining pandemic-related policy support should be carefully

withdrawn to continue supporting the ongoing recovery.

They added that the Saudi Vision 2030 reform agenda should continue to be implemented to promote strong, sustained, diversified, inclusive, and greener growth.

Regarding fiscal consolidation, the directors recommended that it should go in parallel with continued enhancing the social safety net in the near term to support low-income

households.

They encouraged the authorities to maintain the fiscal reforms introduced last year, press ahead with planned energy and water price reforms, and consider ways to rationalize the government’s wage bill.

Directors encouraged the authorities to continue developing the Fiscal Sustainability Program

to reduce fiscal policy procyclicality. They underscored the importance of monitoring fiscal

risks and developing a robust sovereign asset-liability management framework given the

growing role of the Public Investment Fund and public-private partnerships (PPP) in the

economy. Directors recommended further strengthening expenditure management, public

procurement, and fiscal transparency.

Furthermore, they welcomed the continued resilience of the financial sector and the strong supervision

by SAMA.

“Structural reforms should continue to be implemented to diversify the economy and promote sustainable, inclusive growth. In this context, they supported recent reforms to increase female employment and to enhance the job mobility of expatriate workers,” the report said.

Balancing between easing financial access and financial stability

According to the IMF, the borrower support program launched by the central bank has shielded SMEs from the pandemic. Through the program, the Saudi Central Bank assesses if an SME requires payment deferral based on its financial situation.

It indicated that credit growth came to a halt in Oman but is expected to improve this year while in the UAE credit to the private retail segment has recovered but corporate lending continues to contract.

In other countries, it has remained positive and even accelerated in Saudi Arabia.

The report welcomed SAMA’s policy, indicating that announcements of any changes in the program should continue to be made well in advance to allow businesses time to adjust.

As Saudi non-oil economic activities rebounded to the pre-pandemic levels, broad-based support to SMEs is becoming less needed, however, with continued uncertainty about the outlook for hard-hit

priority sectors such as tourism and hospitality, more targeted support focused on viable SMEs in

these sectors may still be required.

Despite the payments program, Saudi banks remain in strong positions, with low levels of non-performing loans (NPLs). Also, bank liquidity remained at very good levels during the pandemic.

Furthermore, mortgage lending witnessed huge growth as government programs have

supported housing demand and supply. Similarly, retail mortgage lending has more than

doubled over the past two years to around 18% of total bank credit.

SAMA and the IMF staff agreed that risks to banks still appear limited given debt service limits on borrowers, the low average loan-to-value ratio, and the fact that most repayments are made by salary assignment from borrowers employed in the public sector.

However, the IMF said that risks need to be carefully monitored and SAMA stressed

that they carefully monitor banks and have surveillance systems in place to identify any build-up of

vulnerabilities to inform macroprudential policy.

Saudi real estate market continues to grow

One of the key Realization Programs of the Saudi Vision 2030 is the Housing Program, which aims to offer solutions to enable Saudi households to own or benefit from housing according to their needs and finances.

It targets to raise housing supplies, especially for lower and middle-income families, develop financing options through banks and finance companies, and improve regulation of the housing market including by reducing the time needed to acquire building permits.

The aim under Vision 2030 was to raise the homeownership rate from 47% in 2016 to 60% by 2020 and further to 70% by 2030.

The program surpassed that target as the Saudi homeownership rate recorded 62% in 2020.

The IMF report indicates that Saudi real estate supply has grown, as around 344,000 new housing units were added in 2020, marking an increase of 4.1% compared to 2019.

Around 30% of these units were supplied through the partnership with the private sector program (Shrakat) and the developers’ platform Etmam.

These initiatives ensure access of qualified developers to interest-free financing, provide subsidized or free land for construction, and facilitate licensing and legal permits.

Moreover, real estate financing programs in the Kingdom have increased.

One of these programs, dubbed Sakani provided around 266,000 residential loans and free land packages in 2020. Under this program, beneficiaries can obtain subsidized mortgage loans up to SAR 500,000—they receive a subsidy on the interest (“profit”) payment to the lender not on

the principal payment according to income level and family size.

Low-income households can obtain a mortgage guarantee and subsidized loan up to SAR 500,000 or free land parcels.

Accordingly, the value of new residential mortgage contracts increased by 84% in 2020 to reach SAR 136 billion, of which 96% were government-subsidized loans.

Meanwhile, Saudi real estate prices have stabilized in 2020 after falling sharply during 2015-19.

Another important aspect of the Saudi real estate market is taxation, under the Real Estate Transactions Tax (REET), the first home purchases up to SAR 1 million are exempt.

REET, which stands at 5%, has replaced the VAT on real estate transactions in October 2020.

The report indicates that Saudi authorities introduced other initiatives to enhance market regulation and efficiency. Digital solutions for homebuyers have speeded eligibility checks and applications and allowed easier access to financial products for homebuyers. The Ijar initiative provides digital solutions for the rental market to increase transparency and efficiency, through standardizing electronic rental contracts, establishing the regulatory framework for real estate brokerage firms and providing a digital matching platform.

Towards a sustainable future, green growth

Saudi Arabia has embarked on ambitious efforts and plans to reduce greenhouse gas emissions (GHG) and support greener growth.

The IMF applauded the decline in GHG emissions, indicating that more work remains.

The Saudi authorities climate actions have accelerated since 2018, leading to lower carbon emissions. These actions have targeted the energy (renewables, Carbon Capture, Utilization and Storage by Aramco), industry, transportation, building, and water and agriculture sectors. Further, energy price reforms, which were started in 2016, have continued. Emissions from fuel combustion, which accounts for the bulk of GHG emissions in Saudi Arabia, declined by 3% during 2015-19 against an increase of 2% in the G20 countries.

This was driven by a faster decline in emissions in the transportation and building sectors. Carbon emissions in these sectors dropped by 25% and 12%, respectively, while increasing by 6% and 2% in the G20 countries.

However, GHG emissions in Saudi Arabia remain above the G-20 and OECD averages.

Saudi Arabia announced a third renewable energy procurement round in 2020, accordingly, investments in renewable energy are expected to reach $50 billion by 2023 and meet 49% of domestically needed electricity in 2030. This is up from a mere 0.2% in 2019.

This comes under the Saudi Vision 2030 Liquid Displacement Program that aims to shift the energy mix towards renewables by phasing out 1 million barrels per day of domestic oil consumption by 2030, which will help reduce GHG emissions and meet the increasing domestic demand for electricity in a more climate-friendly way.

Nevertheless, the Saudi Industrial Development Fund (SIDF) launched a credit facility program of $28 billion (1.4% of non -oil GDP) in September 2019 to support Saudi companies investing in renewable energy.

The Saudi Climate Strategy has recently been launched which aims to reduce carbon emissions through clean hydrocarbon technologies. This complements the government’s efforts to reduce fossil fuels subsidies which declined by 60% since 2012 to reach $28.7 billion in 2019.

IMF recommends further actions to improve energy efficiency in residential buildings and industry, develop water protection and conservation regulations, increase the resilience of infrastructure to

extreme weather events, and upgrade the regulatory framework for green financing and renewable energy.

The Kingdom will need to boost the efficiency of water desalination plants through investment in the latest technology, expand their capacity, and restart water price reforms to reduce consumption.

The Saudi government launched the Qatrah program to rationalize water usage with the target of reducing daily per capita consumption by 43% by 2030 and aims to add around 30 new seawater plants by 2030.

Female labour participation continues to improve

The Saudi female labour force participation rate is estimated to have increased by 13% points to over 33% over the past two years, according to the report.

This comes after the social reforms introduced by King Salman and Crown Prince Mohammed bin Salman, as formal restrictions were removed and legislation establishing the equality of women in the workplace implemented.

Accordingly, more women are expected to get senior public and private sector positions, which will continue to build momentum for increased female labour force participation.

Saudi Arabia’s mandatory maternity leave benefits (10 weeks of paid leave at present) could be raised and programs offering subsidized transportation and childcare to lower-income women expanded as needed.

Another important aspect was the reform of the Kafala sponsorship system for expatriate workers in the private sector. The report explained that with strong enforcement, the new regulations will give foreign workers greater freedom of movement which will benefit their wages and

productivity, attract higher-skilled expatriates and reduce incentives for firms to employ expatriates over nationals.

Regarding the competitiveness of Saudi workers, the report recommends that government should communicate that public sector jobs will be limited in the future to reduce the reservation wage for nationals to take private-sector jobs.