The Effectiveness of Saudi Arabia’s Efforts to Reduce the Economic Impact of Coronavirus 2020
By: Hesham Abualkhair
Tags: Energy, Opec, Stimulus Package, Saudi Arabia, Economics

Faced with an imminent threat of rapidly spreading virus combined with a dramatic fall in oil prices, the government of Saudi Arabia has reacted quickly last month by announcing a long list of actions including a $32 billion stimulus package to mitigate the economic shocks of coronavirus outbreak.

The kingdom’s ongoing plans to diversify the economy away from crude oil are still immature as it currently earns 68% of its revenue from fossil fuel (KPMG 2020). However, Saudi Arabia has a low debt to GDP ratio of 24% and owns the world’s 5th largest foreign-exchange reserves of more than 500 billion USD. Also, the richest country in the Gulf region is the world’s top oil exporter and one of the top 20 economies in the world with a GDP value of 785 billion USD in 2019.

During this outbreak, the likely threat to jeopardize the country’s huge investments in multiple megaprojects aimed to end the long-lasting addiction to oil revenues is the oil itself. Earlier this year, Saudi Arabia's government estimated a yearly average of $58/b for Brent oil price and concluded that it is expecting a deficit of 6.4% in its 2020’s budget (Saudi Arabia’s Ministry of Finance 2020). However, the outbreak of coronavirus has sparked a chain of unprecedented events that led to a historic fall in oil prices causing Brent to reach $27 (a price less than half of what the Saudi government predicted in January). The nearly two-decades low price is being fed by the hit of coronavirus on the demand side (a decrease of more than 20% of the world’s demand), worsened by an oil price war between the world’s top oil producers.

Stabilizing the oil market is the top economic priority for the government of Saudi Arabia to prevent a wider deficit in its budget. During the last month, Saudi Arabia worked closely with its allies in OPEC+ to orchestrate production cuts to revive the prices and to stop the market bleeding. On April 13th, the allied countries struck a historic deal to cut 23% of the production totaling 9.7 MBPD (OPEC 2020). However, the nearly full global crude oil storage is expected to delay the effect of this cut on the prices of oil to the end of 2020. Until that, the government efforts to overcome this shock should be focused on working with OPEC+ to ensure members’ compliance with the agreement while tightening its own belt to keep the deficit within the targeted range. As a result, in early March, the Saudi government unveiled a budget request to multiple ministries calling for a deep spending cut of 5% or 13.3 USD billion from the total budget.

A second problem that might challenge these efforts is the economic effects on the private sector associated with the recently imposed curfew in multiple major cities to slow the spread of the virus. As the number of coronavirus cases increases rapidly around the globe, specifically in neighboring countries like Iran and Kuwait, the government of Saudi Arabia responded early to prevent the Iran scenario. The kingdom is the second most attractive tourist destination in the Middle East with more than 18 million visitors each year including the two holy Muslims’ mosques pilgrims. It was expected that the government will resist taking the bold step to implement a countrywide lockdown and sacrifices the 17 USD billion revenue from tourism. Yet, the Kingdom was among the first countries in the world to react to coronavirus threats by locking-down multiple cities, banning all incoming visitors including religious tourists and suspending schools and universities. These early painful but necessary measures magnified the economic burden and cast a dark shadow over the economy of Saudi Arabia.

To counter these measures, the central bank of Saudi Arabia(SAMA) announced on the 20th of March a 32 billion economic stimulus package intended to offset the economic double punch from the spread of the coronavirus and the falling of oil prices. The goal (as it was announced by SAMA) is “to mitigate the impacts of precautionary coronavirus measures in the SME sector, specifically by reducing the burden of cash flow fluctuation”. The financial support package is dedicated to banks and financial institutions to cover deferred loan payments from SMEs, support the financial institutions to maintain their operations and to provide refunds for all electronic payment fees paid by the stores in the private sector for three months. In addition, the government will provide stimulus funding to postpone fees levied from the private sector for three months including value-added taxes (VAT), excise taxes, and income taxes, temporarily exempting for expat levies and delaying the collection of customs duties on imports.

The Finance Minister Mr. Mohammed Al-Jadaan announced earlier this month that the country’s budget deficit is now targeting a range between 7% to 9% rather than the initial goal of 6.4%, and added:

“I don’t expect the deficit by the end of 2020 to exceed 7% to 9%, and this is our target”

Moreover, he revealed the government’s plans to rely on debt to finance the country’s budget deficit:

“We have huge reserves and very large investments, but we don’t want to liquidate any of these so we will borrow”

Mr. Al-Jadaan also announced that the government approved the increase of the country’s debt ceiling from 30% to 50% of gross domestic product:

“We don’t expect (borrowing) to exceed 50% until 2022 and this year we don’t expect borrowing to exceed 100 billion riyals and it could be less”

The government’s plan to increase the debt is expected to be effective to overcome the deficit problem as it can secure attractive loans with low-interest rates by leveraging its A1 credit score that was given by Moody’s earlier in April (Moody’s 2020). Investors and households were positive that the undertaken steps will reduce the damage reflected by the coronavirus pandemic. This confidence in the economy was clearly seen through the recently published results by Ipsos that ranked Saudi Arabia first in the world’s Consumer Sentiment Index (Ipsos 2020). Overall, the short-term indicators suggest that the Saudi economy is hedged against the impact of coronavirus provided that we see an oil market resurgence by the end of 2020 as the OPEC+ agreement efforts come into effect. Otherwise, longer than expected low oil prices will necessitate further and stricter austerity measures.