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Saturday, April 13, 2024
CEOWORLD magazine - Insights - Saudi Arabia

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Saudi Arabia

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GDP: USD1108.1bn (World ranking 17)
Population: 36.4mn (World ranking 41)
Form of state: Monarchy
Head of government: Salman bin Abdulaziz Al Saud (King)
Next elections: None

Strengths

  • Second-largest proven oil reserves globally, low extraction costs and over 70 years of oil supply at current production rates
  • Commitment to Vision 2030 remains, as well as funding to mega-projects for a diverse economy
  • Stable inflation thanks to large export revenues, ample reserves and a strict monetary tightening cycle helps the construction sector and overall project financing

Weaknesses

  • Over 30% of GDP and 70% of exports reliant on hydrocarbons, exposing vulnerability to oil price fluctuations
  • The resurgence of conflicts in the Middle East pose a threat to investors and people appetite for the region, impacting long-term prospects
  • Succession dynamics and governance issues affect international perception and create uncertainties

Economic overview

Self-inflicted production cuts and diversification hold the key to growth

The Saudi economy looks set to start growing again in 2024, after a year of little to no growth in 2023, but much of its fortune will depend on the government’s stance on oil production. The economic decline was self-inflicted when the monarchy unilaterally reduced oil output by one million barrels per day (b/d) in July 2023 and maintained this attitude until the end of the year to help support oil prices. A rise in oil production and exports in the second half of 2024, along with rapid growth in the non-oil economy, will boost real GDP growth by about +2%, in line with the post-2014 average. A substantial fiscal deficit is likely to remain supportive of non-oil activities, with negative spillovers on energy and construction projects from the resurgence of conflicts across the region.

The kingdom, which has been rich with cash from robust oil sector earnings in recent years, will continue to fund a series of mega-projects aimed at creating a more diverse economy in accordance with Vision 2030. On the other hand, trade disruptions and regional instability may weigh on businesses and foreign appetite for the region, potentially posing obstacles to Saudi Arabia’s plan to attract many more tourists, companie and talent. Even if the country remains heavily reliant on agri-food imports, including grain, it has always been able to find alternatives, given ample purchasing power. Inflation in Saudi Arabia is likely to remain around 2% thanks to large export revenues, ample reserves that allow the local currency to maintain the currency peg with the US dollar and a strict monetary tightening cycle initiated in March 2022, in parallel with that of the US Federal Reserve.

The resurgence of a geopolitical premium to the oil price may complicate plans

Saudi Arabia possesses the world’s second-largest proven oil reserves (>15% of global resources), low extraction costs and its oil will last for over 70 years at current rates of production – the longest reserves/production ratio among the three top producers (US, Russia and Saudi Arabia). The unbalanced nature of the economy is reflected in how much hydrocarbons account for the overall economy – around 30% of GDP and 70% of exports. According to government plans, environmental sustainability should become a driver of long-term growth and efficiency gains. In fact, renewable power generation is booming in the kingdom, but its nominal capacity remains lower than that of the UAE. Water stress is also high and estimates of waste recycling rates remain very low.

In the short term, oil prices will continue to dominate the picture and enable additional government financing to achieve the long-term targets envisioned under Vision 2030. Decisions taken in 2023 by the Organization of the Petroleum Exporting Countries (OPEC) and shared with third parties like Russia, Kazakhstan, Azerbaijan, Mexico and Oman (OPEC+) have proven less effective than in the past to maintain the price of crude oil above USD80 per barrel, which is a comfortable level to meet fiscal and trade balances for most OPEC+ countries. Moreover, the resumption of a geopolitical premium to the oil price, given the resurgence of conflicts in the Middle East, has complicated plans to elevate production quotas, de facto favoring countries that are not bound to output restrictions.

The fiscal balance returned to the positive side in 2022, thanks to exceptionally high oil prices and is likely to return to the negative. Saudi Arabia’s annual current account balance also shifted to substantial deficits in 2015–2016, after 15 years of very high surpluses and posted another deficit in 2020 due to the pandemic-related oil price slump. As expected, the current account surplus widened in 2022, reaching 16% of GDP and is likely to remain in positive territory even though with much lower proportions. Foreign exchange reserves held at the central bank have reduced over the years from a peak of USD746bn in August 2014 to USD438bn in November 2023. Despite the decline, they are still sufficient to comfortably cover maturities on our forecast horizon, but caution related to future prospects may condition the predictability of the government and state-owned entities as long-term investors.

Regional conflicts, succession dynamics and governance concerns affect policy predictability

The resurgence of conflicts in the Middle East, particularly around Israel, poses a threat to the international appetite for the region. In early 2023, Saudi Arabia made a few steps towards normalizing relationships with peers and playing a broader role in the region, which contributed to easing trade and investment conditions. In March, the kingdom reached a historic accord with Iran, negotiated by China. Relations between Saudi Arabia and Türkiye had also come to a truce after years of hostility, but recent altercations related to sporting events hosted by Riyadh may further complicate the picture. In March 2023, Saudi Arabia agreed with Ankara to deposit a USD5bn swap line in the Turkish central bank to mitigate the lira exchange rate volatility, confirming the kingdom’s role as one of the main lenders of last resort for countries in the region.

Succession dynamics and broader governance concerns put a drag on policy predictability. While comments made by a Saudi investor in March 2023 sparked the crisis in the Swiss banking sector, the suspension of diplomatic relations with Qatar in 2017 sparked a few commercial disputes and international arbitration cases. Until governance mechanisms improve and institutional capabilities strengthen, similar events may unfold again.

Competition with the United Arab Emirates for business and investment opportunities is likely to exacerbate policy divergences and enhance the possibility of confrontation between the UAE and Saudi leadership, although the competitive dynamic increases the chance of domestic reforms aimed at improving regulatory and operational conditions in an effort to make each country more appealing to global investors. In March 2023, three foreign law firms were granted the first licenses to practice in Saudi Arabia to encourage business expansion.

CEOWORLD magazine - Insights - Saudi Arabia