Saudi Arabia's economy is set to grow 2.3 per cent next year as stimulus measures put in place to combat a contraction caused by the pandemic and lower oil prices kickstart a "robust rebound", according to the Institute of International Finance.
The institute is forecasting a 5.2 per cent economic contraction this year following an 11 per cent second quarter decline, but said it expects strong growth in the second half of the year as the rise in new cases slows and restrictions ease.
Economic indicators such as purchasing managers' index data, private sector lending, point of sale transactions and cement output, suggest "that a sizeable rebound is already under way", the report by the institute's Mena chief economist Garbis Iradian said.
"However, the depth of contraction in 2020 and the speed of recovery in 2021 is subject to a high degree of uncertainty," it adds.
Saudi Arabia is in the midst of a major economic diversification plan known as Vision 2030 aimed at reducing its reliance on oil revenue. Next year's recovery will be led by the non-hydrocarbon economy, which is forecast to grow 3.4 per cent, compared to 0.9 per cent growth for the hydrocarbon sector.
"The current private sector stimulus focuses on boosting residential housing loans, supporting SMEs, and non-oil export financing," Mr Iradian said in the report. More than 100,000 new homes are planned to be built in 2020 under the Ministry of Housing's Sakani programme, a report by the US-Saudi Business Council stated last week. The programme provides land plots and funding to allow Saudi nationals to buy new homes.
Stimulus measures have also included monetary easing, with the the kingdom's central bank, the Saudi Arabian Monetary Authority, reducing interest rates by 125 basis points to 1 per cent and providing liquidity support to encourage lending to the private sector.
However, inflation is rising – to 6.4 per cent last month – as the VAT rate trebled in July as the kingdom seeks other sources of income to rein in its fiscal deficit. The country ran a deficit of 5.8 per cent in the first half of the year, the institute said, citing official data.
Although the kingdom's reserves are forecast to decline by $54bn this year, they will still stand at $445bn by the end of the year, equivalent to about 28 months' worth of imports, the IIF forecast.
Banks also remain strong, with non-performing loans standing at just 2 per cent of total lending.
