How the Saudi economy is thriving amid global uncertainty

With increasing oil and gas prices and an expanding non-oil sector, Saudi Arabia has been logging record trade surpluses in recent years, while securing government revenue for future investment. Saudi Arabia is expected to be among the fastest-growing economies in the G20 in 2022 – and the Kingdom was on track to fulfil that forecast by the middle of the year. Indeed, in the first three months of 2022 GDP expanded by 9.9% year-on-year (y-o-y), and 2.6% quarter-on-quarter. Saudi Arabia has therefore successfully bounced back from the global downturn accompanying the Covid-19 pandemic. It has also left behind the period of slower growth that the Kingdom witnessed prior to the health crisis, following the 2014 downturn in global oil prices.

Reforms

Saudi Arabia has been making changes to its domestic structure and policy frameworks, a result of the implementation of the Kingdom’s long-term socio-economic development plan, Vision 2030. These efforts have helped the country steadily advance the goals of economic diversification and privatisation since its launch in 2016.

Progress is set to continue despite global challenges. Continuing uncertainties over the future course of the pandemic, along with the negative impact on global supply chains of previous Covid-19 waves, continue to impede global recovery. In addition, the impact of Russia’s invasion of Ukraine and ongoing ramifications of climate change continue to disrupt the way many companies do business. Even so, with Saudi Arabia’s economy in robust shape and able to capitalise on developments in the global market in terms of higher hydrocarbon prices and greater geopolitical influence, the Kingdom stands well placed to continue its socio-economic progress.

Structure & Oversight

Saudi Arabia is classified by the World Bank as a high-income country, with per capita income of $23,585.90 in 2021, distributed among its population of 35.3m that year, a figure that rose to 35.8m in 2022. It is the 14th-largest country in the world in terms of surface area, with its capital, Riyadh, home to the Kingdom’s monarch, King Salman bin Abdulaziz Al Saud. The king is also prime minister and presides over the Council of Ministers (Majlis Al Wuzara). This includes the heads of a range of ministries with responsibilities directly or indirectly impacting on the economy.

The King is also advised by the Consultative Council (Majlis Ash-Shura), which can propose new laws and amend old ones. With the king set to turn 87 years old on December 31, 2022, Crown Prince Mohammed bin Salman bin Abdulaziz Al Saud has an increasingly powerful role in the Kingdom’s policies. Crown Prince Mohammed bin Salman is deputy prime minister and minister of defence, as well as head of the sovereign wealth fund, the Public Investment Fund (PIF), and a range of other key government agencies. He is widely regarded both nationally and internationally as the successor to the throne.

The Kingdom has 13 administrative provinces, each headed by a governor with his own deputy and advisory council. Key ministries include the Ministry of Economy and Planning, the Ministry of Finance, Ministry of Human Resource and Social Development (HRSD), the Ministry of Energy, the Ministry of Investment (MISA), the Ministry of Commerce, and the Ministry of Industry and Mineral Resources. Other ministries have portfolios covering environment, water and agriculture; transport; and communications and information technology, and are also important in the Kingdom’s economic landscape.

A number of other government institutions are also significant. These include the Saudi Central Bank (SAMA), the Capital Markets Authority, and two sub-cabinets that were established by King Salman in 2015 – the Economic and Development Affairs Council (EDAC), and the Political and Security Affairs Council, both headed by Crown Prince Mohammed bin Salman. EDAC serves as a replacement for the previous Supreme Economic Council.

With assets of around $620bn as of July 2022, the PIF is one of the world’s largest sovereign wealth funds. It also owns most of the Kingdom’s mega-projects, such as NEOM, a $500bn new city being constructed in the north of the country, as well as major new tourism developments on the Red Sea coast, and in Riyadh and its surroundings. In recent years the PIF has become a major driver of economic activity within the country (see analysis).

Saudi Arabia is a member of multiple international organisations, including the World Trade Organisation, the IMF and the World Bank. The Kingdom was a founding member of the GCC and the Organisation of the Petroleum Exporting Countries (OPEC). It is also a member of the G20. Like other GCC countries, Saudi Arabia’s currency, the Saudi riyal, has a fixed exchange rate, pegged to the US dollar. This rate, SR3.75 to $1, has remained the same since June 1986.

With around 17% of the world’s proven oil reserves – some 267bn barrels as of 2021 – the Saudi economy has been dominated by hydrocarbons for most of its modern history. Crude petroleum and natural gas accounted for 32.4% of GDP in the first quarter of 2022, with petroleum refining making up an additional 6.2%. Oil and gas also make up around 70% of all the Kingdom’s export earnings – with this level rising as high as 80% in March 2022.

In recent years the contribution of oil and gas to GDP has been declining from historical levels of around 50%. This is due to the expansion in the nonoil sector, which contributes to GDP in areas such as hotel and retail (8.4%); non-oil related manufacturing (8.3%); real estate (5.9%); transport, storage and communications (5%); and construction (4.8%).

Plans & Programmes 

Vision 2030 has dominated Saudi Arabia’s socio-economic policy landscape since its launch in 2016. While also addressing social change, the framework dedicates one of its three pillars to building a thriving economy. This involves not only economic and employment growth, but also diversification, which underscores two key aspects of the Kingdom’s economic reform efforts.

First, the country boasts the region’s largest population – the UAE, which ranks second, has only around one-quarter of Saudi Arabia’s population. The country is also quite young – the median age is 27.5 years – emphasising the importance of job creation. “The localisation of young talent in the Kingdom is helping to shape the future of the country. Their appetite for working, learning and growing is remarkable, and adds a lot of value,” John Brash, founder and CEO of Brash Brands, told OBG.

Second, the economy has had a traditional dependency on hydrocarbons, which have supplied considerable revenue for the government. Indeed, government services accounted for 15.3% of GDP in the first quarter of 2022. This revenue has been historically distributed through subsidies on utilities and basic commodities, and by the creation of public sector jobs for Saudi nationals. Hence, the private sector has been less well developed, with the workforce in certain trades dominated by expatriates.

Assuring young Saudis of future productive and sustainable employment is therefore tied closely to efforts to diversify into other forms of wealth creation beyond oil and gas. Such opportunities would predominately lie in the private sector, with this transition also connected to a liberalisation of employment rules for women.

Vision 2030 seeks to achieve these interconnected goals by boosting non-oil potential in areas such as tourism, manufacturing and ICT, and positioning the Kingdom as a regional and international economic destination for investment. The vast resources of the PIF in particular are seen as key to leveraging domestic and international investment in these sectors.

Forward March

Vision 2030 includes 13 Vision Realisation Programmes (VRPs), under which a string of reforms have already been put in place. These include expanding the stock market, the Saudi Exchange; reducing water and power subsidies; establishing the National Project Management Organisation to further control costs on public infrastructure projects; creating the National Development Fund (NDF) to support the growth of the Kingdom’s development funds and banks; and introducing new bankruptcy laws and taxes. Key tax changes include the 2018 introduction of a 5% value-added tax (VAT) – which was raised to 15% in 2020 – and excise taxes on sugary drinks and cigarettes. Both are seen as efforts to diversify government revenue streams.

Other transformations have included boosting investment under the National Investment Strategy, increasing women’s participation in the labour force, improving the ease of doing business, digitalising government services and bolstering home ownership. Major initial public offerings of stakes in government companies have also been undertaken, with Saudi Aramco listing in December 2019 – the most substantial yet, bringing in $29.4bn from shares in the government-owned oil organisation.

Further reforms are also in the pipeline, including steps towards a recodification of Saudi law, signalled by judicial reforms announced in 2021. Significant among these economic reforms is the Programme HQ, developed by MISA and the Royal Commission for Riyadh City to attract global firms to the capital.

Performance

In 2022 the continuing rise in global oil and gas prices has been a boon for Saudi Arabia’s exports and government revenue. March 2022 witnessed the Kingdom’s oil exports reach $30bn, or around $1bn per day – the highest level in six years. Top export destinations in the first three months of 2022 were China, accounting for 16.8% of the total at SR359.3bn ($95.7bn); and India, with 11.5% of the total and SR41.4bn ($11.3bn) worth of exports. Oil exports comprised some 78.3% worth of exports that quarter. Increased global oil prices – with Brent crude averaging as high as $112 per barrel in March 2022 – were coupled with higher levels of production, at 10.3m barrels per day (bpd). This helped to further boost exports, even as the impact of Russia’s invasion of Ukraine began to be felt throughout global markets.

Non-oil exports also performed well in the first quarter of 2022, up 29.4% y-o-y to SR60.1bn ($16bn). China was the top source of imports, accounting for 22.1% of the SR156.8bn ($41.8bn), followed by the US (8.9%). The first three months of 2022 thus saw a strong trade and budget surplus.

Oil revenue was behind much of the economy’s trajectory in the first three months of 2022 – crude production was up 20.7% y-o-y in the first quarter. While at a slower rate, the non-oil economy also expanded, by 4.2.%, over the same period. Major contributors to this growth were trade, restaurants and hotels (6.3%); transport, storage and communications (5.9%); and non-refining manufacturing (4.1%). These figures indicated a sustained recovery in areas that had experienced a downturn in the pandemic. Development in the non-oil sector was also reflected in the unemployment rate dropping to 10.1% in the first three months of 2022 from 11% at the close of 2021 and around 15.4% at the height of the pandemic in the second quarter of 2020.

Pandemic Response 

The positive performance seen in the first half of 2022 reflected the government’s quick response to the economic effects of the pandemic. Indeed, from 2014 until the start of 2020 the Saudi economy was faced with a long-lasting downturn in oil and gas prices. When oil prices were high in the 2009-15 period, GDP growth averaged 5.2% a year, a figure falling to 0.9% in 2016-19 on the back of lower oil prices. These numbers obscure a significant divergence between oil and non-oil GDP. In 2019, for example, while overall real GDP growth stood at 0.3%, non-oil growth was 3.3%. This reflected the structural changes already under way in line with the goals of Vision 2030 – changes that helped protect the Saudi economy when the pandemic pushed economies around the world into recessions in early 2020. Global oil prices then fell dramatically in the first months of the pandemic, from $66.63 a barrel for benchmark Brent crude in January 2020 to $21.04 that April. The economy overall shrunk by 4.1% that year, while non-oil GDP also was affected, shrinking by 2.3%, as trade, travel and other activities were impacted by lockdowns and other pandemic-related restrictions.

The Kingdom responded rapidly to the pandemic. A Supreme Crisis Committee was established, with free-of-charge Covid-19 testing and treatment – along with a vaccination programme in 2021 – helping keep the virus contained. On the economic front, in March 2020 SAMA lowered its policy rate twice, by a total of 125 basis points. At the same time, the central bank introduced deferred payments, loan guarantees, concessional financing and point-of-sales support schemes for small and medium-sized enterprises. Further, in measures supporting overall liquidity, it also injected around SR66bn ($17.6bn) into banking deposits.

At the same time, there was an additional budget allocation of SR74bn ($19.7bn) in programmes for health, the provision of basic needs, technology support to facilitate remote work and learning, measures to ease overcrowding in workers’ hostels and overseas aid. Furthermore, companies that retained Saudi workers could also get 60% of their wages paid by the national unemployment insurance fund, known as SANED. In total, around 13.9% of non-oil GDP supported these health, employment and fiscal support measures during the first year of the crisis.

Recovery

The second half of 2020 saw a partial re-opening of the economy, while global trade and oil prices began to pick up again. Non-oil industries led the way, as private consumption increased following the partial re-opening. While domestic demand shrank 7.7% in 2020, in the second half of the year it grew 5.9% compared to the first six months. This was reflected in non-oil GDP expansion, which was up 5.6% in the second half of 2020 compared to the first six months of the year. Meanwhile, real oil GDP dropped by 6.7% in 2020. Considering the importance of oil exports, this decline impacted the Kingdom’s current account, which went into a deficit of 2.8% of GDP in 2020.

The fiscal deficit also widened, from 4.5% of GDP in 2019 to 11.3% in 2020. This was financed by a combination of domestic and external borrowing, and from deposits from the central bank. Revenue also saw an increase from the VAT hike implemented in June 2020 to 15%, causing a temporary rise in inflation, with an average rate of 3.4% for the year.

In 2021 OPEC and major non-member producers – an alliance known as OPEC+ – decided to reduce output, which revived prices. Brent crude started 2021 at $53.60 per barrel. The Kingdom cut its output by 400,000 bpd in July of that year, while oil prices began to increase due to the global economic reopening and low reserves. By October 2020 Brent crude had reached $82 per barrel and had an annual average of $70.68 per barrel. Real oil GDP therefore saw 0.2% growth in 2021, along with accelerated growth in non-oil GDP, which rose 5.1% over the year. This latter figure meant that the non-oil sector saw a 3.2% growth since 2019 to the end of 2021.

Inflation was slightly lower in 2021, at 3.1%, while the budget deficit narrowed to 2.1% of GDP. Oil revenue accounted for much of this turnaround, but stronger tax receipts, thanks to the 2020 VAT hike and a return to business by many enterprises, witnessed an increase in tax revenue by 40%. A 2022 report from the World Bank also put the 2021 current account back in the black, with a surplus of 5.2%. This was partly helped by an easing of restrictions on pilgrimages and other travel and transport-related businesses and activities during the health crisis.

Supporting this improved performance was a March 2021 announcement by Crown Prince Mohammed bin Salman of a new investment drive, the Shareek (Partner) initiative. This programme aims to inject SR12trn ($3.2trn) into Saudi Arabia’s economy by 2030, with SR5trn ($1.3trn) coming from the Kingdom’s top-24 companies, and SR3trn ($799.8bn) coming from the PIF, with the remainder mobilised via a new national investment programme.

Monetary Matters

In May 2022 Mohammed Al Jadaan, the minister of finance, told international press that the Kingdom would take a fiscally conservative approach to its oil and gas returns, with new revenue being used to rebuild reserves. The profit would be held in the government’s current account until at least the end of the year, when it would likely be used to repay debts and fund domestic infrastructure projects being led by the PIF and the NDF. This withholding of fiscal stimulus came at a time of increased portfolio investment outflows, however, with these up from less than 1% of GDP in 2016 to around 7% at the end of 2021. It also combined with slowing deposit and money supply growth, and strong credit expansion in the Kingdom’s banks during the first half of 2022.

As a result, mid-2022 witnessed low liquidity – an unusual situation for a time of both high oil prices and a substantial current account surplus. Indeed, the banking sector has historically experienced long periods of high liquidity, with oil exports leading to large surpluses in the Kingdom’s current and financial accounts. Yet, after 2014 lower oil prices led to both an increase in capital outflow and a decrease in export revenue, with SAMA having to sell reserves in order to maintain the US dollar peg and liquidity.

The year 2022 saw fiscal austerity, capital outflow and credit growth lead to a decrease in banks’ liquidity levels. At the same time, by mid-2022 the spread in the three-month Saudi interbank offered rate (SAIBOR) widened to its greatest level since 2017 – by June 2022 SAIBOR was 200 basis points up on the start of the year. Credit growth in the private sector began to slow from 14.2% that April to 13.9% in May, its weakest level since July 2020. These factors spurred the government moving to loosen fiscal policy and/or divert more PIF investment activity into the domestic economy. As part of this response, in June 2022 SAMA deposited SR50bn ($13.3bn) in timed deposits at commercial banks.

In July of that year the government announced it had earmarked SR20bn ($5.3bn) – equivalent to 0.6% of GDP – to support low-income citizens via cash transfers and the stockpiling of household commodities. Some low-income citizens had been suffering from rising prices: even as inflation dropped, food inflation remained high, with the two measuring in at 2.2% and 4.2%, respectively, in May 2022. This has been primarily due to the disruption of global food supplies as a result of Russia’s invasion of Ukraine.

Further fiscal loosening may be expected to follow, as SAMA and the government try to maintain a healthy level of private sector credit growth, though structural changes that the Kingdom is working to put in place under Vision 2030 may impede this. With oil maintaining high prices into the first half of 2022, however, the Saudi economy continues to experience elevated export receipts and surpluses, and the Kingdom has been able to balance its fiscal and monetary policies from a position of strength.

Labour Laws

A healthy employment market is also an important pillar of the thriving economy targeted by Vision 2030, and several key structural reforms were undertaken in recent years with this in mind. With an annual population growth rate of 1.6% and a youthful population, providing jobs for young Saudis is seen as a priority. While in the past the public sector has been seen as the main employment route for many, Vision 2030 sees the private sector as the primary future engine of jobs growth.

This takes up a well-established policy – Saudiisation – and advances its goals of increasing local participation in the workforce. The policy sets quotas for the number of Saudi employees in each industry to help offset a traditional reliance on expatriate labour. Many roles are now also reserved for Saudi nationals, with the variety of jobs falling in this category being continuously expanded by the HRSD.

While Saudi nationals’ rate of economic participation was 40% when Vision 2030 was launched in 2016, by February 2022 the rate had increased to 50%, according to government figures, with a 60% target set for 2030. “For Saudi Arabia and its neighbours in the GCC, the adoption of more restrictive or open visa rules is a result of carefully balancing targets related to the nationalisation of the workforce with aspirations to attract international talent,” Abdulrahman bin Sulaiman Al Mohaimid, CEO of Abdal Human Resources, told OBG.

At the same time, the authorities are also working to bolster women’s participation in the labour force in line with Vision 2030. Women’s participation rate rose from 26% in the fourth quarter of 2019 to 34.1% in the third quarter of 2021, with certain sectors growing considerably. ICT, for example, saw the overall Saudi participation rate rise from 37% to 57% between 2017 and April 2022, while women’s participation in the sector went from 7% to 29%, Abdullah Al Swaha, the minister of communications and IT, told local press in July 2022.

Outlook

Saudi Arabia was able to successfully navigate the headwinds associated with the Covid-19 pandemic, positioning itself to leverage a period of high oil and gas prices to bolster revenue streams. In contrast to previous periods of high prices, the Kingdom is in the middle of a significant and ambitious structural reform programme that is likely to see higher levels of domestic non-oil investment, leading to long term, sustainable growth. The fiscal responsibility shown in recent years also bodes well, with the PIF in particular boosting areas of private sector weakness and non-oil competitive advantage.

While the pandemic is by no means over – and conflict and supply disruptions continue to impede international trade – Saudi Arabia is prepared for these unknowns. GDP growth is widely expected to be substantial in 2022 – around 7%, according to figures from the World Bank – with large trade and current account surpluses accumulating over the course of the year. While some fiscal loosening is likely to be seen in 2023 and ease liquidity issues, it will be undertaken with a well-managed and targeted approach, posing minimal risk to inflation and overall monetary discipline.

With these strong fundamentals, Saudi Arabia is expected to witness economic expansion in the coming years, especially as mega-projects are realised and investment in the country’s future sustained.