Saudi economy slowing down
Saudi Arabia experienced a significant shift in economic momentum, marked by a steep growth downgrade from the IMF on Tuesday. This downturn is quite noteworthy, especially considering that Saudi Arabia held the title of the fastest-growing economy in the G-20 last year.
The kingdom’s economic surge in the past was attributed to a revenue windfall triggered by Russia’s invasion of Ukraine, leading to higher crude prices. Taking advantage of the situation, Saudi Arabia rallied fellow oil producers in OPEC and an alliance led by Russia to curtail global supplies, hoping to bolster prices.
However, the current situation is a stark departure from the impressive economic performance witnessed in 2022. During that year, the Saudi economy outpaced other G20 countries, reaching a historic milestone with its GDP surpassing $1 trillion for the first time ever, as mentioned in the Ministry of Economy and Planning’s (MEP) State of the Saudi Economy Report 2022.
This comprehensive report covered various economic aspects, including real gross domestic product, monetary policy, financial measures, economic diversification, financial markets, households, investment and trade, as well as job markets. Additionally, the report shed light on Saudi Arabia’s overarching strategy for economic growth, emphasizing financial resilience, diversification, sustainability, empowerment of the private sector, and investment attractiveness, all aligned with the goals of Saudi Vision 2030.
The ambitious economic reform program launched under Saudi Vision 2030 played a significant role in enhancing the economy’s resilience through diversification and reducing reliance on oil revenues. The transformation blueprint aimed to convert the Saudi economy into a diversified and sustainable one, boosting productivity and increasing the private sector’s contribution to economic prosperity, in line with the objectives set by Saudi Vision 2030.
Since the inception of Saudi Vision 2030, the kingdom has successfully implemented various programs and structural reforms. Despite the oil sector’s continued contribution to financing the budget, Saudi Arabia managed to augment its non-oil GDP share.
Despite this, several factors have shown that Saudi’s economy is still dependent on oil to a large extent and can get affected by the shifts related to it.
What is behind this shift
While the IMF upgraded Russia’s economic growth estimate, it downgraded Saudi Arabia’s growth outlook for 2023 by 1.2 percentage points compared to the April forecast. Russia’s growth projection was revised upward by 0.8 percentage point to 1.5%, indicating a strong first half of the year supported by retail trade, construction, and industrial production, driven by a substantial fiscal stimulus.
The situation in Saudi Arabia is different as it is shouldering a significant burden in the OPEC+ cuts. Additionally, its voluntary unilateral production cut of 1 million barrels per day (bpd) is putting further strain on its economic growth prospects, given the substantial reliance on oil in its GDP and export revenues.
Lower exports and declining oil prices are already impacting Saudi Arabia’s oil export revenues, which traditionally account for around 80% of total export revenues. In May 2023, oil revenues dropped by 37.7% year over year to $19.2 billion (72 billion Saudi riyals), in contrast to $30.8 billion (115.5 billion riyals) in May 2022 when oil prices were higher.
This year in May, Brent oil prices averaged around $75 a barrel, leading to reduced Saudi oil exports and production as part of the OPEC+ deal, resulting in a 20-month low for Saudi oil revenues. The share of oil exports in the value of total exports also decreased from 80.8% in May 2022 to 74.1% in May 2023, as per official Saudi data.
Consequently, the IMF made the most substantial downgrade to its forecast for the Saudi economy this year compared to other major developed and developing economies. Saudi Arabia’s economy is now expected to grow by 1.9% this year, down by 1.2 percentage points from the IMF’s previous estimate in April. The forecast for next year’s economic growth was also downgraded by 0.3 percentage points from the April assessment, with expectations at 2.8%.
The IMF attributes the downgrade for Saudi Arabia in 2023 to production cuts announced in April and June as part of the OPEC+ agreement. However, it notes that strong non-oil GDP growth is still supported by private investments, including the implementation of “giga-projects.”
Tensions have risen between Saudi Arabia and Russia due to Russia’s unwillingness to curb exports, but both countries have tried to downplay rumors of a rift. Despite this, some experts point out that Saudi Arabia is bearing a heavier burden in the cooperation between the two countries.
In contrast, Russia’s growth rate has improved in the same IMF report by 0.8 percentage points, thanks to the government’s “large fiscal stimulus,” even amidst the ongoing war in Ukraine.
Is this a bad sign for Vision 2030?
In the future, Saudi Arabia faces a significant domestic concern regarding the impact of the growth decline on Crown Prince Mohammed Bin Salman’s economic diversification agenda. According to the IMF, maintaining Brent crude prices above $80 per barrel is crucial for the kingdom to achieve a balanced budget and invest in ambitious projects like Neom and Red Sea island developments, aiming to reduce its reliance on fossil fuels. As of Wednesday, Brent crude was being traded at $82.79 per barrel.
However, there are some positive signs of diversification that show that this negative trend could be reversed in the next years. According to data from the World Tourism Organization (WTO) on Wednesday, Saudi Arabia has become the world’s second-fastest-growing tourism destination. In the first quarter of 2023, the kingdom saw international tourism surpass pre-pandemic levels by 64%, with approximately 7.8 million tourists visiting during this period.
These developments are in line with Saudi Arabia’s Vision 2030 economic diversification initiative, which aims to increase foreign direct investment (FDI) contribution to the country’s gross domestic product (GDP) from 3.8% in 2016 to 5.7% by 2030. In Q1 of 2023, the kingdom attracted SR8.1 billion ($2.1 billion) in FDI, marking a 10.2% year-on-year growth.
Furthermore, the country’s GDP grew by 3.8% in the first quarter compared to the same period last year. Non-oil activities saw an increase of 5.4% year on year, while the oil sector experienced a growth of 1.4%.
As part of its commitment to embracing advanced technologies, the Saudi government has established an international center for research and ethics in artificial intelligence (AI). This strategic initiative aims to expedite the advancement of sophisticated technologies, contributing significantly to the Saudi economy. According to a report from PwC, AI is expected to contribute $135 billion to the Saudi economy by 2030, making the kingdom the biggest beneficiary of technology in the Middle East. As Saudi Arabia pushes for the adoption of digitization and future technologies, PwC predicts AI’s contribution to the GDP to rise to 12.4% in 2030.
Vision 2030 outlines several promising sectors, including renewable energy, industrial equipment manufacturing, digital economy, mining, and tourism, which the government plans to focus on to achieve economic diversification. The Public Investment Fund, Saudi Arabia’s oil-financed sovereign wealth fund with estimated total assets of $620 billion, provides funding for investments within the Vision 2030 initiative.
However, for the success of this economic diversification plan, it is essential to establish a stable and effective business environment that supports the growth of the private sector and attracts foreign investment. Riyadh has already undertaken important reforms related to business regulations, economic governance, and the labor market, but further efforts are required to solidify conditions that foster private enterprise and make Saudi Arabia a regional business hub comparable to UAE and Qatar.