Country Report Saudi Arabia February 2021

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Country Report
Saudi Arabia
Generated on February 24th 2021

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Saudi Arabia 1
Saudi Arabia
Summary
2 Briefing sheet
Outlook for 2021-25

4 Political stability
4 Election watch
5 International relations
5 Democracy Index: Saudi Arabia
7 Policy trends
8 Fiscal policy
8 Monetary policy
8 International assumptions
8 Economic growth
10 Inflation
10 Exchange rates
10 External sector
11 Forecast summary
Data and charts

12 Annual data and forecast
13 Quarterly data
14 Monthly data
15 Annual trends charts
16 Monthly trends charts
17 Comparative economic indicators
Summary
17 Basic data
19 Political structure
Recent analysis
Politics
21 Forecast updates
26 Analysis
Economy
31 Forecast updates
38 Analysis
Country Report February 2021 www.eiu.com © Economist Intelligence Unit Limited 2021

Saudi Arabia 2
Briefing sheet
Editor: Pat Thaker
Forecast Closing Date: January 25, 2021
Political and economic outlook

The Saudi economy is the largest in the Middle East and ranks nineteenth in global terms.
Although currently dominated by oil, a long-term diversification plan (Vision 2030) will present
significant investment opportunities for both local and foreign companies.
The ageing king, Salman bin Abdel-Aziz al-Saud, will rely heavily on his son, the crown prince,
Mohammed bin Salman al-Saud. However, disagreements between the crown prince and his
elderly father suggest that the former may officially take over in 2021.
Saudi regional foreign policy will remain focused on combating an expansionist Iran. However,
this could lead to increasing tensions with the US if the new president, Joe Biden, pushes
ahead with plans to resurrect the Iran nuclear deal.
The change of US president will also create other frictions, given Mr Biden's past criticism of
Saudi Arabia's human rights record and intervention in Yemen. Nevertheless, this will not be
sufficient to threaten the US's long-term strategic alliance with Saudi Arabia.
The kingdom is doing relatively well regionally in terms of rolling out coronavirus vaccines. But
weak global demand for oil will constrain the pace of economic recovery, meaning that it will be
2022 before economic output is restored to pre-pandemic levels.
While using the kingdom's sovereign wealth fund to spur growth, the government will
encourage the private sector to invest in manufacturing, tourism, mining and renewable energy.
Privatisations and public-private partnerships will augment these efforts.
An economic crisis in China, though not part of our current forecast, could have a de-
stabilising effect on the Saudi economy, given its dependence on Chinese export demand.
Key indicators
2020a 2021b 2022b 2023b 2024b 2025b
Real GDP growth (%) -4.2 2.5 2.4 2.8 2.7 2.0
Consumer price inflation (av; %) 3.4c 1.8 2.3 2.1 2.0 2.0
Government balance (% of GDP) -10.6 -6.2 -4.3 -0.3 -0.5 -1.1
Current-account balance (% of GDP) -3.7 -2.7 0.8 3.7 2.2 0.2
Money market rate (av; %) 1.3 1.1 1.1 1.4 1.8 2.3
Unemployment rate (%) 14.8 14.3 13.9 12.5 12.6 12.6
Exchange rate SR:US$ (av) 3.75c 3.75 3.75 3.75 3.75 3.75
a Economist Intelligence Unit estimates. Economist Intelligence Unit forecasts. c Actual.
b

Saudi Arabia 3
Key changes since December 22nd

In a surprise move on January 5th, Saudi Arabia announced a unilateral 1m barrel/day (b/d) cut
in oil production for February and March. This comes on top of the output ceiling it agreed to
at the latest OPEC+ meeting, which ended the previous day.
This provides a clear signal that the kingdom will, in the short term, prioritise its attempts to
shore up global oil prices over the defence of its market share. We now expect Saudi oil
production to average 8.6m b/d in 2021, down from our previous forecast of 9.4m b/d.
With the Saudi move helping to underpin the recent rally in oil prices, we have increased our
forecast for the average price of Brent crude in 2021 to US$53/barrel (from US$47/b). Our
forecast for 2022 also increases slightly, to US$56/b (from US$53/b previously).
The net effect of these changes is to leave our forecasts for the fiscal and current-account
balances in 2021-22 broadly unchanged, as the impact of lower oil production is offset by the
impact of higher average oil prices.
Despite lower oil production, we have also maintained our near-term forecast for economic
growth, reflecting the government's determination to use a portion of sovereign wealth fund
resources to support the recovery in the domestic economy.
A new central bank governor was appointed in late January. We believe the move is consistent
with the crown prince's desire to ensure that monetary policy plays a key role in fostering
economic recovery and supporting the Vision 2030 development plan.
The month ahead

February 11th—Oil production (January, OPEC Monthly Oil Market Report): Following
average production of nearly 9m b/d in December, we expect oil output to dip in January as the
kingdom transitions an average production level of about 8.1m b/d in February and March.
February 18th—Inflation (January): Year-on-year inflation moderated to 5.4% in December.
We expect year-on-year inflation to decelerate further over the coming months, helped by a
continuing decline in housing rental costs.
Major risks to our forecast

Scenarios, Q4 2020 Probability Impact Intensity
The coronavirus epidemic remains uncontained in 2021, leading to a much Very
High 20
deeper and longer-lasting recession high
Very
Further drone and rocket attacks incapacitate major oil installations Moderate 15
high
A human rights scandal leads to damaging condemnation from the US High Moderate 12
Regional instability and the weak oil price make international credit hard to
Moderate High 12
obtain
Shortages of marketable skills increase Moderate High 12
Note. Scenarios and scores are taken from our Risk Briefing product. Risk scenarios are potential
developments that might substantially change the business operating environment over the coming two
years. Risk intensity is a product of probability and impact, on a 25-point scale.
Source: The Economist Intelligence Unit.

Saudi Arabia 4
Outlook for 2021-25

Political stability
The government is facing a multitude of challenges, although domestic instability remains
unlikely. The king, Salman bin Abdel-Aziz al-Saud, who is 85 years old and increasingly frail, will
continue to delegate most daily decision-making to his 35-year-old son and crown prince,
Mohammed bin Salman al-Saud. Besides troubling regional security concerns, the authorities are
grappling with the problems caused by the coronavirus (Covid-19) pandemic and lower oil prices.
A vaccination programme for both residents and expatriates is now well under way. However,
some parts of the economy, including hospitality, travel and religious tourism, are unlikely to reap
any significant benefits until 2022 at the earliest. As a result, the authorities will need to maintain a
high level of support if they are to prevent a rise in social tensions.
The Economist Intelligence Unit continues to expect Mohammed bin Salman to succeed to the
throne, with his control over vital state organs (including the security services) strengthening his
ability to head off any remaining internal opposition. Although abdications are rare in Saudi
Arabia, reported tensions between the youthful crown prince and his elderly father suggest that
Mohammed bin Salman may press behind the scenes for an early transfer of power or officially
take over in 2021. Several of the most senior members of the ruling Al Saud family continue to be
detained on charges of sedition. The arrests form part of a long-running drive by Mohammed bin
Salman to consolidate power as his father nears the end of his reign. Prince Mohammed bin Nayef
al-Saud (the monarch's nephew) and Prince Ahmed bin Abdel-Aziz al-Saud (the only surviving full
brother of King Salman and a son of the kingdom's founder) are among those detained. Prince
Mohammed bin Nayef actually served as crown prince for over two years before he was replaced
by Mohammed bin Salman in 2017. Prince Ahmed has also been mentioned in the past as a
potential heir and was also one of the few members of the Allegiance Council—which determines
the succession—to oppose his nephew's elevation to crown prince. Mohammed bin Salman has
arrested and sidelined family members before, but none have been as senior as Prince Mohammed
bin Nayef and Prince Ahmed. This suggests that the crown prince has been emboldened by his
steady accumulation of power but that he also remains fearful of the resentment that he has
caused in elite circles.
The crown prince could potentially hold power for half a century, providing him with the
opportunity to reshape the kingdom substantially. His leadership has already been marked by
significant social reforms, which have proved popular. He has also taken charge of economic
reform as chair of the Council for Economic and Development Affairs, introducing Vision 2030, a
highly ambitious economic diversification plan. In contrast, measures to increase political rights
will remain largely off the agenda. The crown prince's authoritarian stance is likely to provoke
some low-level discontent, especially among the younger members of the population.
Nonetheless, we believe that most Saudis will steer clear of direct confrontation and instead
restrict their criticism to the relative anonymity of the internet and social media.
Election watch
We do not expect any move towards an elected parliament within the forecast period. The king
will continue to appoint the Consultative Council, which has advisory powers. The country's third
municipal elections went ahead in 2015, but turnout was modest at about 25% of registered voters.
There has been no indication of when the next municipal elections will be held. Given the ban on
political parties and the council's relative lack of power, voter participation will, in any case,
remain low.

Saudi Arabia 5
International relations
Under the presidency of Joe Biden in the US, bilateral relations will be cooler. Of particular
concern for Saudi Arabia is Mr Biden's apparent backing for a restoration of the Iran nuclear deal.
An expansionist Iran is viewed by the kingdom as a major threat to regional stability, given its
support for sectarian militias in Lebanon, Syria, Iraq and Yemen. However, although Mr Biden will
adopt a much more critical stance than his predecessor to alleged Saudi human rights abuses and
to future arms sales to the kingdom, we still expect him to maintain the US's historical strategic
alliance with Saudi Arabia. The Saudi leadership will also modify its own approach. A clear sign of
this was the Saudiled decision in early January to end a three and a half year boycott of Qatar—
which enabled the kingdom to enhance its reputation (hitherto lacking) as a regional conciliator.
Saudi Arabia's involvement in Yemen presents a more tricky challenge. The new US president will
undoubtedly step up the pressure on the kingdom to engage with UN efforts to end the war. The
Saudi government has increasingly been looking for ways to extricate itself from the conflict, so
this could represent welcome common ground. Nonetheless, the Houthi rebels (who are aligned
with Iran) are now the de facto authority in northern Yemen and have staged a series of missile
attacks on Saudi Arabia in recent months (including a thwarted attempt to target Riyadh, the
Saudi capital, in late January). As long as this threat persists, it will be difficult for the Saudi
authorities to endorse any peace initiative.
Democracy Index: Saudi Arabia

Saudi Arabia is ranked in 156th (out of 167 countries) in the 2020 index, having climbed three
places from the previous year. Its overall score has risen from 1.93 (out of 10) in 2019 to 2.08 in
2020, driven by a modest strengthening in the functioning of government category. Despite this
improvement, Saudi Arabia—which is categorised as an "authoritarian" state in the overall index
—still fares poorly when compared with other countries in the Middle East and North African
(MENA) region. It is the fourth-lowest-ranked nation in MENA, ahead of only Libya, Yemen and
Syria (all of which remain immersed in conflict). Since his appointment in 2017, the increasingly
powerful crown prince, Mohammed bin Salman al-Saud, has resisted any moves to strengthen
political accountability—other than a sweeping anticorruption drive—thereby entrenching the
country's autocratic monarchical system. Indeed, if anything, the political room for manoeuvre has
been further restricted, with the government taking a harder line on anything that could be
interpreted as dissent. The Majlis al-Shura (Consultative Council) continues to be wholly
appointed and has no legislative power, and political parties remain banned. Although the
franchise for municipal elections has been extended to include women, local councils still have
very limited powers and numerous female (and male) would-be candidates for the 2015 elections
were blocked by the authorities for opaque reasons. No date has been given for the next municipal
elections. As a result, the country continues to score zero in the electoral process category. Its
score for civil liberties also remains very low, despite a number of social reforms—including a
lifting of the ban on women driving and the reopening of cinemas. The score for civil liberties
continues to be constrained by the lack of a free press, as well as anti-terrorism laws that equate
terrorism with "defaming the state or its reputation". In contrast, there has been progress over the
past 12 months in terms of the effectiveness of government, and functioning of government is
now Saudi Arabia's highest-scoring category. The government's response to the health and
economic consequences of the coronavirus pandemic has been timely and effective—culminating
in the rollout of a vaccination programme in mid-December. The authorities have also pushed
ahead with a number of reforms aimed at diversifying the economy.
Democracy Index
Regime type Overall score Overall rank
2020 Authoritarian 2.08 out of 10 156 out of 167
2019 Authoritarian 1.93 out of 10 159= out of 167
2018 Authoritarian 1.93 out of 10 159= out of 167
Religion and development are pillars of legitimacy

The kingdom's second-highest score is for political culture (in part reflecting high levels of
literacy), for which it achieves a modest 3.13 out of 10. Nevertheless, as in most autocratic states,

Saudi Arabia 6
the government argues that Western-style democracy does not suit the country, resulting in a
ban on political parties. Many Saudis are likely to see religious figures as the most legitimate
political authorities, although the absence of a free press or opinion surveys makes public opinion
hard to gauge.
Freedom of the press is curtailed by, among other restrictions, a prohibition on the publication of
articles, either in print or online, that might "disturb" public order. In addition, the Ministry of the
Interior's security law gives the authorities sweeping powers and could conceivably be used to
brand any opposition as "terrorism". As a result, most Saudis restrict their political criticism to the
relative anonymity of the internet, despite condemnation of social media by the country's religious
clergy.
Democracy Index 2020 by category
(On a scale of 0 to 10)
Electoral Functioning of Political Political
Civil liberties
process government participation culture
0.00 3.57 2.22 3.13 1.47
A free white paper containing the full index and detailed methodology can be downloaded from
www.eiu.com/democracy-2020.
Note on methodology
There is no consensus on how to measure democracy, and definitions of democracy are
contested. Having free and fair competitive elections, and satisfying related aspects of political
freedom, is the sine qua non of all definitions. However, our index is based on the view that
measures of democracy that reflect the state of political freedom and civil liberties are not "thick"
enough: they do not encompass sufficiently some crucial features that determine the quality and
substance of democracy. Our index therefore also includes measures of political participation,
political culture and functioning of government, which are, at best, marginalised by other
measures.
Our index of democracy covers 167 countries and territories. The index, on a 0-10 scale, is based
on the ratings (0, 0.5 or 1) for 60 indicators grouped in five categories: electoral process and
pluralism; civil liberties; functioning of government; political participation; and political culture.
Each category has a rating on a 0-10 scale, and the overall index of democracy is the simple
average of the five category indices.
The category indices are based on the sum of the indicator scores in the category, converted to a
0-10 scale. Adjustments to the category scores are made if countries do not score a 1 in the
following critical areas for democracy:
whether national elections are free and fair;
the security of voters;
the influence of foreign powers on government; and
the capability of the civil service to implement policies.
If the scores for the first three questions are 0 (or 0.5), one point (or 0.5 points) is deducted from
the index in the relevant category (either electoral process and pluralism or functioning of
government). If the score for question 4 is 0, one point is deducted from the functioning of
government category index.
The index values are used to place countries within one of four types of regime:
full democracies—scores greater than 8;
flawed democracies—scores greater than 6, and less than or equal to 8;
hybrid regimes—scores greater than 4, and less than or equal to 6; and
authoritarian regimes—scores less than or equal to 4.

Saudi Arabia 7
Policy trends
The Covid19 vaccine rollout—which began in midDecember, ahead of most other countries in
the region—will remain the government's main focus in the near term. The official goal, of
vaccinating at least 70% of the population by the end of 2021, appears ambitious. Nevertheless,
the kingdom's financial resources and well-developed health infrastructure provide it with some
important advantages in driving its immunisation programme forwards.
There are clear indications that the government intends to use the disruption caused by the
pandemic and current weakness in the price of its oil (its main export) to galvanise support for its
long-term diversification plans under Vision 2030. Mohammed bin Salman announced in
November that the Public Investment Fund (PIF, a sovereign wealth vehicle, of which he is the
chairman) will channel SR150bn (US$40bn, or about 5% of GDP annually) into domestic
investment in 202122—underlining his determination to spur economic recovery and
diversification. More recently, the crown prince has spoken of investment opportunities totalling
about US$6trn over the next decade. With its assets set to exceed US$1.1trn by 2025 (according to
the crown prince), the PIF—in collaboration with the private sector—will remain a key player in
terms of investment. In addition, with the authorities aiming to raise more than US$50bn from
privatisations in the next five years, there will be major opportunities for investors with respect to
future divestment activity. The Ras al-Khair power and desalination complex (valued at about
US$3.5bn) is currently being prepared for privatisation, while moves are afoot to accelerate the
use of public-private partnerships in sectors such as healthcare and education.
Alongside oil and petrochemicals, the government views the expansion of the mining sector as
the third pillar of its industrialisation strategy. The sector's development will be helped by a new
mining law, which came into effect at the start of 2021. Tourism is another area that is being
prioritised. The government is aiming to attract new investments totalling over SR500bn by 2030,
boosting tourism's contribution to GDP from 3.5% at present to 10%. The Red Sea Project on the
kingdom's west coast, which will eventually cover about 10,000 sq miles, represents one of the
largest schemes and will create considerable opportunities for local and foreign investors alike.
Meanwhile, no official explanation has so far been given for the recent surprise change in
leadership at the central bank—which saw Fahad alMubarak replace Ahmed alKhulaifi as the
new governor in late January. However, we interpret this as an indication of the crown prince's
desire to ensure that the central bank pursues growth-oriented policies that are consistent with
his own agenda of economic diversification.

Saudi Arabia 8
Fiscal policy
The government's budget for 2021 sets an expenditure target of SR990bn, which is 7.3% less than
estimated spending in 2020. Despite this reduction, the authorities still describe the overall fiscal
stance as expansionary, once account is taken of the extra SR150bn that is due to be injected into
the domestic economy by the PIF. Although a rise in global oil prices will be positive for revenue
growth, this will be largely cancelled out by lower oil production. As a result, we believe that the
government's target of a 4.9% of GDP budget deficit in 2021 is likely to prove too ambitious.
Admittedly, much will depend on the size of Aramco's dividend payment to the government—
something that is difficult to forecast. Nonetheless, we expect the fiscal deficit in 2021 to be
6.2% of GDP.
Higher oil production, together with expanding non-oil income, will help to drive a narrowing of
the fiscal deficit in 2022-23, with the shortfall declining to just 0.3% of GDP in 2023. This will be
followed by a renewed widening in 2024-25, as global oil prices weaken, pushing the deficit back
up to 1.1% of GDP in 2025. Capital outlays will bear the main brunt of expenditure restraint in 2021-
22, before rising more rapidly later in the forecast period as the government seeks to press ahead
with capital-intensive projects under Vision 2030. Despite rising debt, the authorities are unlikely
to encounter any significant problems in securing the external finance needed to support their
economic diversification efforts.
Monetary policy
The riyal's peg to the US dollar means that the main policy rate of the Saudi Central Bank roughly
tracks movements in US interest rates, even though the two countries' economic cycles are
sometimes out of sync. In response to the hit to demand caused by the coronavirus and lower oil
prices, the key policy rate is currently at a record low of 1% (negative in real terms). The
authorities have also injected over SR100bn (US$27bn) of extra liquidity into the banking system,
in order to help local institutions cover the cost of loan deferrals for small businesses. We expect
the new central bank governor to support the efforts of the PIF to spur a domestic economic
recovery. A loose monetary stance will therefore be maintained until 2023, when renewed
tightening by the Federal Reserve (the US central bank) will prompt a similar response by the
Saudi authorities. However, with inflation remaining relatively subdued in both the US and Saudi
Arabia, the increase in interest rates in the latter part of the forecast period will be comparatively
modest.
International assumptions
2020 2021 2022 2023 2024 2025
Economic growth (%)
US GDP -3.6 3.7 2.3 2.0 1.8 1.9
OECD GDP -5.3 3.7 2.9 2.1 1.9 1.9
World GDP -4.3 4.5 3.4 3.0 2.8 2.7
World trade -9.8 7.0 5.9 5.1 4.5 3.8
Inflation indicators (% unless otherwise indicated)
US CPI 1.2 1.5 1.8 2.2 1.9 2.0
OECD CPI 1.2 1.5 1.9 2.1 2.0 2.0
Manufactures (measured in US$) -1.1 4.1 2.2 3.2 2.1 2.0
Oil (Brent; US$/b) 42.3 53.0 56.0 58.0 55.0 52.0
Non-oil commodities (measured in US$) 2.8 12.9 0.5 -5.7 2.0 1.5
Financial variables
US$ 3-month commercial paper rate (av; %) 0.6 0.2 0.2 0.2 0.6 1.0
Exchange rate SR:US$ (av) 3.8 3.8 3.8 3.8 3.8 3.8
Exchange rate US$:€ (av) 1.14 1.21 1.18 1.17 1.20 1.21
Economic growth
The impact of the coronavirus: vaccine rollout and its

Saudi Arabia 9
impact on Saudi Arabia

The Economist Intelligence Unit estimates that global output contracted by 4.3% in 2020 (4.4% in
our previous forecasting round). In 2021 we expect global growth to rebound by 4.5%, with
growth in OECD countries reaching record highs. However, this apparent rebound in 2021 will
mainly be the result of a statistical distortion owing to low base effects after the global slump in
2020. We continue to expect that global GDP will not recover to its pre-coronavirus (2019) level
before 2022. The start of the rollout of several coronavirus vaccines in developed countries,
including the US and EU member states, has not altered our forecasts. The vaccines will not be
available in quantities large enough in the coming months to be game-changing. Logistics and
shipping will also be difficult. We therefore maintain our view that vaccines will not be widely
available for the general population in developed economies before mid-2021. Access to vaccines
will be difficult initially as all developed countries race to acquire sufficient quantities and poorer
countries struggle to secure funding. As a result, the rollout in middle-income and emerging
countries will take much longer; we do not expect it to take place at a game-changing scale before
2022. The picture appears even bleaker for low-income countries; we do not expect most of these
states to have wide access to a vaccine before 2022-23.
In the case of Saudi Arabia, new coronavirus (Covid-19) infections have recently crept up, to an
average of about 200 a day in late January. However, this compares with a peak of nearly 5,000
new cases a day in mid-2020. Officials nevertheless remain nervous about the possibility of a
renewed spike, given the emergence of new mutant strains of the virus in several countries. The
Saudi authorities have responded by imposing new restrictions on international travel, which will
remain in force until the end of March. Meanwhile, the kingdom's relative economic wealth and
well-developed health infrastructure will be key factors supporting a rapid rollout of vaccines.
Saudi Arabia became the first country in the Middle East to obtain the Pfizer-BioNTech vaccine,
administering the first doses to Saudi citizens on December 17th, with priority initially been given
to residents aged 65 and over, as well as those deemed to be particularly vulnerable to exposure to
Covid-19. According to the deputy health minister, Dr Hani Joukhadar, the vaccination programme
could enable the population to achieve "herd immunity" by the end of September. However, with
delays already occurring in acquiring sufficient quantities of new vaccine, we believe this target is
likely to prove too optimistic.
Economic growth
After an estimated real GDP contraction of 4.2% in 2020—the deepest since 1987—economic
growth will edge back into positive territory in 2021, with a 2.5% expansion in real GDP. The
performance of the oil sector will remain weak, as the authorities opt for lower oil production in the
short term in an attempt to prop up global prices. In contrast, the non-oil economy will benefit
from a significant recovery in international—and in particular Chinese—demand in 2021. A
relatively rapid rollout of Covid-19 vaccines will also help to support a reactivation of the
economy. In turn, this should support a gradual revival in religious tourism—one of the sectors
that has suffered the most from Covid-19 restrictions. However, the way ahead is unlikely to be
smooth—underlined by the recent imposition of new restrictions on international travel in
response to the new strains of the virus that are starting to circulate globally.
In the medium term, an expansion of oil and natural gas output will help to underpin growth in the
hydrocarbons sector. According to the head of Saudi Aramco, the national oil company, natural
gas production is expected to nearly double over the next decade. Economic growth will also be
supported by a resumption of work on several huge infrastructure projects. Although some
schemes seem certain to be scaled back (such as the over-ambitious plans for Neom, a brand new
high-tech city), there will nevertheless be significant opportunities for foreign investors and
contractors as construction activity gathers pace. At the same time, the drive to develop a
substantial manufacturing capability—in defence and pharmaceuticals, among other areas—will
face a number of constraints, including local skills shortages. We forecast that real GDP growth
will average a comparatively modest 2.5% a year in 2022-25.
Economic growth
% 2020a 2021b 2022b 2023b 2024b 2025b
GDP -4.2 2.5 2.4 2.8 2.7 2.0
Private consumption -4.9 2.6 3.1 2.7 2.8 2.3

Saudi Arabia 10
Government consumption 3.4 2.0 2.3 2.0 2.0 1.8
Gross fixed investment -14.1 4.1 4.3 4.1 3.9 3.1
Exports of goods & services -6.8 1.5 1.9 2.9 2.7 1.8
Imports of goods & services -15.1 2.8 3.4 2.6 2.6 2.3
Domestic demand -6.5 3.1 2.9 2.6 2.6 2.2
Agriculture -2.0 1.5 0.3 1.3 1.1 1.0
Industry -4.4 1.8 1.7 2.1 2.0 1.4
Services -3.9 3.4 3.4 3.7 3.6 2.8
a Economist Intelligence Unit estimates. b Economist Intelligence Unit forecasts.
Inflation
Despite a recovery in domestic demand in 2021, inflationary pressures will be subdued. After
averaging 3.4% in 2020, when a value-added tax (VAT) hike helped to push up consumer prices,
inflation will decline to 1.8% in 2021. Inflation will then pick up slightly in 202225—to an annual
average of 2.1%—as the authorities' attempts to forge ahead with projects under Vision 2030 lead
to some capacity constraints and shortages of skilled labour. Nevertheless, inflation will be kept
firmly in check by a gradual tightening of monetary policy from 2023 onwards.
Exchange rates
The riyal will remain pegged to the dollar at SR3.75:US$1—a rate that has been in place since 1986.
Although the peg is occasionally questioned—especially at times of depressed oil prices—the
authorities are strongly committed to defending it. This is because it has come to be viewed as a
symbol of economic stability and helps to attract foreign investment by providing lower
borrowing costs and reduced currency risk. After falling by over 9% in 2020, foreign-currency
reserves will suffer a further decline in 2021, as cutbacks in oil production result in a continuing
large shortfall on the current account. However, at a forecast US$429bn at end-2021, reserves will
still be sufficient to provide about 28 months of import cover. A dip in oil prices in the final two
years of the forecast period will also place some renewed pressure on the external accounts.
Nonetheless, with foreign-currency reserves still providing import cover of about 24 months in
2025, the authorities will have an ample liquidity cushion to defend the peg.
External sector
Following an estimated current-account shortfall of 3.7% of GDP in 2020, the external accounts will
remain under pressure in 2021. Despite higher oil prices on average, export earnings will be
constrained in the near term by the authorities' decision to cut oil production, although non-oil
exports will rise, helped by continued robust economic growth in China (the kingdom's principal
export market). Export growth will outpace import growth on average over the forecast period,
keeping the trade account in comfortable surplus. Overall, we expect the current account to remain
in deficit in 2021, at 2.7% of GDP. Owing to a stronger upturn in oil prices in 2022-23, we expect the
current account to move back into surplus in 2022, with the surplus peaking at 3.7% of GDP in
2023. However, this will be followed by a renewed softening in oil prices, reducing the current-
account surplus to 0.2% of GDP in 2025.
A rise in oil and gas production, as new offshore fields start to come on stream later in the
forecast period, will help to bolster export performance. This will be accompanied by rising
volumes of non-oil exports, including aluminium, phosphates and (in particular) petrochemicals.
However, Aramco has recently been obliged to scale back its expansion plans for the
petrochemicals sector, including an innovative crude-oil-to-chemicals complex at Yanbu. This
underlines the risk that the weak global market conditions could continue to impede the
authorities' attempts step up the pace of export diversification.
The trade surplus, although expanding in 2021-23 following a sharp decline in 2020, will be
accompanied by a widening non-merchandise deficit. Interest payments on the growing stock of
external debt will also increase. Outflows on the capital account will remain sizable throughout the
forecast period as the PIF pursues its long-term mandate of building a large and diversified
portfolio of international assets.

Saudi Arabia 11
Forecast summary
Forecast summary
(% unless otherwise indicated)
2020a 2021b 2022b 2023b 2024b 2025b
Real GDP growth -4.2 2.5 2.4 2.8 2.7 2.0
Crude oil production ('000 b/d) 9,218c 8,600 9,850 11,500 11,800 11,900
Oil exports (US$ bn) 84.0 90.6 117.1 151.5 145.3 133.9
Consumer price inflation (av) 3.4c 1.8 2.3 2.1 2.0 2.0
Consumer price inflation (end-period) 5.4c -1.3 2.2 2.0 2.0 1.7
Lending rate (av; %) 6.5 6.1 6.1 6.1 6.5 6.9
Government balance (% of GDP) -10.6 -6.2 -4.3 -0.3 -0.5 -1.1
Exports of goods fob (US$ bn) 160.2 178.5 214.2 258.5 259.8 250.9
Imports of goods fob (US$ bn) -112.2 -118.2 -122.4 -130.6 -138.5 -143.3
Current-account balance (US$ bn) -26.4 -20.4 6.5 33.4 20.0 1.5
Current-account balance (% of GDP) -3.7 -2.7 0.8 3.7 2.2 0.2
External debt (end-period; US$ bn) 266.0 281.8 293.6 300.6 304.6 312.4
Exchange rate SR:US$ (av) 3.75c 3.75 3.75 3.75 3.75 3.75
Exchange rate SR:¥100 (av) 3.51c 3.60 3.63 3.62 3.58 3.55
Exchange rate SR:€ (av) 4.28c 4.55 4.41 4.37 4.48 4.54
a Economist Intelligence Unit estimates. b Economist Intelligence Unit forecasts. c Actual.

Saudi Arabia 12
Data and charts

Annual data and forecast
2016a 2017a 2018a 2019a 2020b 2021c 2022c
GDP
Nominal GDP (US$ bn) 644.9 688.6 786.5 793.0 721.2 759.6 825.5
Nominal GDP (SR bn) 2,418.5 2,582.2 2,949.5 2,973.6 2,704.6 2,848.4 3,095.7
Real GDP growth (%) 1.7 -0.7 2.4 0.3 -4.2 2.5 2.4
Expenditure on GDP (% real change)
Private consumption 0.9 3.2 1.9 4.5 -4.9 2.6 3.1
Government consumption -17.5 3.3 6.0 -3.5 3.4 2.0 2.3
Gross fixed investment -14.0 0.7 -2.1 4.0 -14.1 4.1 4.3
Exports of goods & services 8.0 -3.1 7.2 -5.0 -6.8 1.5 1.9
Imports of goods & services -18.2 0.3 2.6 9.6 -15.1 2.8 3.4
Origin of GDP (% real change)
Agriculture 0.6 0.5 0.3 1.3 -2.0 1.5 0.3
Industry 2.3 -2.4 2.7 -2.6 -4.4 1.8 1.7
Services 0.8 1.9 2.5 4.4 -3.9 3.4 3.4
Population and income
Population (m) 31.8 32.6 33.4 34.2 35.0 35.9 36.7
GDP per head (US$ at PPP) 46,423 48,015 49,158 49,021 46,793 47,527 48,426
Fiscal indicators (% of GDP)
Central government budget revenue 21.5 26.8 30.7 31.2 27.3 29.2 29.0
Central government budget expenditure 34.3 36.0 36.6 35.6 37.9 35.4 33.3
Central government budget balance -12.9 -9.2 -5.9 -4.5 -10.6 -6.2 -4.3
Public debt 22.4 26.7 26.6 29.7 42.4 45.5 45.2
Prices and financial indicators
Exchange rate SR:US$ (end-period) 3.750 3.750 3.750 3.750 3.750a 3.750 3.750
Exchange rate SR:€ (endperiod) 3.953 4.497 4.294 4.213 4.602a 4.481 4.350
Consumer prices (av; %) 2.0 -0.8 2.5 -2.1 3.4a 1.8 2.3
Producer prices (av; %) 2.6 -1.3 16.0 1.9 3.5a 6.5 2.1
Stock of money M1 (% change) -0.2 2.5 3.9 5.5 11.8 7.8 7.6
Stock of money M2 (% change) 0.8 0.3 2.7 7.1 10.1 6.0 5.8
Deposit rate (av; %) 1.4b 2.0b 3.0b 3.1b 1.5 1.1 1.1
Current account (US$ m)
Trade balance 55,764 98,461 168,749 121,336 47,965 60,318 91,788
Goods: exports fob 183,607 221,862 294,387 261,617 160,190 178,491 214,215
Goods: imports fob -127,843 -123,401 -125,638 -140,281 -112,225 -118,173 -122,427
Services balance -53,014 -60,443 -63,422 -54,417 -42,933 -48,424 -52,667
Primary income balance 15,727 10,698 7,711 7,899 5,501 5,764 5,852
Secondary income balance -42,319 -38,251 -41,066 -36,589 -36,955 -38,063 -38,444
Current-account balance -23,843 10,464 71,972 38,230 -26,421 -20,404 6,530
External debt (US$ m)
Debt stock 189,330b 218,232b 235,749b 254,136b 266,014 281,807 293,599
Debt service paid 13,882b 19,573b 25,183b 28,071b 26,235 28,290 30,007
Principal repayments 7,060b 10,090b 12,975b 14,473b 15,272 17,085 17,868
Interest 6,822b 9,483b 12,209b 13,598b 10,963 11,204 12,140
International reserves (US$ m)
Total international reserves 535,797 496,423 496,589 499,576 453,656a 428,705 432,992
a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts.
Source: IMF, International Financial Statistics.

Saudi Arabia 13
Quarterly data
2019 2020
1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr
Prices
Consumer prices (2000=100) 97.5 97.5 98.2 98.4 98.6 98.5 104.1 104.0
Consumer prices (% change, year on
-3.2 -2.7 -1.8 -0.6 1.1 1.0 6.0 5.7
year)
Wholesale prices (2000=100) 116.7 118.8 120.0 120.8 121.4 117.4 126.7 127.4
Wholesale prices (% change, year on
-0.3 1.8 2.8 3.4 4.0 -1.2 5.6 5.4
year)
OPEC basket (US$/barrel) 63.0 67.9 62.2 63.1 51.5 26.6 43.4 44.0
Financial indicators
Exchange rate SR:US$ (av) 3.750 3.750 3.750 3.750 3.750 3.750 3.750 3.750
Exchange rate SR:US$ (end-period) 3.750 3.750 3.750 3.750 3.750 3.750 3.750 3.750
Repo rate (av; %) 3.0 3.0 2.8 2.3 2.0 1.0 1.0 1.0
M1 (end-period; SR bn) 1,221 1,263 1,281 1,288 1,365 1,425 1,432 n/a
M1 (% change, year on year) 2.3 4.2 6.4 5.5 11.8 12.8 11.8 n/a
M2 (end-period; SR bn) 1,829 1,882 1,887 1,985 2,009 2,052 2,088 n/a
M2 (% change, year on year) 1.9 3.6 2.7 7.1 9.8 9.0 10.6 n/a
TASI stockmarket index (end-period;
8,819 8,822 8,092 8,389 6,505 7,224 8,299 8,690
February 1985=1,000)
Sectoral trends
Crude petroleum (m barrels/day)a 10.1 9.8 9.5 9.9 9.8 9.3 8.8 9.0
Foreign tradeb (US$ m)
Exports fob 65,979 67,227 62,347 63,875 52,758 31,230 43,155 n/a
Imports fob 31,556 32,039 33,834 34,728 33,093 31,237 31,238 n/a
Trade balance 34,423 35,187 28,513 29,146 19,665 -8 11,916 n/a
Foreign reserves (US$ m)
Reserves excl gold (end-period) 499,108513,284500,155499,143472,943447,315447,168453,223
a Including half share of Neutral Zone production. b DOTS estimates, figures are subject to revision.
Sources: International Energy Agency, Oil Market Report; IMF, International Financial Statistics, Direction of Trade Statistics
(DOTS); Bloomberg; Platts.

Saudi Arabia 14
Monthly data
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Exchange rate SR:US$ (av)
2018 3.750 3.750 3.750 3.750 3.750 3.750 3.750 3.750 3.750 3.750 3.750 3.750
2019 3.750 3.750 3.750 3.750 3.750 3.750 3.750 3.750 3.750 3.750 3.750 3.750
2020 3.750 3.750 3.750 3.750 3.750 3.750 3.750 3.750 3.750 3.750 3.750 3.750
Exchange rate SR:US$ (end-period)
2018 3.750 3.750 3.750 3.750 3.750 3.750 3.750 3.750 3.750 3.750 3.750 3.750
2019 3.750 3.750 3.750 3.750 3.750 3.750 3.750 3.750 3.750 3.750 3.750 3.750
2020 3.750 3.750 3.750 3.750 3.750 3.750 3.750 3.750 3.750 3.750 3.750 3.750
Exchange rate SR:€ (av)
2018 4.572 4.629 4.627 4.604 4.433 4.379 4.383 4.331 4.373 4.307 4.262 4.675
2019 4.281 4.257 4.238 4.221 4.194 4.236 4.205 4.170 4.129 4.145 4.147 4.162
2020 4.165 4.092 4.135 4.076 4.069 4.220 4.264 4.439 4.431 n/a n/a n/a
M1 (% change, year on year)
2018 4.4 4.0 2.3 2.8 4.4 3.7 2.5 3.2 4.6 2.8 3.3 3.9
2019 1.4 2.5 2.3 1.9 3.1 4.2 5.1 6.5 6.4 7.6 7.2 5.5
2020 5.3 8.9 11.8 13.2 14.6 12.8 12.6 12.0 11.8 11.7 13.0 n/a
M2 (% change, year on year)
2018 1.6 2.2 0.2 0.3 0.5 -0.9 -0.9 -0.1 2.9 1.8 2.1 2.7
2019 1.0 1.6 1.9 2.9 5.0 3.6 3.9 4.9 2.7 4.9 5.2 7.1
2020 6.6 7.5 9.8 10.0 10.2 9.0 9.5 9.4 10.6 10.8 11.6 n/a
Policy rate (Repo rate av; %)
2018 2.0 2.0 2.1 2.3 2.3 2.4 2.5 2.5 2.5 2.8 2.8 2.9
2019 3.0 3.0 3.0 3.0 3.0 3.0 3.0 2.8 2.6 2.5 2.3 2.3
2020 2.3 2.3 1.4 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0
TASI stockmarket index (end-period; February 1985=1,000)
2018 7,650 7,419 7,871 8,209 8,161 8,314 8,295 7,948 7,907 7,703 7,827 7,827
2019 8,560 8,493 8,819 9,304 8,516 8,822 8,733 8,020 8,092 7,744 7,859 8,389
2020 8,247 7,628 6,505 7,113 7,213 7,224 7,459 7,941 8,299 7,908 8,747 8,690
Consumer prices (av; % change, year on year)
2018 3.2 3.0 2.9 2.5 2.4 2.3 2.2 2.2 2.1 2.2 2.6 1.9
2019 -3.2 -3.3 -3.2 -2.9 -2.6 -2.6 -2.2 -1.8 -1.4 -0.9 -0.8 -0.2
2020 0.7 1.2 1.4 1.3 1.0 0.5 6.1 6.1 5.7 5.8 5.8 5.4
Foreign-exchange reserves excl gold (US$ bn)
2018 494.1 486.8 493.0 506.1 504.1 506.2 500.7 509.1 506.8 504.2 503.9 496.2
2019 489.5 484.2 499.1 504.7 516.7 513.3 503.0 507.5 500.2 488.8 499.7 499.1
2020 501.4 496.9 472.9 448.2 448.9 447.3 447.6 453.0 447.2 446.2 456.5 453.2
Sources: IMF, International Financial Statistics; Haver Analytics.

Saudi Arabia 15
Annual trends charts

Saudi Arabia 16
Monthly trends charts

Saudi Arabia 17
Comparative economic indicators
Basic data
Land area
2.15m sq km
Population
33.2m (2019, General Authority for Statistics)

Saudi Arabia 18
Key provinces
Population in '000 (2010 census, General Authority for Statistics)
Mecca: 6,915
Riyadh (capital): 6,777
Eastern: 4,106
Asir: 1,913
Medina: 1,778
Jizan: 1,365
Qassim: 1,216
Climate
Hot and dry, milder in the winter months
Hottest month: July, 2642°C (average daily minimum and maximum); coldest month: January, 8
12°C; driest months: July, September, October, 0 mm average rainfall; wettest month: April, 25 mm
average rainfall
Language
Arabic
Measures
Metric system
Currency
The Saudi riyal (SR) = 20 qirsh = 100 hallalas. The riyal is pegged to the US dollar at a rate of
SR3.745:US$1
Time
3 hours ahead of GMT
Fiscal year
Calendar year
Public holidays
All Muslim holidays are observed in accordance with the Islamic or hijri calendar, based on the
lunar year, which is about 11 days shorter than the Gregorian year. The weekend is Friday-
Saturday. The month of Ramadan (April 12th-May 13th 2021) is not a public holiday but
significantly shortens the working day. Eid al-Fitr (marking the end of Ramadan) and Eid al-Adha
(Feast of the Sacrifice—the tenth day of the haj, or pilgrimage, estimated to fall on July 20th 2021)
are public holidays. The country's National Day is September 23rd and is sometimes a public
holiday. Travelling in the kingdom is particularly affected during the haj period, which lasts about
a month, as well as on Eid al-Adha and during the school summer holidays, which last until mid-
September

Saudi Arabia 19
Political structure
Official name
Kingdom of Saudi Arabia
Legal system
Based on sharia (Islamic law) and the Basic Law (1992); no written constitution
National legislature
There is no elected legislature. A Majlis al-Shura (Consultative Council) was appointed in 1993
Head of state
The king, Salman bin Abdel-Aziz al-Saud, acceded to the throne in January 2015 on the death of
King Abdullah bin Abdel-Aziz al-Saud. Muqrin bin Abdel-Aziz al-Saud was immediately
nominated as crown prince but was subsequently replaced by his nephew, the interior minister,
Mohammed bin Nayef al-Saud. The latter was replaced as crown prince in June 2017 by
Mohammed bin Salman al-Saud
National government
Council of Ministers, headed by the king, who holds the post of prime minister. The Council of
Ministers exercises both legislative and executive powers
Main political parties

Political parties are not permitted
Council of Ministers
Saudi Arabia 20
Prime minister: King Salman bin Abdel-Aziz al-Saud
Crown prince & defence minister: Mohammed bin Salman al-Saud
Key ministers
Commerce & investment: Majed bin Abdullah al-Qassabi
Communications & information: Abdullah al-Sawahah
Culture: Badr bin Abdullah al-Farhan
Economy & planning: Mohammed al-Jadaan
Education: Hamad al-Sheikh
Energy: Abdel-Aziz bin Salman al-Saud
Finance: Mohammed al-Jadaan
Foreign affairs: Faisal bin Farhan al-Saud
Haj & umra: Mohammed Saleh bin Taher Benten
Health: Tawfiq al-Rabiah
Housing: Majed al-Hogail
Human resources & social development: Ahmed bin Suleiman al-Rajhi
Industry & mineral resources: Bandar Alkhorayef
Interior: Saud bin Naif bin Abdulaziz
Investment: Khalid al-Falih
Islamic affairs: Abdullatif bin Abdel-Aziz al-Asheikh
Justice: Walid bin Mohammed al-Samaani
Municipal & rural affairs: Majid bin Abdullah al-Qasabi
National Guard: Abdullah bin Bandar al-Saud
Sports: Abdulaziz bin Turki bin Faisal al-Saud
Tourism: Ahmed bin Aqeel al-Khateeb
Transport: Saleh bin Nasser bin Ali
Water, environment & agriculture: Abdul Rahman al-Fadli
Key officials
Chairman of the Consultative Council: Abdullah bin Mohammed al-Sheikh
Chairman of the Council for Political and Security Affairs: Mohammed bin Salman al-Saud
Chairman of the Council for Economic Development: Mohammed bin Salman al-Saud
Central bank governor

Fahad al-Mubarak

Saudi Arabia 21
Recent analysis
Generated on February 24th 2021
The following articles were published on our website in the period between our previous forecast and this one,
and serve here as a review of the developments that shaped our outlook.
Politics
Forecast updates
Qatar takes part in Gulf foreign affairs ministers’ meeting
January 4, 2021: International relations
Event
On December 27th Qatar participated in a preparatory meeting ahead of the Gulf Co-operation
Council (GCC) heads-of-state summit, due to be held on January 5th in the Saudi capital, Riyadh.
Analysis
The foreign affairs ministers of Saudi Arabia, the UAE, Bahrain, Oman and Kuwait participated in
the meeting—hosted virtually by Bahrain—while Qatar was represented by its minister of state for
foreign affairs, Sultan bin Saad al-Muraikhi. The absence of Qatar's foreign minister, Sheikh
Mohammed bin Abdulrahman al-Thani, from the meeting is noteworthy, as he has been a central
figure in the latest regional push to repair Qatar's rift with Saudi Arabia. Sheikh Mohammed's
participation would have provided the clearest indication yet that a recent bout of diplomacy, led
by Kuwait and the US, to restore Gulf unity was nearing fruition. However, his absence at the
meeting is consistent with Qatar's policy of lowering the level of its diplomatic representation at
GCC meetings. Qatar's emir, Sheikh Tamim bin Hamad al-Thani, is unlikely to attend the summit,
given that the prospects of a comprehensive agreement between Qatar and the boycotting
countries remain highly uncertain.
Qatar's foreign minister has repeatedly confirmed that Saudi Arabia is representing the boycotting
countries in recent talks. However, the Emirati resistance to reconciliation with Qatar has only
hardened since the UAE initially welcomed, albeit cautiously, efforts by the US and Kuwait to
broker a deal. On December 21st Anwar Gargash, the UAE's minister of state for foreign affairs,
accused Qatar's media of being "adamant to undermine" any agreement. Mr Gargash did not refer
to specific media outlets, but his comments came on the same day that Qatar's state-owned
Al Jazeera Media Network published a report detailing alleged phone-hackings of its journalists
by the UAE and Saudi Arabia.
Mr Gargash's comments coincided with an extensive report by Bloomberg that revealed new
details of the UAE's alleged attacks on Qatar's financial system in 2017. In 2019 Qatar launched
lawsuits in London and New York against Saudi and Emirati banks for their involvement in the
alleged plot to weaken the Qatari riyal. Despite insisting that "no obstacles" faced a resolution to
the Gulf crisis, the UAE's intransigent stance against reconciliation with Qatar diminishes the
chances of a comprehensive agreement.
Impact on the forecast

The UAE's ideological differences with Qatar and its deep suspicions of Qatar's alliances will
probably result in a limited short-term rapprochement between Qatar and Saudi Arabia. Our
political forecasts are unchanged.

Saudi Arabia 22
Diplomatic breakthrough in Qatar boycott

Event
On January 4th Saudi Arabia reopened its land, sea and air borders with Qatar on the eve of the
Gulf Co-operation Council (GCC) summit in the Saudi city of Al Ula that will be attended by
Qatar's emir, Sheikh Tamim bin Hamad al-Thani.
Analysis
Intense diplomatic efforts, led by Kuwait and the US, to achieve a last-minute breakthrough
culminated in the agreement. Sheikh Tamim's decision to attend the summit will mark his first visit
to Saudi Arabia since the boycott began in 2017. Saudi Arabia's crown prince and de factor ruler,
Mohammed bin Salman al-Saud, said that the summit would foster "reunification and solidarity"
among Gulf states in the face of the region's challenges—a reference to Saudi's strategic priority
of containing Iran. The UAE's minister of state for foreign affairs, Anwar Gargash, described the
upcoming summit as "historic", but added that restoring cohesion among Gulf states required
"more work ahead", hinting at the underlying ideological differences between Qatar and the UAE
that will remain unresolved by the breakthrough. The UAE did not join Saudi Arabia in easing
restrictions on Qatar's access to its airspace and waters, confirming its reluctance to hand what it
views as a victory to Qatar.
The GCC summit will be attended by Jared Kushner, the senior adviser and a son-in-law of the US
president, Donald Trump, for whom the breakthrough represents another diplomatic success in
the Middle East. The summit is set to reveal additional details of the agreement, but early
indications suggest that Qatar is expected to freeze lawsuits that it has filed against the
boycotting countries in relation to the dispute.
Coinciding with the US presidential transition, the timing of the breakthrough was calculated by
Saudi Arabia to improve its standing with the incoming administration of the president-elect, Joe
Biden, who has vowed to "reassess" US relations with the kingdom. Qatar has much to gain from
improved relations with Saudi Arabia, including stemming the financial losses incurred by its
national carrier, Qatar Airways. However, Qatar has zealously defended its sovereignty
throughout the boycott and is unlikely to yield on some of the other demands, such as scaling
back its relations with Turkey and Iran.

As we expected, the breakthrough is positive for regional stability, but given the rupture in GCC
relations caused by the dispute, broader reconciliation will take longer to mend. Our forecast that
the boycott will be fully lifted in late 2021 remains unchanged.

Saudi Arabia 23
Yemen's Houthis step up Red Sea maritime warfare

Event
On December 25th a commercial cargo ship in the southern Red Sea was hit by a marine mine that
was presumably laid by the Houthis, the Iranian-backed movement that is engaged in a civil war
against Yemen's internationally recognised, Saudi Arabian-backed government.
Analysis
According to Saudi Arabian state TV, the attack caused no casualties and only minor damage, but
there was no detail on the precise location or ownership of the ship. It is not thought to have been
a Saudi vessel, highlighting the increasing threat to all maritime traffic in the southern Red Sea and
Bab al-Mandab strait, which is crucial to international trade channels. The targeting could have
been by design or by dint of the inherent imprecision of the tactic (given the tendency of mines to
drift from any intended target zone). Owing to such imprecision, a rise in mine usage by the
Houthis will increase risk, driving up insurance premiums and therefore shipping costs. Earlier in
the month the Saudi-led coalition supporting Yemen's government claimed to have recently
destroyed 171 Houthi-laid mines in the area. On December 27th the coalition reported having
intercepted five devices over the preceding 24 hours, asserting that the discovered mines were of
the "Iranian-made Sadaf type"; Iran has stepped up its political and military backing for the rebels
over the past year, prompted primarily by the latter's successes on the battlefield and their
sponsors' desire to secure influence in any post-war political settlement. An explosives-laden boat
struck a Singapore-flagged fuel tanker close to Jeddah, Saudi Arabia's largest Red Sea port, in
mid-December, and in November vessels were targeted near the Jazan and Shuqaiq terminals,
further south along the coast.
Alongside a year-long offensive against the coalition's remaining strongholds in northern Yemen,
the Houthis have accelerated their crossborder activity, presumably to increase pressure on Saudi
Arabia to agree to a settlement on favourable terms. On the day of the latest maritime incident the
kingdom reported having intercepted two ballistic missiles, one of which was aimed at Riyadh, the
capital. On December 23rd the rebels explicitly threatened to bomb Saudi ports in direct retaliation
for the coalition's prevention of fuel tankers from docking at Houthi-controlled Hodeidah port, the
main entry point for all imports to northern areas.

The latest incident confirms our forecast that Yemen's conflict, which we expect to continue in
2021, will increasingly spill over into maritime insecurity in the Red Sea.

Saudi Arabia 24
UAE, Bahrain and Egypt restore diplomatic ties with Qatar

Event
Late on January 5th, only several hours after Saudi Arabia confirmed that it had lifted its boycott
of fellow Gulf Co-operation Council (GCC) state, Qatar, the other three states involved in the
dispute—the UAE, Bahrain and Egypt—followed suit and agreed to restore diplomatic ties with
Qatar, which were fractured in 2017.
Analysis
The breakthrough came at the 41st GCC summit hosted by Saudi Arabia as efforts by the
outgoing administration of US president, Donald Trump, to end the dispute among its key
regional allies gathered pace in late 2020. The Saudi foreign affairs minister, Faisal bin Farhan al-
Saud, confirmed that all outstanding elements of the dispute have been resolved, including
restoring diplomatic ties and lifting economic and travel embargoes. Qatar does not appear to
have been forced to concede to the boycotting quartet's demands in relation to its ties with Iran
and Turkey or alleged support of Islamists. Qatar's state-owned media network, Al Jazeera, has,
however, softened its critical tone in relation to the former boycotting states.
The GCC states are concerned that the incoming US administration of Joe Biden will take a less
accommodating stance toward them, including reviving the international nuclear accord with Iran,
and are keen to improve their image. The collapse in international oil prices and a coronavirus
(Covid-19)-induced slump in economic performance have also led the countries to reconsider their
priorities. Although the UAE had been among the most strident backers of the boycott, it
continued to receive the bulk of its natural gas imports through the Dolphin pipeline from Qatar,
but other business and shipping links and potential investment opportunities were damaged.
Egypt will hope that the ending of the boycott will allow investment links to strengthen. Notably,
on January 6th Qatar's finance minister, Ali Sharif al-Emadi, attended the opening in Egypt of a
Qatariowned hotel—the first official visit between the countries since the imposition of the 2017
boycott.
Underlying frictions remain high, with the boycott bringing Qatar closer to both Iran and Turkey.
The UAE has been notably vocal in seeking to combat a perceived Turkish regional
aggrandisement strategy, siding strongly with Egypt in opposing Turkey's growing ambitions in
the eastern Mediterranean, especially in Libya, where Qatar and Turkey back the UN-recognised
western authorities, while the UAE and Egypt support the opposing eastern forces.

The ending of the boycott is positive for regional stability and economic prospects; we will factor
this development into our forecasts.

Saudi Arabia 25
Saudi government pursues defence localisation drive

January 25, 2021: Political stability
Event
Saudi Arabian Military Industries (SAMI), a subsidiary of the Public Investment Fund (a
government wealth vehicle), has finalised an agreement to acquire Advanced Electronics
Company (AEC, a local defence electronics specialist), in what is considered to be the kingdom's
largest ever military industries deal.
Analysis
The government's Vision 2030 economic plan calls for the proportion of defence spending
deployed locally to rise by some ten-fold to about 50% by the end of the decade, serving
diversification and job creation purposes, as well as reducing state military expenditure: the 2021
budget cuts the defence allocation by 3.8% to SR175bn (US$46.7bn) but the sector nonetheless
accounts for 17.7% of total projected spending. The creation of a local defence sector ecosystem
is envisaged initially to be realised through partnerships with some of the international giants of
which the government has long been one of the biggest customers, and SAMI (which was
founded in 2017 to spearhead the localisation effort) has signed co-operation agreements with
firms including Boeing, Lockheed Martin and Raytheon (US), BAE Systems (UK) and Thales
(France). SAMI aspires to become one of the world's top 10 military industries companies by 2030,
and the AEC acquisition (for an undisclosed sum), originally announced in June 2019 and now
expected to be completed by end-March, comprises a major step to that end. AEC, which was
established in 1988 under the Saudi Economic Offset Programme, had net sales of SR2.3bn in 2019.
Increasing defence sector self-sufficiency has national security as well as economic advantages in
the longer term—a potential benefit highlighted by moves by several Western governments in
recent years to restrict arms exports, given the kingdom's controversial war in Yemen. In early
December Germany extended for another year a ban imposed in 2018, and the UK lifted a similar
proscription in June. The US Congress was repeatedly overruled by the administration of Donald
Trump, a former president, over attempts to block military sales. For instance, on December 29th
the State Department approved the export of 3,000 so-called "smart bombs" by Boeing for
US$290m—one of several deals with Middle Eastern autocracies that were approved last month
ahead of the accession on January 20th of Joe Biden, the Democratic president-elect, who has
promised greater attention to the human rights records of armaments-buyers.

The agreement confirms our view that the government will steadily increase already high defence
spending during the 2021-25 forecast period.

Saudi Arabia 26
US pauses arms sales to Saudi Arabia and UAE

Event
On January 27th the new US government announced that major arms sales to Saudi Arabia and
the UAE concluded in the final months of the previous administration had been put on hold
pending a review.
Analysis
Although billed by Antony Blinken, the US secretary of state, as a routine step whereby a new
government reassesses existing arms export commitments to ensure their alignment with its
"strategic objectives and … foreign policy", the move sends the first concrete signal of the
anticipated shift to a more critical stance towards Saudi Arabia in particular that Joe Biden, the
new president, promised ahead of his election—in stark contrast to Donald Trump, his
predecessor, who often defied domestic and international opinion in his almost unwavering
support for the kingdom. The central objection with respect to arms sales is their potential use in
Yemen's civil war, on which grounds these have faced bipartisan opposition. In December
Mr Trump licensed Raytheon, a US defence giant, to sell 7,500 precision-guided air-to-ground
missiles and other weaponry to the kingdom. Saudi Arabia will remain a bedrock customer for the
US defence industry, but the review signals that that relationship is in future likely to be leveraged
to achieve the new administration's more conciliatory Middle East foreign policy ends. Likewise,
the historical US-Saudi strategic alliance will remain intact, but the kingdom will come under
increased pressure over human rights abuses both in Saudi Arabia and in Yemen.
Relations with the UAE have less domestic political resonance, and the federation's military
withdrawal from the Yemen war in July 2019 has allowed it to escape much of the censure faced by
its Gulf ally. However, the UAE arms deal put under review was a landmark—a US$23.4bn
agreement to supply F-35A fighter aircraft, armed Reaper drones and munitions, offered as an
implicit incentive for the UAE's normalisation of relations with Israel two months earlier. The
Biden administration has voiced support for such normalisation agreements—which Bahrain,
Morocco and Sudan have also signed—but they will no longer be the policy priority they were for
Mr Trump, and the UAE is likely to face pressure in other areas, where policies diverge with those
of Mr Biden's team.

The arms sale review supports our forecast that both Saudi Arabia and to a lesser extent the UAE
will face more pressure over their regional foreign policies under the new US administration,
although they will remain important strategic US allies.
Analysis
Gulf reconciliation process faces stiff tests
On January 5th the Arab Quartet—comprising Saudi Arabia, the UAE, Bahrain and Egypt—
signed a "solidarity and stability" deal (known as the Al Ula agreement) with Qatar, marking
the end of a boycott that it had imposed on Qatar in June 2017. Although specific terms for
mending the rift have not been made public, the final communiqué of the recent Gulf Co-
operation Council (GCC) summit made repeated reference to the principles of "sovereignty and
non-interference" as a basis for restoring cohesion to the GCC and for future relations between
the GCC and regional powers, such as Egypt and Iran.
Given that the dispute was the deepest crisis in the GCC's history, the Al Ula agreement, taking its
name from the Saudi city that hosted the summit, is a positive development for regional stability
and investment prospects. Geopolitical realignments shaped by the dispute in regional hotspots
from Libya to the Horn of Africa lend the agreement further strategic significance. However,
ongoing deep ideological differences between the member states of the Arab Quartet and Qatar

Saudi Arabia 27
cannot be resolved overnight and will complicate the full implementation of the agreement,
especially given the apparent lack of safeguards to monitor and verify compliance by all its
signatories.
Resumption of ties will boost intra-Gulf trade

On the economic front, the end of the boycott will provide a tailwind to the recovery from the
recession that has been induced by the coronavirus (Covid-19) pandemic. For Qatar, stemming the
losses of its national carrier, Qatar Airways (QA), will be among the biggest wins from
reconciliation. The rift had cost QA some of its largest markets and forced it to take longer flight
paths to circumvent the boycotting states' airspaces, increasing its fuel costs. The return of Saudi
tourists to Qatar, who accounted for about half of all visitors before the boycott, will boost Qatar's
nascent tourism industry. Furthermore, restoring connectivity to Dubai, the region's aviation hub,
will be critical ahead of Qatar's hosting of the 2022 FIFA football World Cup. Positive knock-on
effects will also be felt in the banking sector as Saudi Arabian clients begin shifting some of their
funds back to Qatar, strengthening liquidity in the Qatari banking system. The end of the boycott
will also fuel a recovery in Qatar's trade volumes with its Gulf neighbours, which are currently
concentrated in the hydrocarbons sector. Other key areas that are set to benefit are Qatar's stock
exchange, as well as the demand for logistics and consumer goods, which are expected to be
boosted as a resumption of travel leads to an increase in demand in those sectors. Qatar's real
estate sector, in which prices are down by about 30% from their 2015 peak, could also benefit from
a higher volume of transactions as the reconciliation improves investor sentiment.
Qatar appears to have made few concessions

Of the boycotting countries, Saudi Arabia has shown the strongest political will to move towards
Gulf reconciliation, having been the first to restore travel and transport ties with Qatar on the eve
of the GCC summit. Qatar's emir, Sheikh Tamim bin Hamad al-Thani, confirmed his participation at
the GCC summit at the eleventh hour following assurances that Saudi Arabia would reopen its
land border with Qatar. The Saudi-Qatari border is Qatar's only land crossing and had been a
critical artery for the flow of people and essential goods between the two countries before the
boycott. Although Qatar's success in rebalancing its supply chains has vastly reduced its reliance
on its border with Saudi Arabia for imports, it retains importance for Qatari citizens with family ties
to Saudi and as a transport link to Islam's two most holy sites of Mecca and Medina.
For Qatar, Sheikh Tamim's attendance at the summit was the most tangible concession to the Arab
Quartet as it allowed Saudi Arabia's crown prince and de factor ruler, Mohammed bin Salman al-
Saud, to claim credit for the breakthrough and to portray himself as a statesman. This was
captured by the embrace with which the Saudi crown prince welcomed the Qatari emir on his
arrival. With a view to the incoming administration of the US president-elect, Joe Biden, the Saudi
crown prince is eager to burnish his credentials as a constructive regional player. In 2020
Mr Biden vowed to "reassess" the US's relationship with Saudi Arabia and referred to the

Saudi Arabia 28
Kingdom as a "pariah" state with reference to its human rights record. This led the Saudi crown
prince to accelerate progress towards an end to the Qatar dispute, alleviating a source of regional
tension that would have complicated US diplomacy in the region under Mr Biden. Having failed to
extract concessions from Qatar regarding its relations with Iran and Turkey, among other issues,
the boycott also appears to have reached a point of diminishing returns for Saudi Arabia, helping
to speed up its diplomatic efforts to end Qatar's isolation.
Al Ula agreement papers over lingering divisions

While the UAE, Bahrain and Egypt followed suit in restoring trade and travel ties with Qatar, they
have been far more guarded in embracing reconciliation with Qatar. Despite the previous
suggestions of the UAE's minister of state for foreign affairs, Anwar Gargash, that "paths have
diverged and the Gulf has changed and cannot go back to what it was", the UAE fell in line in
order to avoid widening a divergence with Saudi Arabia that has formed over the former's
withdrawal from the war in Yemen and disagreements over OPEC oil production cuts. Notably, the
leaders of the UAE, Egypt and Bahrain did not sign the Al Ula agreement in person. The UAE was
represented by Sheikh Mohammed bin Rashid al-Maktoum, the prime minister of the UAE and the
ruler of Dubai, and Egypt and Bahrain were represented by their foreign affairs minister and crown
prince, respectively. Since easing travel and trade restrictions with Qatar, the UAE has said that
restoring full diplomatic ties requires a resolution of the geostrategic dimensions of the Gulf rift.
The UAE has pointed to Turkey's military presence in Qatar and Qatar's alleged support for
political Islam as "fundamental" issues in a broader rapprochement. Meanwhile, a statement by
the Egyptian Ministry of Foreign Affairs welcomed the Al Ula agreement, but stressed that any
deal should carry commitments to "non-interference in internal affairs".
Following the anti-status quo upheaval of the 2011 Arab uprisings, after which populist Islamist
movements rose to power in certain Arab countries, Egypt and the UAE view political Islam as an
existential threat. Egypt is reportedly insisting that Qatar cut its support for Muslim Brotherhood
leaders abroad in return for the restoration of ties with Qatar. Egypt and the UAE also demand
that Qatar scale back its ties with Turkey, which they view as engaging in neo-Ottoman
interventions in Arab states from Iraq to Libya to Syria. However, in comments by its foreign
minister, Sheikh Mohammed bin Abdulrahman al-Thani, Qatar has reiterated its position that, as a
matter of "sovereign decision", its bilateral relations with Turkey and Iran will not be affected by
recent developments. The GCC summit's final communiqué repeatedly references Iran's nuclear
ambitions, ballistic missiles programme and support for regional proxies as the core threat to the
security of Arab states, suggesting that Qatar's ties with Iran will be closely scrutinised by the
Arab Quartet. While bilateral working groups between each of the Quartet states and Qatar have
been set up to discuss and resolve their respective differences, the deeper divisions at the root of
the Gulf crisis will ensure that the Al Ula agreement is not a culmination of but only the beginning
of the process of rebuilding GCC cohesion.
Saudi Arabia's regional policy reset for Biden era

January 21, 2021
The combative foreign policy espoused by Mohammed bin Salman al-Saud, the crown prince
and de facto ruler, over the past four years faces an enforced reset with the accession of
Joe Biden, the new US president—who has promised a more critical stance towards the
kingdom and a more conciliatory one towards its arch rival, Iran.
The Saudi-led end to a three and a half year boycott of Qatar this month was designed to
present the Saudi government as a constructive force in regional diplomacy. Mohammed bin
Salman's desire to extricate the kingdom from Yemen's ruinous civil war coheres with the
new US president's aims but is unlikely to be achieved given the other side's growing military
strength and commensurate demands.
The Economist Intelligence Unit expects the perceived threat from Iran to continue to be the
central driver of Saudi Arabia's regional foreign policy, while tensions with Turkey show
signs of being dialled down and normalisation of relations with Israel is expected after the
crown prince's succession.
Mr Biden's description of Saudi Arabia ahead of November's US presidential election as a pariah
state is often quoted, and while he will maintain the countries' strategic alliance, the kingdom's
policymakers are acutely aware that the unqualified support offered by his predecessor, Donald
Saudi Arabia 29
Trump, is likely to give way to a more critical stance towards both regional and domestic policy.
Of equal concern to Mohammed bin Salman is the president's stated intent to rejoin the Joint
Comprehensive Plan of Action (JCPOA, the Iran nuclear deal) without preconditions—a move the
Saudi government strongly opposes. A reiterated call for a regional voice in US deliberations on
the issue—and for the nuclear focus of the agreement to be expanded to cover Iran's ballistic
weapons programme and regional political activities, as the outgoing US administration had
demanded—was included in the closing statement of the Gulf Cooperation Council (GCC)
summit, held in the Saudi city of Al Ula in early January. A desire to be viewed as worthy of a
place at the negotiating table is one driver of a more conciliatory foreign policy approach already
evident ahead of Mr Biden's inauguration.
In areas where the crown prince's aggressive stance has clearly proven ineffective, this chimes
with current policy preferences. The boycott of Qatar, engineered by Saudi Arabia and the UAE
(and joined by Bahrain and Egypt) in 2017 on the basis of their GCC counterpart's perceived
overly close ties with Iran and (to a lesser extent) Turkey, as well as alleged support for Islamist
terrorism, failed to deal the severe economic blow intended or to achieve behavioural change
beyond deepening the offending alliances. Even the Trump administration, having initially
encouraged Mohammed bin Salman, came to see the dispute as an unwelcome distraction from the
regional priority of containing Iran—while wider international support was absent. The kingdom
spearheaded the reconciliation enshrined in the so-called Al Ula declaration signed on
January 5th, which ended the trade and transport embargo without reciprocal concessions—the
opportunity for Mohammed bin Salman to pose as a regional conciliator while ditching an
unpopular and unsuccessful policy compensating for the humiliation of the tacit climb-down.
Exiting the quagmire in Yemen is likely to prove

impossible in the near term
Securing an acceptable resolution to Yemen's ruinous civil war will prove far harder, despite the
crown prince's increasing desire to exit the financially and reputationally costly conflict, with
which he is personally closely associated. Mohammed bin Salman made the decision to go to war
within weeks of his elevation to de facto leadership six years ago, leading a coalition battling to
restore the internationally recognised government to power following the seizure of much of the
country by the Houthis, a Shia rebel movement, in late 2014. The key justification for Saudi
involvement—that the group is an Iranian proxy—has become a selffulfilling prophecy, with
political and technical support from Iran evolving over the past two years into increasing supplies
of military hardware (deployed with mounting frequency in crossborder attacks on the kingdom, a
spate of which occurred in late 2020). The Houthis' resulting battlefield success, fighting one of
the world's biggest military spenders into a humiliating stalemate, has in turn encouraged Iran to
step up and make more overt its support with a view to maximising post-conflict influence. The
result is that, although Saudi Arabia is likely to evince greater willingness after Mr Biden takes
office to engage in the moribund UN peace process, the prospects of a settlement appear slim: the
rebels will use their military ascendancy to buttress demands for a central role in any post-war
political order, while, for Saudi Arabia, allowing a perceived Iranian proxy to hold sway along the
kingdom's southern border would be a price too high to escape the quagmire. Nonetheless, the
acute desire for an exit was signalled by an interim proposal reportedly floated through UN back
channels in November for a demilitarised buffer zone to be established along the border in
exchange for an easing of the coalition's economically crippling air and sea blockade.
Originally a twin pilot of the anti-Houthi coalition, the UAE ceased military participation in
July 2019 in favour of assisting the Southern Transitional Council (a secessionist group) and
other local forces in the south in combatting the militant Islamist groups that have filled the
prolonged security vacuum, and of bolstering the UAE's Red Sea maritime interests. The split is
symptomatic of the wider divergence in regional foreign policy priorities between the Gulf allies—
with Saudi Arabia focused on the Iranian threat and the UAE regarding militant Islamism, chiefly
the Muslim Brotherhood, as the chief concern. The UAE has shown increasing willingness to take
an independent line, evident in recent months with respect to Qatari reconciliation (which UAE
reluctance prevented from happening sooner) and in an unusual public spat in early December
over OPEC production policy.
Normalisation with Israel is likely to await the crown

Saudi Arabia 30
prince's succession
The allies also chose different paths over an issue suddenly thrust to the forefront of regional
policy by the Trump administration in 2020—when the UAE in August became the first Gulf state
to announce normalisation of relations with Israel. Saudi Arabia resisted intense US pressure to
follow suit (despite having quietly built closer ties with Israel over several years), with the
octogenarian King Salman bin Abdel-Aziz al-Saud an adherent of the traditionalist position that
diplomatic relations should be conditional on progress towards Palestinian statehood. The issue
is also more-sensitive for Saudi Arabia by dint of the kingdom's pivotal position in the Muslim
world. Mr Biden will take a less transactional approach than his predecessor to promoting the
policy but will remain supportive of it, while Mohammed bin Salman (whom we expect to succeed
his father in 2021) is believed to be in favour, partly to win US accolades but primarily because of
the shared perception of the existential threat posed by Iran, making normalisation a strong
probability over the coming year.
By contrast, shared censure from the new US president could form the basis for an improvement
in relations with Turkey. These had steadily deteriorated since 2015 in tandem with the pursuit by
Recep Tayyip Erdogan, the Turkish president, of a more assertive foreign policy—which placed
the two aspirant regional superpowers on opposite sides of conflicts in Libya and Syria and saw
Turkey line up with Iran and Qatar against the Saudi-UAE axis in a battle for influence. An
informal boycott of Turkish goods emerged in the second half of last year, sparked by Turkey's
well-publicised decision to prosecute senior Saudi officials (including people close to the crown
prince) over their alleged role in the infamous murder of Jamal Khashoggi, a dissident Saudi
journalist, in October 2018—refocusing international attention on an incident that has already
proved hugely damaging to Mohammed bin Salman's global reputation. However, although
Mr Trump was almost unconditionally supportive of the crown prince (notably even in the
immediate aftermath of the assassination) and pursued a periodically hostile policy towards
Turkey (finally imposing sanctions in December 2020), the Biden administration is expected to be
equally critical of both states' military adventurism and domestic human rights abuses—
encouraging common cause to be made in response. Mr Erdogan spoke to King Salman by
telephone just ahead of the Saudi-hosted G20 summit in November, resulting in a pledge "to keep
channels of dialogue open to improve bilateral ties and overcome issues".
Overall, we expect Saudi foreign policy to become less bellicose during Mr Biden's presidency,
with a view both to preserving the US security umbrella and to attaining some influence over
evolving US policy towards Iran—which will be manifested in the dialling down of conflicts with
Qatar and Turkey, in greater willingness to engage with peace-making efforts in Yemen and
ultimately in the normalisation of relations with Israel.

Saudi Arabia 31
Economy
Forecast updates
Saudi Arabia's exports and trade balance continue to improve
January 4, 2021: External sector
Event
Saudi Arabia's crude oil exports increased for a fourth consecutive month in October, driving a
modest improvement in the trade surplus, according to data from the General Authority for
Statistics (GAS, a government agency)
Analysis
Adherence to deep OPEC-agreed production cuts had cut the kingdom's oil exports to a record
low of less than 5m barrels/day (b/d) in June 2020, followed by only marginal upticks in the three
months thereafter, and prices have remained subdued as the coronavirus (Covid-19) pandemic
slashed global demand. Oil revenue shrank by 39.8% year on year during the third quarter, driving
down total merchandise exports (of which oil accounted for 67%) by 31.4%, to SR161.8bn
(US$43.2bn), and narrowing the trade surplus to SR44.6bn (compared with SR90.4bn a year
earlier). However, the outcome was a substantial improvement on the previous quarter, when the
oil price nadir drove the balance into deficit for the first time since early 2016. The upturn
continued into October, with crude exports rising to 6.16m b/d, driving increases in total export
earnings and in the trade surplus, of 8.4% and 28.1% respectively, over September figures.
Preliminary indications are that oil sales declined marginally in November, but the price of the
OPEC Reference Basket rose by 6.3% to US$42.61/barrel, suggesting that the external position will
have continued to improve. Non-oil exports also maintained their recovery in October, reaching
near pre-pandemic levels of SR18.9bn, primarily reflecting a rebound in the global
chemicals market.
Despite the positive trajectory, total exports and the surplus that month were respectively 32.7%
and 39.3% lower year on year. The prospects for 2021 were brightened by an agreement in early
December to relax the oil production curbs from January 1st on a pro-rata basis, implying an
increase of around 126,000 b/d (1.4%) in Saudi output (with further easing expected during the
year). Prices are also expected to strengthen considerably as the rollout of coronavirus vaccines
allows the US and European economies to reopen, galvanising demand. Nonetheless, a delay in
the international recovery owing to the renewed resurgence of the virus evident in December,
coupled with rising oil supply from competitors, could depress both sales and prices during the
first half of 2021, slowing the external improvement.

The GAS data supports our forecast of gradual improvement in export earnings in 2021, but rising
goods and services imports on the back of domestic demand recovery will put external accounts
under continued pressure.

Saudi Arabia 32
Saudi Arabia goes ahead with unilateral oil production cut

January 6, 2021: Economic growth
Event
On January 5th Saudi Arabia announced a unilateral 1m-barrel/day (b/d) cut in oil production in
February and March, on top of the ceiling agreed to under a deal between OPEC and a Russian-
led group of non-OPEC producers (collectively known as OPEC+) to restrict collective output to
offset the demand slump triggered by the coronavirus (Covid-19) pandemic.
Analysis
The surprise announcement came shortly after an OPEC+ meeting to decide on February
production limits. Under the agreement that was struck in April to avert a price collapse, curbs had
been due to be eased by 2m b/d from January 1st, but after a prolonged and fractious conclave
early last month, only 500,000 b/d was initially added to supplies on a pro-rata basis owing to
continued demand uncertainty. This is to be reviewed monthly. In the debates Saudi Arabia has
consistently focused on price, against countries prioritising market share and chafing to reactivate
unused capacity. In December the kingdom clashed with the UAE, its closest regional ally, over
the issue. This month Russia was the main proponent of raising the collective cap by another
500,000 b/d, with Saudi Arabia's opening position calling for a reversal of the January increase.
Two days of discussions concluded with an unusual compromise: existing ceilings are to remain
unchanged in February and March, except for Russia and Kazakhstan, which can raise output by
a combined 75,000 b/d each month.
Abdel-Aziz bin Salman al-Saud, the Saudi energy minister, announced the additional cut after the
meeting's closing communique was released, and cited fragile fuel demand and the emergence of
new coronavirus strains (prompting renewed lockdowns). The cut will reduce the kingdom's
production to 8.12m b/d (compared with a 2019 average of 9.78m b/d) until the end of the quarter,
essentially unilaterally implementing the kingdom's preferred production strategy. The move
sends a strong signal of willingness to defend desired price levels, but will be fiscally debilitating
should the policy fail. Brent crude has averaged just over US$50/barrel in January, and Saudi
Arabia's 2021 budget (in which more than two-thirds of revenue is from oil) assumes a price of
about US$48/b. Similar to one made in June, the cut is a short-term tactic, rather than an indication
of intent or perceived ability to reassume the kingdom's historic role as the world's
swing producer.

The additional cut will be factored into our forecast, through modest downward revisions to our
real GDP, budget and current-account forecasts.

Saudi Arabia 33
Saudi Arabia announces new labour market rules

January 18, 2021: Policy trends
Event
On January 10th Saudi Arabia's government announced plans to nationalise jobs at the kingdom's
seaports, three days after revoking a prohibition on expatriates managing Saudi-
owned companies.
Analysis
The two changes, despite having no direct bearing on each other, encapsulate the tension in the
kingdom's labour market policymaking. The imperative to increase flexibility in order to encourage
investment and fuel economic growth is set against the countervailing need to increase the
number of skilled jobs available to young Saudis by imposing local employment quotas on the
private sector, despite this typically increasing labour costs. A long-running Saudiisation
(Nitaqat) programme had gathered pace even before the onset of the coronavirus (Covid-19)
pandemic in 2020—with employer levies for expatriate workers and their dependents progressively
increased and mandatory minimum local employment levels extended to new sectors—but the
economic fallout from the virus has injected added urgency. Unemployment among nationals
reached a record 15.4% at end-June 2020; third-quarter figures are late in being released, but the
IHS Market Purchasing Managers Index (PMI, a survey of business conditions and sentiment) for
December recorded a month-on-month fall in employment even as the overall score reached a 13-
month high.
Companies operating at the kingdom's nine seaports are the latest to be subjected to Saudiisation
directives under a programme developed by the General Authority for Ports (Mawani, a
government agency) in co-operation with the Ministry of Human Resources and Social
Development. According to their announcement, jobs in about 300 categories are to be reserved
for Saudi nationals. Implementation will start at Jeddah Islamic Port, in the west of the kingdom. In
late December the ministry announced that 30% of accountancy positions in firms employing
more than five people in such roles should be localised by an unspecified date.
The precise motivation for the removal of the proscription on expatriates managing Saudi-owned
companies, which was announced by the Ministry of Commerce and Investment, was not
explained. However, it would appear to be supportive of the economic diversification drive
enshrined in the government's Vision 2030 plan, which calls for the development of new domestic
industries, such as renewables and technology, in which experienced local professionals
are lacking.

We expect unemployment among nationals to fall in 2021, primarily as a result of the economy's
return to growth rather than of Saudiisation measures, which we nonetheless expect to succeed in
gradually increasing the local share of the workforce during the forecast period (2021-25).

Saudi Arabia 34
Saudi crown prince lays out investment goals

Event
Investment opportunities worth some US$6trn will be available over the next decade as the
kingdom proceeds with the Vision 2030 economic development plan, according to a statement by
Mohammed bin Salman al-Saud, the crown prince and de facto ruler, at the World Economic
Forum (WEF) on January 13th.
Analysis
The government has a habit of attaching eye-catching figures to its long-term economic plans, but
the latest proclamation coincides with a recent drive to inject new momentum into the far-reaching
programme after the inevitable interruption last year caused by the coronavirus (Covid-19)
pandemic, which sent the economy into an estimated 3.6% recession. Mohammed bin Salman said
that new projects would comprise about US$3trn of the investment, and the Public Investment
Fund (PIF, a sovereign wealth vehicle) and the local private sector would account for some 85% of
the total. Progress on the fund's multi-dollar greenfield tourism and real estate developments has
notably accelerated. Three days before his WEF appearance, the crown prince launched a
US$100bn-200bn sub-project (a 170-km-long urban community) within PIF-led NEOM, a US$500bn
futuristic zero-carbon new city planned in the far north-west, which has otherwise moved slowly
since its unveiling in 2017. Earlier in the month, the latest in series of major contracts was awarded
on the fund's Red Sea Project (a vast coastal resort)— this one to DAA International, an Irish
company, to operate the airport.
Tourism and transportation are among key target sectors, as well as renewables. Another major
investment announced over the past six months was by PIF-affiliated ACWA Power and Air
Products (US) in a US$5bn green hydrogen plant (the world's largest) at NEOM. In December
ThyssenKrupp (Germany) was awarded a German government grant to supply the facility's
electrolysis technology, and on January 14th the Saudi cabinet approved a planned agreement
between the two governments' energy ministries to co-operate in the nascent hydrogen sector.
Regulatory facilitation, especially for the foreign investors who are expected to contribute some
US$900bn of the US$6trn total, is also ongoing, and a new mining law, setting out licensing terms
and procedures, came into effect on January 1st. Foreign direct investment (FDI) totalled
US$4.6bn in 2019 (almost 40% lower than when Vision 2030 was unveiled in 2016) and shrank
sharply in 2020, owing to the pandemic.

We expect FDI to rise steadily in 2021-25 and beyond as the government doubles down on Vision
2030 plans and as global economic recovery takes hold.

Saudi Arabia 35
Listed companies offered finance by Saudi Arabian government

Event
On January 17th the National Debt Management Centre (NDMC, part of the Ministry of Finance)
signed an agreement with Tadawul, the operator of the local stock exchange, to offer long-term
loans and increase the debt ceilings for listed companies in certain sectors, both to support firms
hit by the recent economic slowdown and to encourage new listings.
Analysis
The kingdom's stock market outperformed regionally in 2020, despite the estimated 2.5%
contraction of the local economy caused by the coronavirus (Covid-19) pandemic and associated
oil price slump (a disconnect shared with major global markets): the benchmark TASI index ended
the year 3.6% higher, while market capitalisation edged up by 1.2% to SR9.1trn (US$2.4trn), and
trading volumes more than doubled to SR2.1trn, largely as a result of the listing of Saudi Aramco,
a giant government oil company, in December 2019. A long-running government drive to develop
the local bourse to support non-oil private-sector growth was maintained, and derivatives trading
was introduced in August and daily trading limits increased to 30% for new stocks in October.
Meanwhile, stimulus measures worth more than SR180bn were extended to private companies
across the board to offset the pandemic's economic fallout.
The NDMC and the Tadawul placed the new financing initiative in both contexts, saying that
extending longterm loans to listed firms in the real estate, healthcare and education sectors—and
increasing their debt ceilings—would both encourage corporate investment and incentivise
unlisted companies to float. There are indications that the former is resuming, with the IHS Market
Purchasing Managers Index (a survey of business conditions and sentiment) hitting a 13-month
high in December. New listings were inevitably scarce in 2020, given the prevailing economic
uncertainty (with the TASI's modest full-year increase masking high downside volatility) but the
two initial public offerings (IPOs) staged—of a healthcare and a retail business—both priced at
the top of the range, defying concerns that the record-breaking Aramco share sale had drained all
available liquidity and raising just under US$1.3bn in total. Tadawul officials have indicated that a
strong IPO pipeline exists for this year, with the potential for more than a dozen listings.

The NDMC/Tadawul measure is consistent with government policy throughout the economic
downturn of prioritising the protection of the domestic private sector over immediate fiscal strains
and supports our view that access to finance through the local capital markets will improve
strongly during the forecast period (2021-25), supporting non-oil growth.

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Delayed employment report shows Saudi joblessness falling

Event
Unemployment among Saudi nationals fell to 14.9% in the third quarter of 2020, while the total
workforce continued to shrink, according to the latest Labour Market Survey published by the
General Authority for Statistics (GAS).
Analysis
Recorded joblessness among Saudi nationals had soared to a record 15.4% in the second quarter
at the peak of the local outbreak of the coronavirus (Covid-19) pandemic and corollary
containment lockdown, which triggered a 10.1% year-on-year contraction of the non-oil private-
sector and a 7% fall in total real GDP. The former rebounded in July-September, expanding by
5.7% quarter on quarter as restrictions were eased, but the impression (based on independent
reports and anecdotal social media evidence) that the upturn is failing to translate into a
commensurate job market recovery was fuelled by the month-long delay in releasing the official
data, arousing suspicion that some massaging of the figures was occurring, perhaps as
provisional whole-year data became available and in order to paint a picture of steady
improvement.
The GAS data confirm that total employment fell marginally in the third quarter, by 1.3% to 13.46m,
but, crucially for the government, the number of Saudi nationals in work rose by 81,854, or 2.5%,
to 3.25m (equivalent to 24.1% of the total workforce), driving a 0.5-percentage-point fall in overall
unemployment (including expatriates) to 8.5%. Labour market participation among working-age
Saudis edged up only marginally during the three months, by 0.2% to 49%, but that metric is
showing longer-term improvement, up from 45.6% a year earlier. While progressive Saudisation of
the workforce has been a policy aim for several decades, there has been a notable doubling-down
by the government in recent months, which is assumed to reflect the desire to cushion the
citizenry from the pandemic's employment fallout: quotas for nationals have been rolled out or
increased in several sectors, and a hike in the levy for employing expatriates was implemented in
July. Such measures run counter to wider government efforts to otherwise reduce business costs
to enable the local private sector to weather the coronavirus storm, highlighting the overriding
importance of job creation in economic policy formation.

The third-quarter data support our view that unemployment rose sharply in 2020. We expect the
figure to fall in 2021-24 as economic growth resumes.

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Saudi government kicks off 2021 international financing

January 29, 2021: External sector
Event
On January 29th the government raised US$5bn in a two-tranche US dollar-denominated
international bond issue.
Analysis
The public finances were hit hard last year by the coronavirus (Covid-19) pandemic and
associated oil price slump, registering an estimated deficit of SR298bn (US$79.5bn), and the 2021
state budget (published in December) projects another substantial shortfall (of SR141bn) in 2021
—as oil prices and production remain subdued while spending is cut only modestly. A detailed
deficit-financing plan published by the National Debt Management Centre (NDMC, part of the
Ministry of Finance), envisages SR124bn of new borrowing in the coming year—in the form of
conventional bonds, sukuk (Islamic bonds) and "government alternative financing"—of which
about 55-75% will be domestic, implying an international financing requirement of up to US$15bn
and raising the total debt stock to SR937bn by year-end, which the NDMC calculates as
equivalent to 32.7% of GDP. The remaining shortfall will be bridged by drawdowns from reserves,
which stood at US$457bn at end-November. The debt stock had been increasing since the
previous oil price crash in 2014 but leapt to SR854bn at end-2020 (SR40bn of which matures this
year) after an unprecedented SR220bn worth of borrowing, including US$12bn via international
securities.
The NDMC document also states an intent to diversify funding pools and investors—possibly
through issuing in other foreign currencies—and to raise the bulk of sovereign external finance
during the first half of the year to clear the path for public and private-sector corporates, which
will likewise need to borrow to recover from the pandemic's economic impact. Saudi Aramco, the
giant government oil company, is expected to return to the market this year. Both the size of the
borrowing requirement and international competition for finance strengthened the argument for
tapping the market early—as governments worldwide similarly face the budgetary fallout from the
public health emergency and global recession. Within the region, Turkey, Oman and Bahrain have
already made their 2021 debuts. The Saudi issue was well received, with pricing tightened by
about 10 basis points from guidance, albeit with demand not as spectacular as in some recent
auctions—in particular for the longer paper: the US$2.75bn 12year bonds were priced at 130 basis
points over ten-year US Treasuries, while the US$2.25bn 40-year securities were launched at
3.45%—with order books totalling about US$13bn and US$9bn respectively.

The issue is consistent with stated government financing plans, and our fiscal and external
forecasts are unchanged.

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Saudi Public Investment Fund launches five-year plan

Event
Saudi Arabia has launched a five-year plan for the Public Investment Fund (PIF, a sovereign
wealth vehicle), which calls for annual investment of SR150bn (US$40bn) in the local economy
and for assets under management to more than double to SR4trn.
Analysis
The overarching theme of the plan confirms the refocusing that we have highlighted during the
second half of 2020 on domestic investment—as a means of accelerating delivery of the Vision
2030 development road map and of supporting economic recovery from the coronavirus (Covid-
19) pandemic. After an opportunistic flurry of Western equity purchases early last year, local PIF-
led projects have notably accelerated, visible especially in the defence, tourism and clean energy
sectors. According to Yasir al-Rumayyan, the PIF's governor, the proportion of foreign assets in
the portfolio would probably fall from about 30% to 20% by 2025, during which period SR2trn is
intended to be injected into local target sectors. The restated interlinked aims of "launching new
sectors, building strategic economic partnerships, and localising technologies and knowledge"
make clear that international co-investment will remain central to the strategy but that foreign
partners will be called upon to establish domestic operations, which will include a number of
sectors—including automotive, healthcare and technology companies—leveraging the fund's
existing investment relationships.
Other priority sectors in which rising domestic investment is expected to create openings include
defence and aerospace, education, mining, renewables, tourism, and transportation: the PIF is
committed to delivering 70% of an improbable target of increasing renewable power-generation
capacity to 27.3 GW by 2023 through projects directly negotiated with private developers, while
persuading international defence companies to establish local manufacturing operations in return
for major sales contracts is central to plans for Saudi Arabian Military Industries, a PIF subsidiary,
to become a major global player.
However, finding the financial resources to deliver such lofty investment ambitions will be
challenging, especially during the early years, with oil prices set to remain subdued and the state
budget expected to remain in substantial deficit in 2021-22. Funding is likely to come from
investment returns, loans and privatisations of local portfolio companies as well as government
cash injections—not ruling out selling additional shares in Saudi Aramco, the giant government
oil company.

The five-year plan confirms that the PIF will play an increasingly important role in domestic
economic development during the forecast period (2021-25), assisting non-oil growth, and will
support rising foreign direct investment.
Analysis
MENA faces mixed prospects on vaccine rollout in 2021-22
January 5, 2021
Countries across the Middle East and North Africa are scrambling to secure early and
assured access to approved and potential Covid-19 vaccines.
Wealthier and more internationally connected, as well as strategically important, countries
will gain the earliest access to vaccines to help them push ahead with mass immunisation
plans in 2021.
Weaker and more vulnerable states will rely on international co-operation and support from
global vaccine donation and distribution initiatives, but a lack of finance and the difficult
distribution terrain will delay and prolong vaccine rollout.
The Economist Intelligence Unit expects the region to face a long return journey to normality

Saudi Arabia 39
on the public health and economic fronts, while achieving pre-pandemic levels of GDP growth
will be beyond the reach of most, if not all, states in 2021 and 2022.
Countries across the Middle East and North Africa are adopting a range of strategies to support
vaccine rollout plans, which include brokering advance purchase agreements (APAs) direct with
international pharmaceutical companies, leveraging their established international relations and
developing new ties with host governments of major vaccine suppliers, building up their own
national vaccine production and distribution hubs, and participating in global vaccine
development and distribution initiatives. Some countries are faring better than others and the
prospects for the mass rollout of Covid-19 vaccination vary considerably across the region.
Securing advance purchase agreements

A patchwork of APAs is evolving across the region, which reflects a range of factors including
established and evolving geopolitical ties, a pragmatic approach to hedging bets on the
availability of vaccine candidates and the depth of financial resources available to enter into such
agreements.
Publicly disclosed data made available by early January suggest that about half of the countries in
the region had secured advance supply arrangements. Egypt has announced major deals to
secure vaccines from the US-German alliance Pfizer-BioNTech, the UK-based alliance Oxford
University-AstraZeneca, the Russian Direct Investment Fund (responsible for marketing the
Sputnik V vaccine) and the Chinese company Sinopharm. Turkey has announced large APAs with
Pfizer-BioNTech and the Chinese company Sinovac. Israel, Qatar and Kuwait have declared APAs
for a much smaller number of doses from Pfizer-BioNTech and two US-based companies, Moderna
and Arcturus Therapeutics, as well as Oxford-AstraZeneca, although these orders represent the
largest coverage of population, at 130%, 100% and 67% respectively.
Some countries in the region that have not publicly disclosed details of any APAs will most
certainly have such agreements in place. Initial shipments of Covid-19 vaccines have already
arrived or are scheduled to arrive in January in Bahrain, Egypt, Israel, Morocco, Oman, Qatar,
Saudi Arabia, Turkey, and the UAE. Other countries have struggled to secure APAs, which
reflects their limited financial resources or lack of strategic importance to help them enter the
global competition for vaccines and force their way to the front of the queue.
Participation in clinical trials

Several countries across the Middle East and North Africa have participated in clinical trials for
Covid-19 vaccines, which have helped them to secure early and preferential access to vaccine

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shipments. Bahrain, Egypt, Jordan, Morocco, the UAE, Saudi Arabia and Turkey have
participated and continue to participate in trials of vaccines being developed by the Chinese
pharmaceutical companies Sinopharm, Sinovac and CanSino. The UAE completed stage three
clinical trials of the Sinopharm vaccine and granted emergency use authorisation for free-of-
charge access to the entire population in December (earlier approval for frontline medical staff was
granted in September). In addition, the UAE is participating in clinical trials of Sputnik V, a vaccine
being developed by the Russian Gamaleya National Centre of Epidemiology and Microbiology
(and marketed by the Russian Direct Investment Fund), while Turkey has participated in clinical
trials of the vaccine developed by Pfizer-BioNTech. Chinese pharmaceutical companies, in
particular, have established a strong presence in the region through clinical trials that will most
likely aid the expansion of the Chinese vaccine footprint across the region.
Global community to the rescue

All countries in the Middle East and North Africa have signed up to the Covid-19 Vaccine Access
(COVAX) Facility led by the World Health Organisation (WHO)—a multilateral risksharing
mechanism for pooled vaccine procurement and distribution that aims to ensure equitable access
to vaccines for 190 participating countries. The COVAX Facility has secured APAs for almost
2bn doses of several promising vaccine candidates that could begin delivering in the first quarter
of 2021. The COVAX Facility aims to provide enough doses to vaccinate up to 20% of all
participants' populations by the end of 2021 and the intention is to provide additional doses to
reach higher coverage in 2022. Plans for 2021 and 2022 are subject to regulatory approvals,
individual country readiness to receive and distribute vaccines, formal requests for vaccination
supplies and financial contributions from participating states.
Eleven countries in the Middle East and North Africa (Bahrain, Iran, Iraq, Israel, Jordan, Kuwait,
Lebanon, Libya, Oman, Qatar and Saudi Arabia) have made commitments to the COVAX Facility
—meaning that they have agreed to make a down payment at a discounted price to receive
vaccines to cover up to 20% of their population by the end of 2021; two countries (Turkey and the
UAE) have signalled their intention to participate in the COVAX Facility; and nine countries
(Algeria, Egypt, Mauritania, Morocco, Sudan, Syria, Tunisia, the West Bank and Gaza, and
Yemen) fall into the group of 92 low- and middle-income countries that are eligible for the Gavi-
COVAX Advance Market Commitment (AMC), which intends to supply donor-funded doses of
approved vaccines and again to provide vaccination cover for 20% of the population by the end
of 2021.
The COVAX Facility has an ambitious agenda and could face challenges that delay and extend
the delivery schedule significantly. For instance, its portfolio of doses does not yet include the
already approved Pfizer-BioNTech and Moderna vaccines (both from the US), and some of the
cheaper vaccine candidates that it is acquiring, such as the Oxford-AstraZeneca, Novavax (US)
and Sanofi/GSK (France) vaccines, could face delays to production or distribution. A major issue
facing the COVAX Facility is the fact that the world's most developed and richer countries are
snapping up a large proportion of scheduled global vaccine supply for their own use rather than
for wider global distribution. Moreover, the facility is under financial pressure as it struggles to
reach a US$6.8bn fundraising target (by mid-December it had raised US$2.4bn) to fulfil its ambition
of equitable 20% population coverage across all participating sates by the end of 2021.

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Potential local production opportunities

The Middle East and North Africa has some promising locations for vaccine production under
licence from international pharmaceutical companies, which could boost their access to effective
Covid-19 vaccines during 2021. Egypt has granted legislative and regulatory approval for local
manufacturing operations to begin to produce the vaccine developed by Sinovac, while a
Memorandum of Understanding is in place to produce the Sputnik V vaccine. Israel and major
international pharmaceutical companies (including US-based Johnson & Johnson) have invested
heavily in vaccine manufacturing facilities in recent years, which could see capacity dedicated to
the production of foreign-developed Covid-19 vaccines in 2021 for domestic and international use.
Other production sites for foreign-developed vaccines could be established in Morocco
(Sinopharm) and Algeria (Sputnik V), which have established pharmaceutical manufacturing
sectors and evolving commercial relations with China and Russia.
A few countries in the Middle East and North Africa are banking on development of their own
domestically tested and produced vaccines to support imported supplies, which is the case in
Bahrain, Egypt, Iran, Israel and Turkey. Israel began phase two human trials of its nationally
developed Covid-19 vaccine in December and completion of the entire trial process including the
phase three trials is expected to take place in the summer of 2021, which could facilitate national
rollout in the second half of the year.
Iran is facing the triple whammy of the worst Covid-19 outbreak in the Middle East, extremely
stretched national finances and effective barriers to procurement created by international
sanctions. Iran launched human trials of its own vaccine in late December and the government
hopes to unveil an effective vaccine for emergency use in March, which could greatly boost
national vaccine rollout plans starting around mid to late 2021. In the meantime, Iran is hopeful
that international payment issues will be resolved to allow doses to be acquired through the
COVAX Facility during the second or third quarters of 2021.

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Emerging storage and distribution hubs

Strategic importance as storage and distribution hubs could benefit some countries in securing
access to vaccines and implementing their national rollout plans. The UAE, Egypt and Israel have
the potential to emerge as key logistics centres that facilitate the storage and distribution of
coronavirus vaccines across the Middle East and North Africa.
The UAE intends to leverage its position as a global logistics hub with technically advanced
transport and storage facilities to facilitate the distribution of Covid-19 vaccines throughout the
region and wider world. The Hope Consortium has been set up involving Etihad Cargo, Abu
Dhabi Ports and existing global partners with the aim of transporting 6bn doses of approved
vaccines around the world in cold and ultra-cold storage facilities during the first half of 2021,
rising to 18bn doses transported by the end of the year. The consortium has strong expertise in
pharmaceutical logistics, specialist pharmaceutical and healthcare services, and a myriad of
existing regional and global supply routes that put it in a strong position to achieve its delivery
targets assuming delivery of already approved vaccines.
Egypt has been identified as a potential storage and distribution hub owing to its strategic
location, strong logistics offering and local manufacturing capabilities in the pharmaceutical
sector. In addition, Israel could emerge as a regional distribution hub with the government
pushing hard to develop logistics capabilities that will support national vaccination rollout efforts
and at the same time contribute to the global vaccine supply chain.
Tough terrain for some

The wealthy Gulf states of the UAE, Qatar, Bahrain, Kuwait and Oman, as well as Saudi Arabia,
Israel, Egypt and Turkey, have relatively advanced infrastructure that will facilitate the
distribution of Covid-19 vaccines and support their ambitious mass vaccine rollout plans. Access
to Covid-19 vaccines will be made difficult for some other countries in the Middle East and North
Africa because of the lack of effective healthcare sectors, weak or inadequate local pharmaceutical
transport and storage facilities (including limited supply of cold and ultra-cold storage facilities)
and highly unstable or insecure delivery environments. These constraints will be felt most in the
region's fragile and vulnerable states, which will impede early access and delay national
vaccination rollout plans.
Syria and Yemen remain engulfed in long-running and devastating civil wars that provide a
difficult backdrop for the effective rollout of Covid-19 vaccines, while their lack of resources mean
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that they are reliant on donor funding to implement vaccinations strategies. Warring factions in
Libya recently signed a peace deal but the country's medical, transport, storage and power supply
infrastructure has been severely compromised, which will delay and disrupt the rollout of
vaccines. Similar conditions are found in Iraq, where issues surrounding poor pharmaceutical
storage and distribution facilities are compounded by the still weak and volatile security
environment.
Ambitious vaccine rollout plans

Most of the Middle East and North Africa will follow a staged vaccine rollout strategy, providing
initial access to frontline healthcare workers, the elderly (those aged over 65 years) and vulnerable
(those with underlying medical conditions), followed by the more populous younger and healthier
groups of society. Targeting and protecting these groups first should allow governments to begin
easing remaining Covid-19 containment measures that are dampening domestic economic activity.
Rollout strategies in terms of when they start, how fast they progress and how far they extend will
be affected by factors such as available national finance and international connections to facilitate
vaccine imports, the quality of vaccine storage and distribution facilities, and potential for local
production of vaccines. Bearing these and other factors in mind, we have grouped states across
the Middle East and North Africa into three broad groups based on the start and likely speed and
extent of vaccine distribution.
Potential mass vaccination rollout schedules

The initial distribution of Covid-19 vaccines will be skewed towards the wealthier nations in the
Middle East and North Africa, which have managed to secure substantial APAs with international
pharmaceutical companies. In addition, vaccines will become available more quickly in those
countries with strategic importance to vaccine developers (from the US, Europe, Russia and
China), and those who have participated in clinical trials or have been identified as regional
vaccine storage and distribution hubs. These factors place the relatively wealthier Bahrain, Egypt,
Israel, Kuwait, Morocco, Oman, Qatar, Saudi Arabia, Turkey and the UAE at the head of the
queue for vaccine distribution among countries in the region. These countries have ambitious
rollout plans that hinge on enough vaccines becoming available from the finite pool of global
supplies and a rapid ramp-up in vaccine distribution during the first half of 2021 that could see a
significant proportion of their populations get vaccinated by the third or fourth quarter of 2021.
Slightly later access to Covid-19 vaccines will be an issue for some countries that are struggling
financially and have limited early purchase agreement options, which could see mass vaccination
plans delayed until mid-2021. Immunisation of a significant proportion of the population is
unlikely to be achieved until the first half of 2022. Countries that fall into this category include
Algeria, Jordan, Lebanon, Tunisia and the West Bank and Gaza. Jordan and Tunisia are yet to
make decisions over which vaccine they will adopt but initial messaging suggests contact with
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Chinese, Russian and US vaccine providers. The West Bank and Gaza could benefit from vaccine
donations from Israel that would speed up the immunisation process, while Algeria could benefit
from more widespread immunisation should local production of the Russian vaccine Sputnik V
gain approval and momentum.
Late access to Covid-19 vaccines could see some of the poorest and most troubled states receive
smaller, late shipments and experience prolonged rollout plans before a significant proportion of
the population is vaccinated. These countries are unlikely to start mass immunisation until the
third or fourth quarters of 2021 at the earliest and a significant proportion of the population will
still be without a vaccine by mid to late 2022. Falling into this category are Iran, Iraq, Libya,
Mauritania, Sudan, Syria and Yemen. Direct APAs are minimal, unsecured and largely
unaffordable and most of these countries will rely heavily on global support initiatives such as the
WHO's COVAX Facility. Possible positive disruptors within this group that could bring forward
mass vaccination plans for some countries are the potential for national vaccine production in Iran
that could start in the third quarter of 2021 and build up distribution rapidly assuming ongoing
vaccine development plans are successful, as well as the intentions of Russia and China to
distribute cheaper vaccines much more widely to increase their strategic footprint in the region.
Slow-moving economic recovery

The Middle East and North Africa faces a very mixed picture in terms of Covid-19 vaccination
rollout across the region and the economic benefits this could bring. Currently, vaccine rollout
plans are mostly staged and subject to the drip feed of a limited and highly sought global vaccine
supply (which could cause some APAs to fail and global vaccine distribution initiatives to stall).
Some countries are experiencing an uptick in transmission and most face the emerging threat from
new, more contagious strains of Covid-19 that could lead to a tightening of Covid-19 containment
measures in the first quarter of 2021 just as vaccine programmes get under way.
Ambitious vaccine rollout plans are more likely to succeed in the wealthier and internationally
connected countries in the region, although the economic benefits are unlikely to be felt until the
second half of 2021, at the earliest, and in most cases not until 2022. Vaccination plans for the less
developed countries will be obstructed by the lack of financial resources, infrastructure
deficiencies, weak healthcare services and in some cases heightened security risks, which will
contribute to their continued subdued economic performance in 2021 and 2022.

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Little immediate respite for oil producers

Members of the OPEC+ alliance (OPEC plus a group of non-OPEC producers) agreed in December
to increase their production incrementally by a collective 500,000 barrels/day (b/d) each month in
the first quarter of 2021. Since August 2020 OPEC+ members have cut 7.7m b/d from their
collective oil production and had intended to ease this target to 5.8m b/d from the beginning of
January, which would have brought about 2m b/d back on to the market at a time of suppressed
demand. Saudi Arabia had preferred to extend the current OPEC+ production quotas for another
three months but reached a reasonable compromise position with more bullish producers,
especially the UAE and Russia.
The more bullish positions held by some within the OPEC+ alliance reflect the likely emergence of
two bright spots for oil producers in the year ahead: a strong economic rebound in China, the
main source of oil demand growth; and the prospect of mass rollout of coronavirus vaccines.
However, the timeline for most mass vaccination programmes means that these will only begin to
lift global and regional economic activity significantly in the second half of 2021. In the interim,
OPEC+ members will have to contend with soft demand for energy products during the first half of
2021 and oil prices below US$50/barrel during much of the year. Oil prices at about US$50/barrel
are still well below what most oil producers in the Middle East and North Africa need to breakeven
on their fiscal and external balances, which will continue to place a financial squeeze on most of
the region's oil producers despite the beginnings of an economic recovery.
Zombification series: the role of central banks during Covid

January 19, 2021
Central banks' responses to the coronavirus (Covid-19) pandemic have shown that monetary
policy has not yet run out of ammunition in times of crisis.
Monetary policy authorities have been successful in preventing the coronavirus-induced
economic recession from turning into a full-blown financial crisis.
Central banks quickly deployed a wide set of powerful crisis-management policy tools,
avoiding some of their past mistakes.
These interventions have led central banks to rethink their mandates. They now have greater
policy discretion.
The expansion of central banks' mandates could incur a political backlash, leading to changes
in their relationships with governments.
As expected in times of crisis, most central banks in advanced economies responded to the
coronavirus-induced recession by reducing their key policy rates to lower funding costs and to
support demand. With most near the lower bound in their rates, all major central banks also
resorted to quantitative easing, which has been an effective tool in restoring confidence and
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reducing private and public borrowing costs. Central banks also expanded their short-term
lending operations in order to provide banks with ample funding. Finally, the decision by the US
Federal Reserve (the Fed) to activate foreign-exchange currency swap lines with several central
banks was crucial in ensuring the continued global supply of US dollars.
A new crisis, new instruments

Beyond these well-known tools, a key feature of central banks' response to the pandemic has
been the use of direct instruments to facilitate the flow of credit to households and businesses.
These have consisted of the expansion of long-term lending measures, such as targeted lending
programmes designed to provide credit to financing institutions at favourable terms (conditional
on loan extension to firms).
For the first time, a major central bank—the European Central Bank (ECB)—also started to offer
loans to banks at an interest rate below its deposit rate (using the "dual rate" structure), thereby
mitigating the adverse effects of negative interest rates in terms of bank profitability. Central
banks also established or increased the size of their commercial paper and corporate bond
purchase programmes. These policies helped companies to meet their short-term obligations,
thereby preventing a wave of bankruptcies.
Drawing on lessons from the global financial crisis

The response of central banks to the Covid-19 crisis differed from those deployed during the
2008-09 global financial crisis in a number of important ways, set out below.
A quicker reaction. The most striking difference was the rapidity of central banks'
interventions after the outbreak of the Covid-19 pandemic, compared with their responses to
the global financial crisis. Policy tools that had been put in place in a period of around ten years
were deployed in only a few weeks.
Collateral requirements temporarily eased. This is one of the most important policy measures
put forward by major central banks since the start of the Covid-19 crisis. In the euro zone, for
example, during previous crises banks could only use high-quality assets as collateral to obtain
credit from the ECB. As the value of eligible collateral falls during a crisis, financing institutions
usually saw their access to central bank liquidity curtailed, and in many cases reacted to this by
reducing lending activity to the real sector. New collateral requirements fixed this issue.
Monetary and fiscal interventions supported one another. After the global financial crisis,
many governments undermined the effects of monetary stimulus by pursuing fiscal austerity,
most notably in the euro zone. In 2020 monetary policy responses were accompanied by
massive fiscal stimulus by national governments, which offered state guarantees on private-
sector loans. New asset purchase programmes also lowered borrowing costs for governments,
thereby containing the costs of fiscal measures.
Changing the nature of a central bank

Central banks' interventions have provided significant macroeconomic and financial stability to
the global economy, but the actions that they have taken are not without political and economic
risks. The combination of the global financial crisis and the coronavirus-induced recession has
resulted in central banks being entrusted with significantly more power and discretion, fuelling a
rethink around the interpretation of central bank mandates.
The use of this discretion after the 2008-09 financial crisis provoked a political backlash. The
authority to undertake asset purchases in the US led to calls for the Fed to be audited.
Furthermore, in August 2020 Germany's Constitutional Court ruled that some of the ECB's asset
purchases were not lawful.
This use of broad discretion in interpreting central bank mandates has increased since the start of
the Covid-19 crisis as some of the new tools that central banks have employed, such as purchases
of corporate bonds, allow them significantly more leeway. This is especially the case given that
central banks have interpreted their mandate for price stability as encompassing actions that
effectively allow their countries' governments to borrow at favourable rates, blurring the
independence of monetary and fiscal policy. Additionally, actions such as the purchase of
corporate debt have the potential for more direct policy impacts on specific sectors, rather than
the general macroeconomic environment. As a result, political scrutiny of central banks is likely
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to intensify.
Macroeconomically, these issues link to the issues of zombification we have addressed earlier in
this series. With the interest-rate tool exhausted, and inflation subdued (at least for the time
being), the role of the central bank mandate to shield politicians from making politically
unpopular choices around access to credit has broken down. Instead, central banks are
increasingly shifting towards a de facto—and occasionally explicit—role of supporting
government policy, in collaboration with ministries of finance. Barring a major spike in inflation,
the relationship between central bank tools, political scrutiny and economic management is likely
to remain in flux over the coming years.
GCC stockmarkets remain weighed down by pandemic fallout

Stockmarkets in the Gulf Co-operation Council (GCC) states, in line with global markets, were
pummelled in the first half of the year, owing to the coronavirus (Covid-19) pandemic and the
resultant impact on the economy and, for GCC states, on international oil prices. Unprecedented
fiscal and monetary stimulus measures taken by governments and central banks have led to a
glut in global liquidity that subsequently propelled global markets up strongly year on year by
the end of 2020. However, stockmarkets in the GCC member states have not generally seen
gains and have been dragged down by the continued weakness in global oil demand and prices
and their heavy impact on regional liquidity. The weakness of the oil price recovery in 2021 will
remain a constraint on these markets, but developments in other sectors and new financial
product innovations should lead to local capital markets playing a growing role in local
financing.
Dated Brent crude averaged just US$42.2/barrel (b) in 2020, down by 34% compared with 2019,
while OPEC+ supply constraints have further dampened oil-related earnings. Although Saudi
Arabia's TASI index was the outlier among the GCC indices, ending with positive gains of 3.6%
for the index over the year, and the Qatar index was flat year on year (up by just 0.1%), other GCC
stock indices witnessed negative returns. Kuwait was the worst performer in the region, down by
11.7%, reflecting a combination of the impact of the collapse of oil prices and the weakest policy
response among the wealthier of the GCC member states. Although among the least directly
dependent on oil in the GCC, Dubai's businesses rely heavily on regional liquidity, and other
important sectors in Dubai, such as travel, logistics and tourism, have been especially hard hit by
the pandemic. The Dubai Financial Market index was down by 9.9% year on year by end-2020, but
neighbouring Abu Dhabi fell by only 0.6%. Bahrain and Oman, which are the two GCC states with
more limited government capacity to support the economy through the pandemic, also saw local
stockmarkets fall significantly, down by 7.5% and 8.1% respectively. Performance in 2021 will be
heavily affected not just by the course of the pandemic and optimism over when it will end—GCC
stockmarkets were up in November and December amid growing hopes of a vaccine rollout—but
by ongoing policy initiatives.

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GCC stockmarket performance in 2020

(% change year on year at year-end, unless otherwise indicated)
Market capitalisation Index at last
(US$ bn) close (points) 2019 2020
Index
S&P GCC n/a 113.3 8.3 -1.7
Saudi Arabia 2,413.3 8,747.1 7.2 3.6
Abu Dhabi 198.1 4,964.9 3.3 -0.6
Qatar 150.1 10,262.1 1.2 0.1
Kuwait (All Share PR) 107.6 5,459.5 23.7 -11.7
Dubai 72.8 2,419.6 9.3 -9.9
Bahrain 20.8 1,477.5 20.4 -7.5
Oman 11.5 3,643.5 -7.9 -8.1
Source: Refinitiv.
Some sectors more insulated from pandemic, as many

corporates took a hit
Among sectors, defensive stocks such as consumer staples and consumer discretionary products
that provided products or services that remained in demand even during lockdowns outperformed
during the pandemic, but in the longer term, other sectors will be more prominent in regional
economies and in capital markets. Healthcare was the second-best performing sub-index, and the
GCC Healthcare index gained 37% in 2020. Healthcare firms experienced increasing demand for
products and services arising from the pandemic. The need for homeworking during prolonged
pandemic restrictions also provided opportunities for the telecoms sector, and major listed
regional telecoms firms generally reported income growth in 2020. Banks, energy and financial
firms, which still account for the bulk of indices in the region, faltered during 2020, pulling down
overall performance. The poor performance of these firms reflects 2020 corporate performance,
which is likely to at least partly reverse in 2021.
According to Refinitiv, overall GCC (excluding Bahrain) corporate earnings declined by 44% year
on year in the first nine months of 2020, on account of the economic hit resulting from the
pandemic and lockdowns. The region's biggest sector—hydrocarbons and related firms—
witnessed a sharp fall in earnings of 52% during the first nine months of 2020 compared with the
first nine months of 2019. For example, Saudi Basic Industries Corporation, a petrochemicals giant,
posted losses for the first two quarters of the year, although it recovered sharply, recording sharp
year-on-year earnings growth in the third quarter of 2020. Although international oil prices remain
low by historic standards, lockdowns are likely to ease significantly as 2021 progresses and
pandemic concerns begin to wane later in the year, and mining and related industrial firms should

Saudi Arabia 49
begin to bounce back, boosting corporate earnings and stock performance. However, the
hydrocarbons sector is unlikely to grow rapidly, owing to structural shifts accelerated by the
pandemic.
The banking sector has also been hit hard by the pandemic, and the earnings of GCC banks fell by
32% year on year in the first nine months of 2020, on account of higher provisions, impairment
charges and lower revenue owing to the unprecedented operating environment. The region's
largest bank by market capitalisation, Qatar National Bank, reported a 15% drop in net income
during that period. Moreover, despite extensive monetary stimulus and liquidity support
programmes, some of which are stretching into mid-2021, some firms will still not be able to meet
obligations to banks, and the pandemic is expected to result in an increase in non-performing
loans. Most GCC banking systems have adequate capital buffers to absorb unexpected losses,
and the pandemic does not pose a systemic threat, but the burden will be a drag on banks'
performance, including on stockmarkets, and could limit their lending. This could make capital
market borrowing more attractive for some larger firms.
Sectoral indices' performance varies widely in GCC

(% change year on year; year-end)
2020
Non-cyclicals 50.0
Healthcare 37.0
Basic materials 10.0
Telecom 5.0
Cyclicals 7.0
Industrials 5.0
Real estate -0.1
Financials -5.0
Energy -6.0
Banks -7.0
Source: Refinitiv.
Economic prospects starting to improve

The strength of government and corporate balance sheets, higher international oil prices and a
recovery of economic growth—boosted by rapid vaccine rollouts—will be key determinants of
the region's equity market performance in the coming years. Progress on vaccination—the GCC
states are among the most advanced globally in their programmes—and further stimulus measures
are likely to improve confidence in equity markets. The likelihood of corporate defaults is likely to
remain an overhang in the banking system, with construction (for example, Arabtec, a UAE firm,
filed for bankruptcy in 2020) and hospitality and travel among the more vulnerable but sufficient
capital buffers. Probable liquidity stimulus extensions from central banks should provide sufficient
support for the region's banks to absorb defaults.
Advances in the structure of the individual bourses will also support stronger performance by
attracting new investors and allowing more stocks and markets to be included in global
benchmark indices. At the end of November MSCI added seven Kuwaiti stocks to its Emerging
Market Index, which is likely to bring passive investment flows into Kuwait equity markets.
Markets will see more listing from non-traditional firms

The introduction of derivatives trading by Saudi's Tadawul stockmarket will attract more
sophisticated foreign investors to trade in Saudi stocks and help market participants to hedge
their positions. A year after the successful listing of a stake in Saudi Aramco on the Tadawul, the
Saudi stockmarket has seen a further four initial public offerings (IPOs), which have raised about
US$4bn. Although the amount is small, given the hostile market conditions in 2020, it bodes well
for future capital-raising on the stockmarket. The IPOs included a local healthcare company and a
grocery retail business. It is likely that regional markets will see a growing number of listings away
from the traditional financial services and real estate industries.
As Dubai is more dependent than its GCC peers on travel and tourism and real estate, both of
Saudi Arabia 50
which will take longer to recover from the pandemic than most other industries, the emirate's
stockmarket could lag behind its peers in the region, both in terms of overall performance, as well
as attractiveness for potential IPOs. However, the delayed World Expo, to be hosted by Dubai
from October 2021 could help to support a stronger economic recovery later in the year and
potentially lead to wider market interest. The UAE's normalisation of relations with Israel could
also provide a potential boost to corporates in certain areas, particularly high-technology,
healthcare and water and agritech, which could drive listings by Emirati technology firms.
Technology firms have performed strongly both on regional and global stockmarkets—a trend
that is likely to continue, at least in the short term. The UAE-Israeli (and Bahraini-Israeli)
normalisation deal will also afford opportunities for greater co-operation between regional
stockmarkets. In December the Tel Aviv Stock Exchange and Abu Dhabi Securities Exchange
signed a co-operation agreement enabling firms in the two countries to access each other's
markets more easily and to potentially open the path toward cross-listings. Bahrain's bourse has
signed a co-operation agreement with Israel's Diamond Exchange.
Other recent geopolitical developments will also potentially increase positive sentiment in regional
stockmarkets. Israel is likely to continue to seek to improve ties with other Gulf states. In addition,
in early January Saudi Arabia and the other boycotting states (Bahrain, Egypt and the UAE) lifted
their embargo on Qatar, allowing for increased regional business ties and co-operation. Regional
OPEC member states are also maintaining some market unity in the hope of stabilising oil markets.
Although the region remains vulnerable geopolitically, and the trajectory for the global economy
to emerge from the pandemic crisis is still uncertain, overall prospects for regional economies and
their stockmarkets should improve in 2021.
EIU Global Outlook - Expect delays for coronavirus vaccines

January 19, 2021
In 2021 many countries will be looking to immunisation programmes to deliver a permanent
solution to the coronavirus (Covid-19) pandemic. Just one month after the first vaccines received
emergency authorisation, countries are already in a race to inoculate their populations. Israel
and the UAE are currently far ahead, followed by the EU, the UK and the US. Many other
countries, some even wealthy, have not yet even begun—Japan, for instance, plans to start
administering vaccines only in late February.
Demand far outstrips supply

All countries are aware that even as companies ramp up production and airlines plan shipments,
demand for the vaccine far outstrips supply this year. Of the 12.5bn doses that the main vaccine
producers have pledged to produce in 2021, 6.4bn have already been pre-ordered, most of them by
wealthy countries. Canada, for instance, has secured supplies for five times its population. Israel
is reported to have paid far over the odds to secure doses of the Pfizer vaccine. This is just not an
option for poorer countries.
Mass immunisation programmes will not be cheap

The costs associated with vaccine rollouts are not solely determined by price, and many
developing countries will struggle to finance the additional costs (such as transport and
distribution costs, and salaries for healthcare workers who will administer the shots), especially
after the coronavirus-induced recession has already depleted fiscal resources and led to
ballooning budget deficits. In addition, there are concerns that the current vaccines may not be
effective against future mutations of the coronavirus; in such a case, immunisation campaigns
would have to be renewed regularly.
Vaccine diplomacy is coming

In early 2021 we expect that three vaccines, from Pfizer (US)-BioNTech (Germany), Moderna (US)
and AstraZeneca-Oxford University (UK), will be rolled out on a massive scale in developed
countries. Meanwhile, Chinese and Russian vaccines are being rolled out both domestically and
to emerging countries such as Egypt via diplomatic bilateral deals. This situation will foster so-
called vaccine diplomacy—with Russia and China trying to bolster their global status via the
delivery of vaccines—this year and beyond. Both countries will also seek to adopt a transactional

Saudi Arabia 51
approach to the delivery of vaccines, using coronavirus shots as a bargaining chip to advance
long-standing interests.
Rich countries will be the first to vaccinate their

populations
Countries towards the front of the queue—including the UK, the US and most countries in the EU
—are expected to have immunised their priority groups (such as the elderly or healthcare workers)
by end-March, with other rich countries catching up by end-June. We therefore expect that global
economic prospects will brighten from mid-2021, with the global economic rebound gaining speed
in the third and fourth quarters. However, life will not be back to normal even by then, as
immunisation programmes for the bulk of the population in advanced countries will continue until
mid-2022.
The timeline for middle-income countries will be longer

China and Russia, which have developed their own vaccines, could be on a similar schedule to
developed countries, with mass immunisation completed by late 2022. Other countries including
Mexico, Indonesia and Egypt have been promised supplies in return for running clinical trials, and
others such as Brazil and India have become integral to global production plans by housing
factories. This should give them early access to doses for priority groups, although their ability to
achieve mass vaccination will depend on factors including fiscal space, population size, number of
healthcare workers, infrastructure and political will. The timeline for other middle-income countries
will be longer, stretching to late 2022 or early 2023.
Bleak prospects for the developing world

Finally, some middle-income countries and most low-income countries will be relying on COVAX,
an initiative led by the World Health Organisation (WHO) that aims to secure 6bn doses of
vaccines for poorer countries around the world. The first 2bn of these will be given in 2021, mainly
to healthcare workers (COVAX doses will cover only up to 20% of the population of eligible
countries). However, COVAX supplies may be slow to arrive, especially if delays in the
production for and delivery to richer countries push back delivery dates for poorer nations. In
addition, unexpected hiccups in procuring supplies have occurred in most developed countries,
suggesting that in developing countries with poor infrastructure, few healthcare workers and
inadequate refrigeration, the rollout will be even harder.
World economy: forecast summary

2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Real GDP growth (%)
World (PPPa exchange rates) 3.3 3.8 3.5 2.6 -3.6 4.8 3.8 3.5 3.3 3.3
World (market exchange rates) 2.5 3.2 2.9 2.3 -4.3 4.5 3.4 3.0 2.8 2.7
US 1.7 2.3 3.0 2.2 -3.6 3.7 2.3 2.0 1.8 1.9
Euro area 1.8 2.7 1.9 1.3 -7.4 4.8 3.9 2.3 1.9 1.8
Europe 1.9 2.9 2.2 1.5 -6.5 4.3 3.8 2.4 2.1 1.9
China 6.7 6.8 6.6 6.1 2.3 8.7 5.0 5.2 4.9 4.6
Asia & Australasia 4.5 4.9 4.3 3.8 -1.8 5.6 4.0 4.1 4.0 3.9
Latin America -1.5 0.9 0.8 -0.5 -7.4 3.9 2.8 2.2 2.4 2.4
Middle East & Africa 4.9 1.4 0.7 0.4 -5.9 2.2 3.3 3.4 2.9 2.5
Sub-Saharan Africa 0.8 2.3 2.4 2.2 -4.2 1.6 3.1 3.8 4.1 3.8
World inflation (%; av)b 3.1 3.2 3.5 3.5 3.3 3.4 3.3 3.2 3.0 3.0
World trade growth (%) 2.1 5.8 3.7 0.9 -9.8 7.0 5.9 5.1 4.5 3.8
Commodities
Oil (US$/barrel; Brent) 44.0 54.4 71.1 64.0 42.3 53.0 56.0 58 55.0 52.0
Industrial raw materials (US$; %
-2.2 20.2 2.2 -8.6 -3.2 11.6 -1.2 -3.0 2.7 1.2
change)
Food, feedstuffs & beverages (US$; %
-3.5 -1.0 1.5 -4.3 7.5 13.8 1.7 -7.5 1.5 1.7
change)

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Exchange rates (av)
¥:US$ 108.8 112.1 110.4 109.0 106.8 104.1 103.3 103.5 104.7 105.6
US$:€ 1.11 1.13 1.18 1.12 1.14 1.21 1.18 1.17 1.20 1.21
a Purchasing power parity. b Excludes Venezuela.
Source: The Economist Intelligence Unit.
Zombification series: what's next for monetary policy?

January 20, 2021
The coronavirus (Covid-19) pandemic has sparked a unique economic crisis, requiring an
unprecedented response from both a fiscal and a monetary standpoint.
Central banks in Japan, Europe and North America have doubled down on quantitative easing
(QE); policy rates across most of the developed world are at or near zero, with central banks
pouring massive amounts of liquidity into markets.
The Bank of Japan (BOJ) appears to be locked for good into its loose monetary approach.
However, the European Central Bank (ECB) and the Federal Reserve (Fed, the US central
bank) are hoping to avoid this long-term trend.
We believe that unconventional monetary policies, including QE, will be a feature of advanced
economies throughout our 2021-25 forecast period, at least.
Policies that the world's leading central banks considered to be "unconventional" two decades
ago—rockbottom interest rates and substantial, steady capital injections—have since then
gradually become the norm across OECD economies.
Japan was the first to adopt QE measures more than 20 years ago. Other major central banks,
notably the Fed and the ECB, first made a move in this direction in 2008 to thwart an economic
collapse during the global financial crisis. Since then any attempts to wean their economies off
easy money have proved short lived, and the coronavirus crisis has now led to unprecedented
injections of liquidity.
The Fed: putting the genie back in the bottle

In the wake of the global financial crisis, the Fed tried to extricate itself from its unorthodox
monetary policy. Between 2016 and 2019 it raised its policy rate by 225 basis points, but the
institution's balance sheet remained four times larger than before the crisis, reflecting the huge
scope of asset purchases that it had made. The pandemic has prompted a revival of such policies.
In December the Fed chairman, Jerome Powell, announced that the central bank would maintain its
current bond purchases of US$120bn per month until the economic recovery made "substantial
further progress", and suggested that the federal funds rate would remain at the zero lower bound
until at least 2023.
Such policy raises a thorny question: does the Fed have a way out? The institution hopes to
Saudi Arabia 53
avoid the path taken by Japan for several decades and by the ECB since 2014. In August 2020 it
abandoned its annual inflation target in favour of a long-run target; in order to achieve 2%
average inflation "over time", the Fed plans to accommodate several years of overshooting—
something that the BOJ has been attempting since 2016. Mr Powell hopes that this will lift market
expectations for inflation, and therefore potential economic growth.
We believe that the Fed will struggle to achieve this goal as economic conditions in the US
increasingly resemble those in Europe and Japan. In late 2020 the Fed's own assessment of the
potential (longer-run) rate of growth was revised down to 1.8% per year; it was as high as 2.5% as
recently as 2012. Although ageing and slowing population growth are contributing to a slower
economic tempo, slow productivity growth is largely to blame. It is therefore no surprise that the
Fed estimates that the neutral federal funds rate—an interest rate that neither constrains nor
boosts economic growth—has been more than halved, to 2.5%. Moreover, with Fed bond
purchases likely to continue well into 2021 and perhaps beyond, keeping bond rates down,
inflation expectations may struggle to reach the Fed's 2% target.
ECB: making up for lost time

The euro zone debt crisis (2010-14) forced the ECB to adopt zero interest rates in 2014, followed a
year later with the launch of an asset purchase programme (APP). In March 2020 the ECB
launched a €750bn (US$909.6bn) Pandemic Emergency Purchase Programme (PEPP) to buy
private and publicsector securities. By December the PEPP had grown to a total of €1.85trn
(US$2,24bn).

Saudi Arabia 54
Christine Lagarde, the ECB president, has stressed that the ECB is mandated to "support the
general economic policies of the EU", whereas the institution's focus was, in the past, solely on
inflation. With this in mind the ECB will extend open-ended QE and related pandemic measures
such as the PEPP until at least 2022. In the longer term the ECB will focus on keeping policy
accommodative relative to economic performance and boosting growth capacity. The ECB's
targeted longer-term repo operations (TLTROs) will play a role here, and the official policy rate is
set to remain at zero for the remainder of our forecast period.
Is the ECB long on the way to Japanification? After many years of QE and zero interest rates, the
BOJ augmented its policy portfolio from 2013 by rapidly expanding the monetary base in an
explicit attempt to overshoot its 2% inflation target (albeit unsuccessfully), and by buying longer-
dated government bonds, in an effort to flatten the yield curve. The ECB has recently achieved
the latter, but the efficacy of adopting the former is in doubt.
Can the Fed and the ECB escape Japanification?

For now it appears that US economic growth may prove firm enough in the coming years to allow
the Fed to walk back some of its massive stimulus efforts, although progress is likely to be slow.
We forecast that the Fed will begin to raise interest rates from end-2023, but serious downside
risks remain. If US economic performance disappoints—for example, if labour force participation
does not recover—US rates may remain on hold until 2025. This will make it harder for the central
bank to lift inflation expectations in the medium and long term, potentially locking it into a lower-
for-longer path.

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Such a possibility raises concerns about the zombification of corporates in the US, as well as in
Europe. The corporate debt market worldwide has expanded rapidly in recent years, particularly in
2020. With interest rates likely to remain at rock bottom and central bank capital injections likely to
continue in the coming years, this will make it easier for "zombie" firms to continue to service their
debt at low cost, despite not being profitable. Beyond being a drag on productivity, which will in
turn weigh on inflation and growth expectations, a large stock of heavily indebted firms raises the
spectre of corporate defaults.
As for Europe, the ECB has a chance to lead the way in terms of escaping a zero-rate, low-inflation
world. Through its TLTROs, the ECB has put in place a programme for decoupling the rates that it
lends to banks from its stated policy rate. In theory there is no limit as to how low interest rates
could be cut (at least for these targeted lending facilities), thereby circumventing the "effective
lower bound"—the point where rate cuts become counterproductive. Dual rates—even more
negative rates for TLTROs coupled with a tiering of deposit rates on banks' reserves, both
divorced from the policy rate—would make it more profitable for banks to lend to targeted,
growth-inducing sectors. This could stoke growth, bring back inflation and eventually cause the
ECB to return to a more orthodox policy mix.
Zombification series: what next for labour markets?

The working-age population is shrinking in many developed economies, weighing on long-
term growth prospects.
In the short and medium term, this trend may be offset by encouraging the participation of
groups that have previously been marginalised, such as women and the elderly.
In the longer term, technological innovation will be needed to compensate for the shortfall in
labour supply.
The rise in automation, digitalisation and the use of robots will create imbalances and
disruption in the labour market.
Governments will need to explore ways to increase job security and incomes to prevent mass
unemployment resulting from technological advancement.
An economy's growth outlook is closely linked to its labour market, which provides essential
input to production. In return for their labour, workers earn wages (often the predominant part of
their income), a large portion of which is then spent on the consumption of goods and services,
augmenting demand while incentivising firms to invest. However, recent changes in the labour
markets of many rich economies—particularly a shrinking workingage population—risk triggering
a prolonged period of subdued economic growth.
How to sustain growth with a shrinking working-age

population?
A declining working-age population weighs on an economy's growth potential. The diminishing
pool of labour means that businesses need to either increase capital investment or find ways,
usually through innovation, to boost the productivity of the existing labour supply. A rise in the
number of retirees relative to the working-age population also diverts resources towards
healthcare and social security and away from other productive uses, increasing the tax burden for
working-age people (something that, in turn, restricts consumption). Finally, the large-scale
departure of experienced workers through retirement can hurt productivity growth owing to the
loss of skills and in-work knowledge they have accumulated during their careers.
Governments have a few immediate options to mitigate these issues. First, as Japan has tried to do
recently, they can encourage the participation of groups that have been previously marginalised
in the labour market, thereby replenishing the available labour force. Japan saw its total working-
age population decline by 8.5% between 2010 and 2019. However, the country's total employment
grew by 1.9% over the same period, with real GDP expanding by an average of 1.3% per year.
A key element in Japan's success in defying a disadvantageous demographic trend to sustain
employment lies in the government's active encouragement of female labour participation.
Benefiting from an expansion of childcare services and spurred by the elimination of tax
deductions for dependent spouses, the female labour participation rate in Japan rose by

Saudi Arabia 56
5.4 percentage points in the decade following 2010 (compared with a 0.4 percentage points rise in
the male participation rate). Japanese women remain more likely to be employed in part-time or
irregular work and to enjoy inferior job quality and benefits than their male counterparts, but the
increase in female labour participation has contributed to both overall employment and economic
growth. In addition to increasing the participation of women, governments may also entice retired
people to go back to the labour market.
Immigration represents a second option. A country can adjust its immigration policies to allow in
foreigners with skill levels that complement those of its own workforce and meet demand in the
domestic market, so that the negative impact on the native workforce can be minimised. As well as
contributing directly to economic production in their host countries, foreign workers are also a
source of tax revenue. However, social attitudes to immigration generally do not align with the
economic consensus, making large-scale immigration as a means of addressing the challenges of
an ageing and shrinking population a political non-starter. This was evident during the 2015
migration crisis in Europe, and in the subsequent rise of anti-migration populist politicians in the
region.
Robots as a long-term solution?

Boosting labour participation or increasing immigration can alleviate the impact of demographic
ageing, but the impact of these measures is limited. In the long term, automation represents a
solution to boost productivity growth. Again, Japan is a shining example in this area. According
to the International Federation of Robotics, Japan ranked fourth in the world in 2017 for robot
density in the manufacturing sector. For every 1,000 employees in Japan's manufacturing sector
there were 31 industrial robots installed, compared with a global average of just nine. Japan is also
a major producer of industrial robotics, accounting for over half of the global supply and boosting
the country's exports.

Saudi Arabia 57
The application of new technologies, such as robotics and artificial intelligence (AI), may have a
positive impact on labour markets as long as the complementary effects of new technologies
(boosting productivity by functioning alongside workers) outweigh their substitution effects
(replacing workers). By providing more productive tools, new technologies can improve workers'
efficiency and allow them to focus on higher value-added tasks. Technological innovation may
also create new jobs. On balance, the combination of these factors has so far more than offset the
job losses that automation inevitably induces.
Robots come with side-effects

The development of automation means that certain jobs will disappear, potentially resulting in
mass job cuts in particular sectors. The Autor-Levy-Murnane hypothesis argues that jobs that
mainly involve routine tasks—those that can be standardised and are often repetitive in nature—
are particularly exposed to the substitution effects of automation and AI. Many of these
vulnerable jobs are at the low-to-medium skill level in the manufacturing, hospitality and catering
and retail industries. The provision of training for unemployed people (so that they can acquire
new skills to pursue jobs created outside their previous industry) is an often-cited policy
response to this issue. However, the experience of many advanced economies shows that
retraining is often hard, and many people are reluctant to move away from their region to seek a
new job.
The coronavirus pandemic will hasten the trend towards automation, as many firms and factories
have chosen to increase technology investment during the pandemic in order to adjust to social
distancing rules. Although a world where no one needs to work appears far-fetched, technological
innovation will probably make machines more competent and reduce the demand for human labour
in various sectors. The resulting disruption in the labour market will pressure governments to
bring forward measures to enhance social welfare (particularly unemployment issuance) and job
security for permanent employees and temporary contract workers.
A prominent example has been the EU's efforts to develop the "flexicurity" model following early
successful experience in Nordic countries. These in practice combine reliance on market
mechanisms in job creation and rearrangement with social security and an active labour policy to
ensure legal rights and benefits for workers and the unemployed. This points to the fact that
politics and policies will represent a big driving factor behind the future of labour markets.
Over the coming years, governments will come under increasing political pressure to ensure that
automation does not lead to an era of mass unemployment and penury.

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Outlook for 2021-25

Data and charts

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Political and economic outlook

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Key changes since December 22nd

The month ahead

Major risks to our forecast

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Outlook for 2021-25

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Democracy Index: Saudi Arabia

Religion and development are pillars of legitimacy

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impact on Saudi Arabia

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Data and charts

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Annual trends charts

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Monthly trends charts

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Comparative economic indicators

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Main political parties

Central bank governor

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Impact on the forecast

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Diplomatic breakthrough in Qatar boycott

Impact on the forecast

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Yemen's Houthis step up Red Sea maritime warfare

Impact on the forecast

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UAE, Bahrain and Egypt restore diplomatic ties with Qatar

Impact on the forecast

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Saudi government pursues defence localisation drive

Impact on the forecast

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US pauses arms sales to Saudi Arabia and UAE

Impact on the forecast

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Resumption of ties will boost intra-Gulf trade

Qatar appears to have made few concessions

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Al Ula agreement papers over lingering divisions

Saudi Arabia's regional policy reset for Biden era

Exiting the quagmire in Yemen is likely to prove