One of the few countries to remain largely unaffected by the global financial downturn, Saudi Arabia's economy is growing at a pace and, despite its expansionary fiscal policy, it continues to post a budgetary surplus. It has now started to put this capital to work in tackling pressing social issues, such as its high unemployment rate and housing shortage.

While many countries are still suffering from one of the worst economic slowdowns in history, Saudi Arabia remains one of a handful of countries where the impact of the global financial crisis has barely been felt. In 2012, it continued to grow above the average pre-crisis level of 3%, with real gross domestic product (GDP) registering 6.8% annual growth. And the country’s hard-fought efforts to diversify the economy are bearing fruit, with the non-oil sector recording higher growth of 7.2% compared with the oil sector's 5.5%.  

The non-oil private sector has played a pivotal role in driving the country's economy forward, as reflected by the fact that it outpaced all other sectors to record the highest growth of 7.5%.   

Robust growth

In stark contrast to the austerity measures being imposed by many European governments, Saudi Arabia is pursuing an expansionary fiscal policy, and throughout this still continues to post a fiscal surplus. In 2012, the fiscal balance remained in surplus for the third consecutive year, edging to SR386.5bn ($103bn), equivalent to roughly 14% of GDP.  

As the largest economy in the Middle East, Saudi Arabia is forecast to continue its robust growth, at 5.1% in 2013, according to the International Monetary Fund (IMF). Among G-20 economies, this places Saudi second only to China in terms of growth.

“Since the onset of the global financial crisis in 2007, Saudi Arabia adopted a fiscal expansionary policy to offset the impacts of the downturn. At the G-20 meetings in 2008, the country announced the largest fiscal package as a percentage of GDP of all the countries,” says Fahad Alturki, senior economist at Riyadh-headquartered Jadwa Investment. “The country has two cushions that it benefits from – a low debt-to-GDP ratio and its accumulation of foreign exchange reserves. And we continue to build on these two cushions.”

Saudi Arabia’s fiscal surplus increased in 2011 due to the surge in its oil revenues, which reached $81.6bn, or roughly 14% of its GDP.

Fuelled by high oil windfalls, Saudi Arabia has continued to put in place large government expenditure programmes, which in turn have ensured that the country's diversification efforts have gathered impressive pace over the past decade. A 20% increase in government spending saw real GDP growth reach 7.1% in 2011 and the country witness 8% growth in its non-oil economy, the highest since 1981, according to the IMF.

Industrial action

Particular attention is also being paid to the industrial sector. In April 2012, the government doubled the capital of the Saudi Industrial Development Fund (SIDF) to SR40bn from SR20bn in an effort to develop the country's industrial sector. SIDF is a government-affiliated fund that grants medium and long-term loans for private industrial projects.  

“The fund started with capital of SR500m. This was raised to SR20bn in 2005, and last year King Abdullah approved doubling it to SR40bn,” says Abdulrahman Al-Hamidy, vice-governor of the Saudi Arabian Monetary Agency, the Saudi central bank. “And 2012 was a record year in terms of loans being extended by the industrial fund.” 

SIDF has issued loans worth SR95bn since it was first set up in 1974 to support industrial services projects, as well as raising the amount of financing available to projects in less developed areas of the country. For example, it is currently helping to finance the second phase of the Saudi Arabian Mining Company's (Maaden's) $10.8bn integrated smelter and rolling mill complex.

Loosening the purse strings

At the end of 2012, the Saudi Arabian government announced the largest budget in the country’s history and the highest in any Arab country. It plans to spend SR820bn in 2013, a 19% increase on the SR690bn that was budgeted for 2012. With revenues forecast at SR829bn, this translates to a budget surplus of SR9bn.

Capital spending totals SR285bn in the 2013 budget, with a large proportion of it going towards contract awards on projects such as ports, railways and water plants. This represents a 36% increase on the total value of projects awarded in 2011 – generating the largest number of opportunities out of all Middle Eastern countries for contractors, consultants and vendors.

“The government is adamant in pursuing expansionary policy to diversify the economy and ensure sustainable growth,” says Said Al-Shaikh, chief economist at the National Commercial Bank (NCB), the country’s largest bank by asset size, in his 2013 budget report. “The 2013 budget continues to reflect the government’s focus on long-term sustainable development that requires investment in infrastructure, education, healthcare, and social and economic development projects. As expected, education and training continued to be central to the aforementioned strategy, receiving 25% of total allocations, with health accounting for 12% of the budget.”  

The rise in geopolitical risk associated with the Arab Spring uprisings has prompted the country to place social spending at the top of its fiscal agenda in order to address the pressing issues of unemployment and shortages in affordable housing.

Uprising concerns

Saudi Arabia's domestic expenses in 2011 increased to $129bn, roughly half of its oil revenues, in order to appease large swathes of its 27 million populace. While Saudi’s uprisings did not gain anywhere near the same magnitude as those that shook other parts of the Arab world – most notably Egypt, Libya, Tunisia and Syria – protests did take place.

The country’s Shi’ite minority staged a series of protests in the oil-producing eastern province, while hundreds of university graduates and teachers also took to the streets in Riyadh and Jeddah to demand more jobs be created with better wages. They vowed to continue demonstrating until the government produced these jobs.

In response, King Abdullah unveiled $37bn in benefits for citizens, including a 15% pay rise for state employees, as well as extra funds for housing, studying abroad and social security. This included a subsidies programme called Hafiz, which pays unemployed Saudis SR2000 a month for a maximum of one year. In September 2012, the Saudi labour ministry revealed that 1.3 million Saudi nationals were receiving unemployment benefits.

Unemployment worries

Unemployment in Saudi Arabia stands at an average 12.1%, but is concentrated among the young demographic bulge, exceeding 20% for Saudi nationals that fall within the two age brackets of 20 to 24 and 25 to 29.

In August 2011, the government introduced the Nitaqat Saudisation programme, which instructs firms in the country to employ a higher percentage of Saudi nationals. It uses a new system of quotas for Saudi versus foreign employees, set according to the size and sector of each company. Businesses that fail to meet their targets suffer financial penalties, while those that hit them are rewarded with fiscal incentives.

It was estimated in 2012 that unemployment cost the Saudi government SR5.5bn a year, with government figures showing that the labour force participation rate (the ratio between the number of people in employment and the country's labour force) stood at 36.4% – roughly half the global average. 

A decades-long population boom means the government can no longer afford to reduce unemployment by creating public sector jobs. Currently, about 90% of working Saudis are employed by the government, while 90% of jobs in private companies are filled by about 8 million foreigners.

Boost to education

Fully aware that education is integral to combating unemployment, the Saudi government earmarked SR204bn for education in its budget for 2013, up from SR168bn in 2012 and SR150bn in 2011. Investment in human capital has become a top priority for the government, evidenced by the fact that spending on education has more than tripled since 2000. The budget includes plans to build 610 new schools in addition to the 3200 already under construction.

“We have been careful to use our financial resources to address our challenges,” says Mr Al-Hamidy. “And education is a key focus for us. Today, there are more than 100,000 Saudis studying abroad – whether in the US, the UK, Canada or Australia. And we are also focused on improving our health services.” 

The country has launched hundreds of healthcare-related projects at a cost of SR12bn with the aim of trebling the number of state-run beds to 60,000 in the next few years. The 12% share of the 2013 Saudi budget allocated to healthcare is roughly triple the 4% to 6% share of Gulf government budgets that were dedicated to the sector prior to the financial crisis.

Housing crisis

Besides increased social spending, in March 2011 King Abdullah announced a $67bn spending package to build 500,000 affordable housing units, in a bid to tackle severe housing shortages in the country. Work on the scheme began in September 2011, resulting in 6000 new homes being added to Riyadh’s residential market in the third quarter of 2012.

Another 100,000 will be built in the city by 2015, according to estimates by global real estate services firm Jones Lang LaSalle. However, the homes are being built on a range of sites throughout the country, covering a combined area of 32 square kilometres.

“It is estimated that it will take 10 years to complete the construction of all the 500,000 units,” says Mr Alturki. “Programmes such as this will not only address the acute housing shortage but also help to rein in inflation. The shortage of residential accommodation has driven up rental values which have been a key contributor to the country’s high inflation. So inflation is more of a structural problem rather than a temporary monetary phenomenon and that’s somewhat worrying.”

Hedging against inflation

Saudi Arabia’s inflation has been hovering at a level between 4% and 5% since 2008, compared to roughly 2.3% in Europe. These investments in social infrastructure are themselves helping to drive the growth of the construction sector, with the value of awarded construction contracts remaining above the SR200bn threshold in 2012.

The construction and manufacturing sectors were the two key drivers of the 7.5% growth in the non-oil private sector in 2012, growing at a respective 10.3% and 8.3%.

Another promising growth driver of the economy is non-oil exports. These reached a historical $48.9bn in 2012 and are expected to gain momentum owing to growing exports of petrochemicals and plastics. Over the past five years, Saudi Arabia has been pushing to develop its downstream activities.

“The initial structure of the modern Saudi economy centred around oil and gas and was spearheaded by [the government's national oil company] Saudi Aramco,” says David Dew, managing director of Saudi British Bank (SABB). “The economy then diversified into petrochemicals and related activities through companies such as Sabic, more lately into minerals and mining through companies such as Maaden, and we are now seeing true diversification into all sectors.”    

Leading the pack

The growth and liberalisation of the Saudi Arabian economy has resulted in a dramatic rise in foreign direct investment (FDI) over the past decade – growing from about $200m in 2001 to a peak of $35.8bn in 2009.

“During the 2000s, Saudi Arabian recorded the highest inward FDI figure among all Middle Eastern countries,” says Mr Alturki. “And there is still huge potential for it to grow further as the growth prospects for the country overall are very positive because there are many sectors of the economy driving good returns on investment.”

Depressed by the prevailing global financial crisis and the lower risk appetites of international business, they have since dropped to $25bn in 2010 and $16.4bn in 2011. Even so, as Mr Al-Hamidy points out: “Saudi Arabia is the largest recipient of FDI in the Arab world today and we’ve worked hard to improve our business climate in recent years.”

In December 2011, the country overtook its Gulf Co-operation Council neighbours the United Arab Emirates and Bahrain to become the top financial centre in the Gulf as ranked by the World Economic Forum.

Since becoming a full member of the World Trade Organisation in 2006, there has been a steady removal of restrictions in Saudi Arabia in order to create a more level playing field for international businesses. For example, in 2004 there were 13 different procedures involved in starting a business, and the process took an average of 71 days. Today, there are three procedures and approval can be granted in five days. Similarly, the cost of starting a business, measured as a percentage of the country’s per capita income, has fallen dramatically from 67.2% in 2004 to 5.9% in 2012.

“The vast majority of our customers realise that Saudi Arabia is a preferred market and we are speaking to a large number of multinationals who increasingly want a Saudi presence,” says Mr Dew.

“There is a lot of confidence in the country because of its strong fiscal position and the large infrastructure projects are generating a lot of business opportunities for both Saudi and international companies. And SABB is well placed to capture its fair share of this business as the leading international bank in the country.”

An attractive anomaly

Taken in the context of the global economy, it is not hard to see why Saudi Arabia is proving an ever-attractive investment opportunity. With multi-million dollar projects being announced across a range of sectors, its young population and long-term financial stability, the country represents an anomaly to the economic upheaval being seen across the world today.

While its GDP dropped to 0.5% in 2009, technically speaking, Saudi has not ever experienced a recession. “I always say that there’s no country in the world that matches the strength of the short- to mid-term outlook for the Saudi macro economy,” says Mr Alturki.

“But that’s not to say we don’t have any challenges. We need to invest further in education, employment opportunities and infrastructure, and continue to expand and diversify the economy away from oil. We revised our GDP forecasts upwards four times during 2012 and most of the revisions were connected to the oil sector where we had underestimated the volume of oil production.”

Oiling the wheels

Jadwa is expecting oil production to contract by 1.5% in 2013 from 9.9 million barrels per day (mbpd) to 9.6 mbpd in 2012, and therefore is forecasting a slowdown in GDP growth to 4.2% in 2013. Meanwhile, NCB is projecting that Saudi oil production will average 9.5 mbpd in 2013, with the drop due to higher compliance among Organisation of the Petroleum Exporting Countries members. Accordingly, oil revenues are expected to decline by 14.7% to about SR973bn and, therefore, NCB is estimating slower growth of 3% in 2013.

And yet as the world’s biggest oil exporter – oil still accounts for 90% of government revenue – Saudi Arabia continues to benefit enormously from a healthy flow of petrodollars. For 2012, the country announced its highest ever expenditure of $184bn, and yet still managed to achieve a fiscal surplus of about $81.6bn, the second highest level since 2008.

This placed Saudi Arabia in a unique position of being able to continue to stimulate the economy and simultaneously achieve a current account surplus of 24.5% of GDP in 2012. This saw the country earn the number one spot in the top five list of most stable financial markets in the world according to the World Economic Forum Financial Development Report 2012, and it ranks as the world’s third least indebted country.

“The reason we’re performing so well today is because we’re seeing the benefits of a carefully crafted strategy that we’ve worked hard to implement over the past 10 years,” says Mr Al-Hamidy. “Our public-debt-to-GDP ratio stood at nearly 100% in 1998. Almost all of it was local, there was no foreign debt, but still it was close to 100%. In 2012, it had fallen to a mere 3.6%.”

Conservative stance

Indeed, by the end of 2012, Saudi Arabia had slashed its public debt to below SR100bn for the first time in nearly 15 years. The country has been careful to capitalise on the strong oil prices over the past decade by ploughing its revenues and fiscal surplus back into the economy. And it is sure to benefit from the fruits of this strategy for the foreseeable future.

Renowned for taking a conservative stance, the government has assumed a breakeven oil price of $70 a barrel in the 2013 budget, resulting in a budget surplus of SR9bn. However, at the more optimistic end of the scale, NCB is forecasting oil prices at $110 per barrel. This would result in a fiscal surplus of SR277bn in 2013, leading revenues to rocket to SR1147bn and boosting the country’s annual net foreign assets by nearly $70bn to an all-time high of $710bn. 

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