Saudi Arabia: Paving the way for the future
Now Reading
Saudi Arabia: Paving the way for the future

Saudi Arabia: Paving the way for the future

With a young leadership at the helm, the GCC’s largest economy has embarked on a journey of growth, diversification and alliances

Gulf Business

Saudi Arabia is charting a new growth course.

Powered in large part by an intent to embolden its non-oil-based economy, the kingdom has marked sustainability, tourism and diversification as key priorities, subsequently unveiling reforms, projects and alliances to set itself on a formidable trajectory of progress.

The year 2019 ended on a high note for Saudi Arabia in the wake of the historic IPO of the world’s biggest oil producer Saudi Aramco that helped raise $29.4bn. Last year, factors such as oil vaulting into negative territory for the first time in history, and the global health crisis caused by the Covid-19 pandemic which resulted in social and economic restrictions did challenge the country’s growth, but the kingdom continued with its mitigating efforts and also embarked on an investment spree.

“The Saudi economy entered the Covid-19 pandemic with strong policy buffers and reform momentum. The authorities responded quickly and decisively to the crisis with a range of fiscal, financial, and employment support programmes that helped cushion the impact of the pandemic on the private sector. As the lockdown eased and the economy recovered in the second half of 2020, the government withdrew or increasingly targeted the temporary fiscal and employment support,” the International Monetary Fund (IMF) said in a statement, after its 2021 Article IV consultation with Saudi Arabia.

“The economy is recovering well. The non-oil recovery that started in the second half of 2020 is expected to continue with non-oil growth projected at 4.3 per cent this year [2021]. While central government fiscal consolidation will be a drag on growth, it is expected to be offset by higher Public Investment Fund investment and strong private demand. Real oil GDP growth is projected at -0.4 per cent in 2021 as production is assumed to remain in line with the OPEC+ agreement and overall real GDP is expected to grow by 2.4 per cent. Over the medium-term, growth is expected to accelerate as the economic reform agenda begins to pay dividends.”

It added: “Inflation is expected at 3.2 per cent in 2021 (annual average). Credit to the private sector has been very strong, boosted by programmes to encourage mortgage and SME lending. Banks remain liquid, well capitalised, and well-regulated and supervised.”

Saudi began the year hosting the 41st GCC Summit at its ancient city of AlUla, where the kingdom – along with the UAE, Bahrain, and Egypt – signed an agreement to reset ties with Qatar, ending a three-year regional row. The kingdom’s sovereign wealth fund Public Investment Fund (PIF) also launched its five-year strategy in January, including its Vision Realisation Programme (VRP) 2021-2025. The fund said that it would spend a minimum of $40bn annually in domestic projects investments, contribute $320bn to non-oil GDP cumulatively through its portfolio companies, as well as increase assets under management to over $1.07 trillion. It also plans to generate 1.8 million direct and indirect jobs by the end of 2025.

Oil also recorded a strong recovery this year with Brent futures nearing $78 in early July, despite a downward spiral in 2020. Global oil demand is now seen rising by 5.3 million barrels per day (bpd) on average this year to reach 96.2 million bpd, and by a further 3.2 million bpd in 2022, the International Energy Agency said in its August 2021 oil market report.

“Global oil supply is ramping up fast. In July, producers boosted output by 1.7 million bpd, as Saudi Arabia ended voluntary curbs and the North Sea bounced back from maintenance. Supply is expected to rise further after the producer bloc agreed a deal on July 18 that aims to raise production by 400,000 bpd a month from August  until the remaining cuts are phased out.”

Saudi Arabia has launched a series of directives running the gamut of the economic ecosystem to enhance competitiveness and local capabilities. In an attempt to better regulate the local labour market, Saudi introduced revised directives governing foreign labour. The new initiative is aimed at regulating the exit and re-entry visa issuance process, granting foreign workers added flexibility. The kingdom also trebled its value-added tax (VAT), initially introduced in 2018, from 5 to 15 per cent, effective July 1, 2020, to shore up revenues.

Ravi Bhatia, director, Sovereign Ratings, S&P Global Ratings notes that the VAT increase supported fiscal receipts during a difficult time when oil prices were low. “They are also continuing to support the structural shift toward increasing non-oil revenues and reduced reliance on oil. The VAT increase did impact inflation slightly, but the effects should be temporary.”

Sachin Kerur, head of Middle East at Reed Smith, builds on this: “Saudi Arabia’s  decision to raise value-added tax to 15 per cent was a bold decision. As it works towards Vision 2030, the kingdom has made no secret of its desire to diversify away from oil and increase non-oil income. Raising the VAT was just one of the means to achieve this.

“The move to increase VAT will of course result in increased consumer prices and therefore may present short term challenges for some individuals and businesses. We have seen from Q1 data that the government has lowered the fiscal deficit, both by raising VAT and lowering expenditure. This is a positive indicator and reinforces the kingdom’s long-term strategy in maintaining fiscal responsibility in a post-Covid world and reaffirming a commitment to its Vision 2030.”

The Saudi government also announced its intent to cease contracting with companies and commercial institutions which have regional headquarters outside the kingdom to further localise commercial operations. The move, which will come into effect from January 1, 2024, aims to create more jobs, limit economic leakage and increase spending efficiency.

Kerur at Reed Smith opines that on the basis that this will not come into effect until 2024, there is a lot that may change between now and then. “What should be clear is that companies which are committed to the region will have the insights and will forward plan to ensure they can properly cover the whole region, whatever the eventual corporate structuring that is required.”

Amid economic initiatives, the GCC’s largest economy is also seeking to build a sustainable future as it looks to address environmental concerns. Aiming to become the world’s ‘largest supplier of hydrogen’ as well as being cognisant of the importance of renewables, Saudi is exploring opportunities and earmarking considerable investment to pursue sustainable forms of energy. It aims to develop the world’s largest green hydrogen project after an agreement was signed between Air Products, ACWA Power and NEOM last year. The $5bn green hydrogen-based ammonia production facility will be located in NEOM and will produce green ammonia for export to global markets. The world’s first blue ammonia shipment was also dispatched from Saudi Arabia to Japan in 2020.

Additionally, the Dumat Al Jandal wind farm recently produced its first carbon-free megawatt-hours of energy. Located in the Al-Jouf region, the wind power project is connected to the country’s electricity transmission grid and the farm will – upon completion – supply energy to power up to 70,000 Saudi homes, saving 988,000 tonnes of CO2 emissions per year. ACWA Power also announced the financial close for the 1,500MW Sudair Solar plant last month, which, with an investment value of SAR3.4bn, is set to become one of the world’s largest single-contracted solar PV plants.

“The kingdom is committed to building a more efficient and lower-carbon energy future, having announced goals to generate 50 per cent of its power from renewables by 2030, with the remainder fuelled by gas, displacing oil currently used for power generation in the country,” notes Hisham Al Bahkali, president of GE Saudi Arabia and Bahrain. “We can collaborate to further decarbonisation efforts by improving the efficiency of existing assets, bringing technologies with record-setting efficiency levels to the country, providing renewable power generation equipment, digital solutions, and more.”

In March, Saudi Crown Prince Mohammed bin Salman announced the Saudi and Middle East green initiatives with local targets including the planting of 10 billion trees across Saudi Arabia, reducing carbon emissions by more than 4 per cent of global contributions, raising protected areas to more than 30 per cent of the total land area and achieving 50 per cent renewables in the kingdom’s energy mix by 2030.

Meanwhile the Middle East Green Initiative will see the kingdom collaborate with other regional countries to plant an additional 40 billion trees. The project will restore an area equivalent to 200 million hectares of degraded land, representing 5 per cent of the global target of planting one trillion trees and reducing 2.5 per cent of global carbon levels.

“As a leading global oil producer, the kingdom fully recognises its share of responsibility in advancing the fight against the climate crisis. Just as the kingdom underpinned energy markets during the oil and gas era, it is going to become a global leader in forging a greener world,” Prince Mohammed said at the time.

High among Saudi’s priorities to tip the scales firmly toward a diversified economy is the revamp of the country’s tourism landscape. The intent to attract broader foreign interest was materialised when Saudi rolled out its international tourism e-visa in September 2019 following a massive global marketing campaign. The country issued more than 400,000 tourist visas by March 2020, when it closed its borders due to the pandemic. The kingdom is also focusing on building its infrastructure to support its tourism ambitions. Among the high-profile development projects touted to change the tourism landscape are the Red Sea Project, the $500bn NEOM, the $8bn Qiddiya entertainment zone and Amaala.

“In Saudi Arabia, tourism represents a relatively small proportion of the overall economy. Given the desire to diversify the economy, tourism makes a lot of sense. Today, we have something like 3-3.4 per cent contribution [of tourism] towards GDP, which is largely based on religious tourism,” John Pagano, CEO of The Red Sea Development Company and Amaala told Gulf Business earlier this year.

Other tourism projects include the Soudah Development near the country’s border with Yemen, as well as the AlUla project which is projected to contribute SAR120bn to the kingdom’s GDP. “Saudi Arabia has been a tourist destination for a long time with many flocking to the kingdom for Hajj and Umrah. The kingdom has recently started to implement exciting plans to develop its tourism sector to attract a more diverse spread of foreign visitors with the development of a number of new cultural and heritage sites as well as major entertainment venues. And just recently, the Crown Prince has announced plans to create a new national airline and committed to invest over $147bn in transportation infrastructure over the next nine years,” says Kerur.

Similar to the other GCC states, Saudi Arabia has also seen a rise in its entrepreneurial ecosystem with the kingdom seeing a strong acceleration in startup funding. According to MAGNiTT’s H1 2021 Saudi Arabia Venture Capital Report, the country’s venture capital ecosystem grew by 65 per cent year-on-year to reach its highest half-yearly funding in H1 2021, while early-stage funding made up 82 per cent of the 54 transactions closed in the first half of the year.

Startups headquartered in the kingdom closed one in every five transactions registered in the MENA region, with fintech startups specifically raising 1,700 per cent more capital year-on-year, the report added.

Initiatives and developments across the business terrain also bore fruit – according to Saudi Arabia’s Ministry of Investment, the kingdom issued 478 new foreign investor licences during Q1 2021, the biggest number in a single quarter since records began in 2005. The manufacturing sector secured 114 new licences, while retail and e-commerce, and construction garnered 78 licences respectively. According to UNCTAD’s World Investment Report 2021, FDI in Saudi increased by 20 per cent year-on-year to reach $5.5bn in 2020, with investments concentrated in financial services, retail, e-commerce, and ICT.

With key goals in sight and efforts in place to boost local capabilities, bolster the entrepreneurial landscape and enhance competitiveness, Saudi Arabia is riding into the future at an encouraging pace.

As Bhatia notes: “The growth prospects are improving, as global oil prices (and Saudi production volumes) are stronger this year and increasing vaccination rates will also support the non-oil economy. We expect this momentum to continue.”

You might also like


Scroll To Top