As the landmark Future Investment Initiative summit kicks off in Riyadh on 24 October, GRI presents a special 3-part series on risks and opportunities in the Kingdom. Our first post examines the state of the economy, and the top sectors ripe for investment.

The Kingdom of Saudi Arabia is well into its generational transformation of the economy and society. Vision 2030, an ambitious reform plan aiming to diversify the country away from oil dependency, was launched by the young Crown Prince Mohammed bin Salman in 2016 and has been executed by a framework and targets set out in the enabling National Transformation Plan. Since then, social and economic reforms have been announced and carried out at break-neck speed, almost too rapidly for the economy and society to absorb.

A new non-oil economy?

An economy that relied on its vast oil reserves and high oil prices to drive state spending was for decades able to function sustainably, with more than 60% of the labor force employed by the public sector and 80% of government revenues derived from oil proceeds. Yet, the halving of oil prices from their above $100-dollar barrel days in 2014 to the mid $50s seen today has given the Kingdom impetus to chart a new course, spearheaded by the ambitious, young, reform minded Crown Prince.

Austerity measures have been enacted and government spending reined in, in an effort to reduce the budget deficit that shot up to 17.2% of GDP in 2016 to an anticipated 9.3% of GDP in 2017 and 1% by 2022. This fiscal adjustment required cuts to utilities subsidies, slashing of public sector wages, and a reduction in capital spending that included the postponement of major public infrastructure projects. Excise taxes on soft drinks and tobacco, levies on expatriate workers and the impending introduction of a Value Added Tax (VAT) in January 2018 all signal the swiftness and seriousness of the government’s efforts to tackle the fiscal deficit. Additionally, the Kingdom has tapped the international bond markets for $39 billion over the past year through international bond issues and local sukuks, signaling investor confidence and utilizing another tool to bridge the budget deficit.

However, measures to improve non-oil growth to balance out the “Fiscal Balance Program” have not proven adequate. Along with persistent low oil prices, fiscal consolidation has lead the Kingdom to a recession in Q3 2017 and projected GDP growth of close to zero for the end of the year. Unemployment has jumped to 12.7% for Saudi nationals and that number hovers around 40% for the burgeoning youth population.

Accelerating social and economic reforms

The government has sought to ease the tough economic environment by accelerating social reforms, including women’s right to drive, loosening of the male guardianship system, establishing an entertainment authority that has already hosted concerts and festivals, diminishing the authority of the religious police and more. Bringing women into the workforce should also aid the economic recovery, with the driving ban removal alone expected add about $90 billion of output by 2030, reducing the outflow of remittances from foreign drivers, thereby contributing to an improving current account balance.
Gulf base