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Saudi Arabia’s economy shrank by 7 percent, with the unemployment rate hitting a record high in the second quarter as the combined effect of the oil price crash and the coronavirus pandemic hit the world’s largest oil exporter hard.
Saudi Arabia’s gross domestic product (GDP) slumped by 7.0 percent year over year in Q2, the Kingdom’s General Authority for Statistics said on Wednesday. The oil sector contracted by 5.3 percent, while the non-oil sector shrank by 8.2 percent due to the restrictions and lockdowns to curb the pandemic.
In Q2, the value of exports of goods and services plunged by 55.8 percent from a year earlier, mainly due to a 61.8-percent plunge in the value of oil exports, the statistics authority said.
Meanwhile, the Saudi unemployment rate increased to 15.4 percent in the second quarter of 2020, a record high and 3.1 percentage points higher than in the same period of last year.
Among the unemployed Saudis, 63.1 percent belonged to the age group of 20-29 years, the General Authority for Statistics said.
The collapse in oil prices—to which Saudi Arabia itself contributed when it flooded the market with oil during the worst demand crash in April—has forced the Kingdom to take some very unpopular measures such as tripling the value-added tax (VAT), reducing payouts to poorer households, and discontinuing cost-of-living allowances for state workers.
Saudi Arabia’s economic outlook for this year remains uncertain amid the pandemic-driven economic slowdown and the collapse in oil prices that led to the Kingdom slashing its oil production as part of the new OPEC+ pact, Ahmed al-Kholifey, governor of the Saudi Arabian Monetary Authority (SAMA), said earlier in September.
Saudi oil revenues have been plunging year over year since March, while the deficit in the Kingdom’s finances in Q2—the worst quarter for oil in decades—stood at US$29 billion because of the continued slump in oil prices and oil demand.
By Tsvetana Paraskova for Oilprice.com
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Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews.
Saudi might want to start to learn from Norway on how to manage their income from oil. With vast reserves from decades of oil income, they should be able to diversify their economy. It's not an option anymore.
Still, Saudi Arabia isn’t alone in this ordeal. Whilst Saudi Arabia’s GDP shrank by 7% in the second quarter of 2020 as a result of the COVID-19 pandemic triggering a collapse of both global oil demand and prices, the United States’ GDP shrank by 32.9% during the same period, UK’s 20.4%, the European Union’s (EU’s) 12.1%, Japan’s 7.8% and China’s 6.8% in first quarter of 2020 but reversed trend and grew at 3.2% in the second quarter.
And despite excellent efforts in the diversification of its economy, Saudi Arabia’s budget is still overwhelmingly dependent on the oil export revenues to the tune of 85%-90%. While the Saudi non-oil sector has been growing, it continues to be dependent on government contracts and these in turn depend on the oil revenue.
However, the speed of diversification has had to slow down since many projects deemed essential for the diversification have to be shelved or even cancelled altogether.
As a result of low oil prices, the Saudi oil sector contracted by 5.3% while the non-oil sector shrank by 8.2%. Meanwhile, the Saudi unemployment rate increased to 15.4% in the second quarter of 2020 from 12.3% in the same period of last year particularly among the Saudis youth according to the Saudi General Authority for Statistics.
Saudi Arabia needs an oil price above $80 to balance its budget. With prices ranging from $40-$45 a barrel, Saudi budget deficit could mushroom to $116 bn this year. And with oil prices far below its budget breakeven price, Saudi Arabia like other Arab Gulf producers has had to issue debt bonds. Still, Saudi Arabia has a sizeable financial cushion to enable it to weather the storm until oil prices start to surge and surge they will.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London