Saudi Arabia Economic Overview
Overview Saudi Arabia enjoys an eminent position as the largest economy in the MENA region and 19th largest in the world. Strategically positioned at the heart of the Arabian Peninsula, it not only holds the largest proven oil reserves, but is also home to two of Islam s holiest sites and a thriving economy. Facts GDP: $665.5 billion (2015 est.) GDP per capita: $54,600 (2015) Inflation: 2.3% (2015) GDP growth rate: 3.4% (2015 est.) Total population: 27.75 million (July 2015) Saudi population: 20.7 million Unemployment rate: 11.4% (2015 est.) Member of the World Trade Organization and G20 Source: https://www.cia.gov/library/publications/the-world-factbook/geos/sa.html 2
Building a Modern Economy The Kingdom has undergone a remarkable transformation since its unification in 1932. It has evolved from a subsistence agricultural and commercial society into a global economic power, made possible by the discovery of oil in 1938. Oil was discovered in the Eastern Province city of Dhahran, after King Abdul-Aziz signed an oil concession with Standard Oil of California. This U.S.-Saudi partnership developed into Saudi Aramco- the largest oil company in the world, and laid the foundation for a longstanding U.S.-Saudi relationship. The oil industry began to take off in the 1960s. Steady oil exports provided the funds needed to build a modern infrastructure of roads, hospitals, modern schools, airports and seaports. However, it was not until the 1970s- when the Arab oil embargo and regional instability raised the price of oil dramatically, that Saudi emerged as a political and economic power. The Kingdom experienced fast-paced economic growth, a massive accumulation of wealth and rapid urbanization. Over the course of the decade, GDP grew by 10 percent per year. The massive inflow of revenues allowed the Kingdom to increase its import level, spending heavily on defense and infrastructure, and supplying large amounts of foreign aid. 3
Oil An oil-based economy, Saudi Arabia possesses roughly 18% of the world s proven crude oil reserves (266.7 million barrels). It ranks as the world s largest producer and exporter of petroleum (11.6 million barrels per day) and plays a leading role as a member of the Organization of Petroleum Exporting Countries (OPEC). While the private, non-oil sector s contribution to GDP has increased over the past decade, the oil and gas sector accounts for a majority of government revenues (50% of GDP; 85% of export earnings in 2015). While this has contributed significantly to the Kingdom s growth, such heavy dependence leaves the country vulnerable to supply and demand disruptions and price fluctuations (Graph 1). Figure 1: Saudi Arabia Composition of Nominal GDP. Source: Saudi Arabian Monetary Authority (SAMA) 4
Trade Saudi Arabia ranks as the 19th largest exporter and the 20th largest import market in the world, ending 2015 with a recorded trade surplus of $21 billion dollars (Trading Economics). Top exports include crude petroleum, petrochemicals and plastics but represent all economic sectors. Exports of non-oil products continue to grow (averaging around $6 billion dollars per year). A strong and growing consumer market has opened the doors for increased imports of foreign goods and services. In 2014, imports amounted to $152 billion, up 43% since 2010 and range from imports range from aircraft equipment to pharmaceuticals. Trade has expanded tremendously in the Kingdom following bilateral trade agreements and the formation of free-trade zones with neighboring GCC countries. China, India, Germany, South Korea and the United Arab Emirates are among Saudi Arabia s leading trading partners however the U.S. tops the list with trade totaling $71 billion in 2013 (Office of US Trade Representative). The Kingdom acceded to the World Trade Organization in 2005 and has since enjoyed increased commercial activity on the global market. The government and chambers of commerce encourage the private sector to undertake commercial ventures by offering long-term interest free loans and other incentives. Today there are over 580,000 licensed commercial enterprises with an estimated joint value of $54 billion. 5
National Development Plans The government recognized the importance of diversifying the economy as early as 1970, when the Ministry of Economy and Planning embarked on the first of a series of five-year development plans. The plans were aimed at expanding the country s physical and social infrastructure as well as its non-oil sectors. This included the construction of bridges, dams, an extensive pipeline network and communications systems. Substantial funds were spent on the building of more hospitals, schools and universities as well as vocational training programs. As the infrastructure took shape, the government launched a major effort to expand the agricultural and industrial base, in addition to other sectors. The major industrial towns of Yanbu and Jubail were designed by the government in partnership with the private sector and international corporations to accommodate heavy industries such as petrochemical projects, iron and steel plants and oil refineries. The government introduced structural reforms by the 1990s, encouraging privatization, joint ventures and the liberalization of trade. Commercial laws were revised, but the agenda continues with an increased focus on diversification and privatization. In a matter of decades, Saudi Arabia transformed itself from a desert kingdom populated by nomadic tribes to a modern economic entity which controls over a quarter of the world s oil. John Mazor, Worldmark Encyclopedia of National Economies 6
Economic Diversification and Investment In 2015, Saudi entered its tenth development plan. Efforts to privatize, diversify and transform into a knowledge-based economy have opened up a wealth of opportunities for foreign direct investment. According to the United Nations Conference on Trade and Development (UNCTAD), diversification efforts have attracted over $147 billion dollars over the past two decades. The introduction of the Foreign Investment Law in 2000 also increased incentives for FDI, including the right to own property and real estate. Many investments have gone towards large-scale solar projects in a serious effort to support the country s transition to renewable energy. Other investments have gone towards the construction of projects such as the King Abdullah Economic City, a new financial district in Riyadh and new metro transit lines, which are expected to contribute over $150 billion to the country s GDP and create 1.3 million jobs by 2020. Recognizing Saudi youth as its number one asset, the Kingdom has prioritized education and research and development initiatives, launching the King Abdullah University of Science and Technology in 2005 while also sponsoring over 200,000 students worldwide through the King Abdullah Scholarship Program. Investing in education is vital for the Kingdom, whose youth (aged 25 and below) make up over 60% of the population. According to the Saudi Arabian General Investment Authority (SAGIA), Saudi dedicated $57 billion to education and training in 2015, up 3% from the previous year. 7
GDP Growth As a result of the Kingdom s long-term investment and diversification plans, the share of non-oil output in GDP has steadily increased and will continue to post a healthy growth at around 3.5%. According to Jadwa Investments, the non-oil private sector will remain the driving force behind the country s economic growth, which continues to dampen in response to the severe drops in oil prices. The World Bank expects economic growth to average 2.4% in 2016, down from 3.5% in 2014 (Graph 2). Construction, transportation and consumerdriven sectors are leading economic growth in the private sector, which now accounts for 40% of GDP (Saudi Central Department of Statistics and Information). This is expected to continue growing as Saudi opens the doors to more foreign investments. Figure 2: Saudi Arabia GDP Growth (2016 forecast) based on World Bank Data. 8
Challenges and Prospects Excess supply of oil on the market combined with slowing demand (think China s economic slowdown) caused oil prices to drop by over 70% in the last 18 months (Graph 3). While this 12- year low resulted in Saudi Arabia entering a $98 billion budget deficit in 2015, the government has committed to policy reforms and budget cuts. The Kingdom started 2016 by cutting energy subsidies, which, according to the IMF, accounted for 10% of GDP- roughly $60 billion. While the cuts will ease pressure on public debt, they also aim to reduce inefficient domestic energy consumption, which at the current rate, jeopardize Saudi s role as a market leader. Energy efficiency is a national responsibility, and unlike the Kingdom s long-term plans to diversify its energy mix, it provides an immediate impact that is both vital for a growing population and sustainable. In addition to the abovementioned subsidy cuts, the government has taken prudent steps to encourage foreign investment. The Tadawul Saudi Stock Exchange- the largest and most liquid market in the region (valued at around $500 billion) opened up to qualifying foreign investors in June 2015. Furthermore, SAGIA announced its plans to ease restrictions on foreign direct investors, allowing full foreign ownership of businesses for the first time. Opening up to foreign investment will not only promote growth and competitiveness in the private sector, but will also create jobs for a young population. Such a large youth brings with it enormous talent and innovative potential which the Kingdom has nurtured through it s education reforms and Saudization efforts of the workforce. But if the Kingdom is to raise output and productivity, it must ensure its investments and policies translate into employment for the young. 9
Figure 3: West Texas Intermediate (WTI) prices dropped from $103 per barrel in Feb 2014 to $32 per barrel in Jan 2016. Source: Energy Information Administration (EIA) Summary Despite its continued dependence on oil revenues, Saudi Arabia has taken a cautious approach to reduce the impact of lower revenues on the local economy while also creating significant investment opportunities through diversification and privatization reforms. While it continues spending on vital development projects, the Saudi economy remains robust and strong and is poised to sustain steady growth as it enters a new economic climate. 10
Written by: Nourah Aleidi Edited by: Nabaa Hashmi Work Cited "Crude Oil Price History Chart.» Energy Information Administration, Web. <http://www. macrotrends.net/1369/crude-oil-price-history-chart> "GDP Growth (annual %). Saudi Arabia» World Bank, Web. <http://data.worldbank.org/ indicator/ny.gdp.mktp.kd.zg> "Saudi Arabian Monetary Agency (SAMA)." The Saudi Arabian Economy page 58. 2015. Web. <http://www.sama.gov.sa/en-us/economicreports/annualreport/5600_r_annual_en_51_ Apx.pdf> 1717 Pennsylvania Avenue NW Suite 1025 Washington DC Tel : 1 202 559 9250 11
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