The COVID-19 pandemic had a devastating effect on the world economy. Certain industries, especially those reliant on travel and physical contact, were ravaged. Supply chains were disrupted and led to a dampening of production and international trade. In addition, the pandemic had a toll of over two million lives and put tremendous stress on health services. Certain groups, including women, youth, the poor, and workers employed on contract basis were the worst affected economically. While governments mounted relief measures, the economic and social impact was still tremendous. Debt levels reached unprecedented levels globally, making the global economy susceptible to financial market stress. While there was a recovery in many countries in the middle of the year after easing of the lockdowns imposed during April-May, restrictive measures had to be re-imposed due to the resurgence of the virus.
The global economy
The global economy is estimated to have contracted by 3.5% in 2020, which is an improvement on some previous estimates, reflecting the recovery in the second half of 2020. The recovery will however vary widely across countries depending on medical facilities, policy support, exposure to cross-country impacts, and structural characteristics. Estimated contractions in advanced economies, emerging/developing economies, and the Middle East and Central Asia are 4.9%, 2.4%, and 3.2% respectively. China was the only major economy to grow in 2020, although its growth rate of 2.2% was its lowest in four decades. Governments have been faced with the daunting task of financing relief measures in the face of declining tax revenues, which will inevitably result in growing deficits and rising debt.
The projected global growth rates for 2021 and 2022 are 5.5% and 4.2% respectively. Expectations of recovery are based on the availability of COVID-19 vaccines and continued fiscal support, particularly in developed countries. Global trade volumes are expected to grow by 8% in 2020 and 6% in 2021.
The GCC economies
The GCC economies faced a challenging 2020. Apart from the pandemic, there was the impact of lower oil prices. GCC governments promulgated sizeable relief packages to alleviate the impact of the crisis. Lower oil prices also impacted Government revenues. A combination of business closures, travel restrictions, need for social distancing, and supply chain disruptions impacted the retail, transport, travel, and hospitality sectors.
Most central banks in the region have endeavoured to alleviate the situation by reducing interest rates, relaxing capital and liquidity requirements, and offering relief measures to banks’ customers. They also curtailed restrictions on lending to support lending to the private sector. Relief measures were targeted at the SME sector, such as deferring loan payments, extending concessional loans, and reducing fees.
Looking ahead, while GCC governments will strive to provide continued fiscal support, while there will be a slight increase in oil production in 2021, price increases are unlikely until 2023. There is the possibility of a strong recovery in sectors such as airlines and hospitality with the availability of vaccines.
Saudi economy and banking sector
The Kingdom’s robust fiscal and foreign currency reserves gave it resilience in the face of the pandemic.
The Government intends to follow an expansionary fiscal strategy in 2021, relying more on Government-controlled funds. With fiscal discipline, it is expected to limit expenditure to 7.3% below 2020 levels. The budget deficit is expected to narrow to 4.9% of GDP in 2021 from 12% in 2020. Fiscal deficits are expected to continue into the medium term, leading to a rising public debt. However, further borrowing will be made possible by the Kingdom’s low debt/GDP ratio. With the boost given by less stringent restrictions and improvement in trade balances, real GDP growth is forecasted to reach 2.8% in 2021.
The Saudi banking sector was also severely challenged by the pandemic. The sector received funding support from SAMA in the form of interest-free deposits to the tune of SAR 50 billion. There has been strong growth in mortgage financing despite the COVID-19 pandemic, driven by the strong demand for housing in the Kingdom and the support given by the Government. It has also been assisted by a step-down of the tax rate from 15% to 5% for retail property buyers. Home ownership levels in the Kingdom have now surpassed 50%; this marks the achievement of a goal by 2020, which was an intermediate milestone of Vision 2030. The overall loan growth resulted in a total asset increase of 9.8% since December 2019 reaching USD 716.17 billion. The customer deposit base achieved a 5.7% growth over the same period reaching USD 509.80 billion.
Looking forward, credit growth is expected to remain resilient in 2021 – 2022 in nominal terms, but growth percentage should reduce due to the impact of a higher base. Corporate growth may pick up as the Public Investment Fund launches infrastructure programs. Retail credit growth will remain strong due to mortgages but will slow as saturation approaches. ESG considerations are gaining momentum across many sectors, and will also be given increasing importance by investors, corporates, and customers. We can therefore expect more focus to be given to such considerations by the banking sector in the years to come.
