Economy, Finance and Trade Saudi Arabia: Major Reforms Should Help Diversify the Economy

Euromonitor International’s Saudi Arabia Economy, Finance and Trade Country Briefing focuses on the largest economy in the Middle East and Africa (in US$ terms) that remains highly dependent on revenues from hydrocarbon exports. For the first time since 2009, Saudi Arabia experienced a general government net budget deficit of 3.4% of GDP in 2014 that surged to 16.9% (the worst ever) in 2016, owing to dwindling oil prices. A protracted era of low oil prices has made diversification essential for the government. Thus, in mid-2016, the government launched two key programmes to achieve ‘Saudi Arabia’s Vision 2030’, diversify the economy and boost public revenue from non-hydrocarbon sectors.

Saudi Arabia’s economic slowdown to continue in 2017, owing to lower oil prices that have adversely impacted public spending and revenues:

Subdued oil prices, coupled with relatively lower external demand and the deal made by OPEC (Organization of the Petroleum Exporting Countries) to cut oil output (by 1.2 million barrels a day) in November 2016 greatly impacted Saudi Arabia’s economy, bringing down both consumption and investment levels. Annual real GDP growth plunged from 10.0% in 2011 to only 1.4% in 2016, the lowest in 14 years;

The country remains highly reliant on revenues from hydrocarbon exports, as mining and quarrying accounted for 21.9% of gross value added (GVA) in 2016. However, the proportion stood far lower than 47.2% in 2006, thanks to a prolonged period of low oil prices that has made diversification vital for the government. According to trade sources, in December 2016, the government announced plans to offer funds worth SAR200 billion over 2017-2020 to the private sector for the expansion of the non-oil sector;

Saudi Arabia is very rich in hydrocarbon resources, and according to BP’s Statistical Review of World Energy, the country recorded the second largest proven oil reserves globally in 2016. ‘Mineral Products’ accounted for 76.0% of total goods exports in 2016, pointing towards the external sector’s huge reliance on oil exports, leaving Saudi Arabia highly vulnerable to a fall in oil prices, which would have a major impact on its trade balance, as well as public finances;

FDI inflows into Saudi Arabia fell by 60.5% in real terms over 2011-2016, due to heightened political and economic uncertainty, amidst low oil prices. While diversification and privatisation efforts could attract FDI, the new expat levy that came into effect in July 2017, could deter investment due to higher costs associated with hiring foreign workers;

The key risk facing Saudi Arabia’s public finances relates to trends in global oil prices, owing to the extremely large portion of oil-related revenue out of total government revenue. Nonetheless, the country’s high foreign exchange reserves and low debt levels would allow it to withstand an extended period of low oil prices (even if public spending remains high), although this situation would not be sustainable in the long term.

Reducing budget deficit and boosting non-oil revenue remain key government objectives

The Saudi government’s high budget deficit, owing to generous subsidy programmes and the absence of personal income tax provision, threatens the country’s fiscal sustainability. Thus, in 2016, the government launched the Fiscal Balance Program, that aims to achieve a budget balance by 2020, via boosting non-oil revenues, eliminating unwanted subsidies, and encouraging privatisation (including plans to sell off almost 5.0% of its national oil giant, Aramco, in 2018). On the other hand, the ‘National Transformation Program 2020’, worth SAR296 billion (US$78.9 billion), launched across 24 government bodies in June 2016 (with plans to escalate its coverage annually), intends to increase the country’s non-hydrocarbon proceeds by more than three-fold from SAR164 billion (US$43.6 billion) to SAR530 billion (US$141 billion) by 2020.

Effective implementation of these two key programmes, which are a part of ‘Saudi Arabia’s Vision 2030’, would help increase growth of the private sector, particularly the non-oil sector, and reduce unwanted expenses; thereby helping the nation restore its fiscal and macroeconomic stability.