Change in Saudi Arabia has been disrupted by Covid-19, but not blown off course. While the economy has suffered, not least from tumbling oil prices, the country’s crown prince, Mohammad bin Salman, is pressing on with his ambitious spending plans. He is, however, looking increasingly beyond oil revenues for other funding sources.
Last year, the country’s economy underwent its worst contraction since 1999. Before the pandemic, growth had been expected to exceed 2% in 2020, but gross domestic product (GDP) actually shrank by 4.1%.
Saudi Arabia is gradually reducing its dependence on oil, but production stills accounts for around 40% of GDP. So, the economy took a direct hit from the collapse in oil demand, and prices, as the world economy was paralysed by the pandemic.
Lockdown also hit the non-oil economy, which the crown prince is trying to grow. This included a decline in retail sales and the almost complete cessation of domestic and foreign pilgrimages to Mecca, which constitute a major part of the Saudi tourist industry.
Since its unveiling in 2016, Vision 2030 has been Saudi Arabia’s playbook. The brainchild of the crown prince, this wholesale programme of change aims to reduce dependence on oil; to diversify, part-privatise and ‘Saudi-ise’ the economy; and to pursue social liberalisation.
Renovating the economy
Vision 2030 is also characterised by a series of so-called giga-projects — some say ‘vanity’ projects — designed to help diversify and Westernise the economy. The largest of these is Neom, a $500bn city-state-to-be that is the size of Belgium, situated along the northern Red Sea coastline.
In January, the crown prince announced the first big Neom construction project, called The Line. This will be a 105-mile long car-free, zero-carbon ribbon of connected communities, where all facilities would be within walking distance. It would cost between $100bn and $200bn and be able to house a million residents, he told reporters.
A huge entertainment park is planned at Qiddiya, where the infrastructure alone will cost a reported $8bn. It will include theme parks, sports facilities and, banned from the country until recently, cinemas and theatres.
It’s becoming increasingly difficult to decipher the overall fiscal stance, because an increasing amount of spending is off-balance sheet
The Red Sea Project is a luxury tourism enterprise, also Belgium-sized, that will cover 50 islands in the Red Sea. No cost has been stipulated.
Some are sceptical of the country’s ability to pull off these grandiose schemes, pointing to the $20bn Kingdom Tower in Jeddah, designed to top Dubai’s Burj Khalifa as the world’s tallest building. Construction began in 2013, stopped in 2018 and the tower remains about one-quarter built.
Like Qiddiya, the Red Sea Project’s development company is owned by the Saudi sovereign wealth fund, the Public Investment Fund (PIF). The PIF, which is also the cornerstone investor in Neom, is steadily doing more of the heavy-lifting to finance the crown prince’s aspirations.
“It’s becoming increasingly difficult to decipher the overall fiscal stance, because an increasing amount of spending is off-balance sheet,” observes Jason Tuvey, senior emerging markets economist at Capital Economics. “Capital spending used to be done by the government, but now it’s being done by PIF.”
Sovereign investment
PIF’s new five-year plan, announced in January, calls for it to grow assets under management from the present level of around $400bn to nearly $1.1tn by the end of 2025. Along the way, it intends to create 1.8 million direct and indirect jobs, while devoting at least $40bn per year to domestic projects and investments. The fund has also said it will contribute a cumulative $320bn to non-oil GDP through its portfolio companies.
In a continuation of this theme, PIF is taking over some of the investment activities of the Saudi Central Bank, SAMA (recently renamed but continuing to use the acronym from the Saudi Arabian Monetary Authority).
Last year, $40bn was transferred to PIF from SAMA’s foreign reserves, which were deemed larger than necessary to defend the riyal–dollar peg. PIF subsequently invested the funds more aggressively than the conservative central bank might have done and, given its market timing after the Covid-19 crash, has reportedly done rather well. SAMA’s foreign reserves currently stand at around $450bn.
Jason Tuvey, Capital Economics
It is hoped that the private sector, domestic and foreign, will assume more of the giga-project funding burden. The budget for 2021 confirmed that privatisation and public private partnerships would remain integral to Vision 2030, particularly in the face of rising public debt.
To that end, a newly announced SR27tn ($7.2bn) ‘Shareek’ (‘partner’ in Arabic) plan will mobilise private sector investment in the economy. The sum is made up of SR10tn in central government spending, SR4tn under the National Investment Strategy, SR3tn in investment from the PIF, and SR5tn from big listed Saudi firms. The balance (SR5tn) will come from private consumption spending.
Among the participating Saudi businesses are oil giant Saudi Aramco and petrochemicals firm Saudi Basic Industries Corp (Sabic), which will contribute SR3tn between them.
They, and 22 other local companies, have agreed to reduce their dividend payments and redirect the money into the local economy. The crown prince argues that shareholders will not lose out because the resulting domestic spending will spur stock-market growth. In the case of Aramco and Sabic, those shareholders are overwhelmingly the government itself.
Curtailed FDI
Efforts to attract more foreign direct investment (FDI) have not been as successful as the crown prince might have liked. One reason may be laid at his own door — reputation risk following the assassination of dissident journalist Jamal Khashoggi at the Saudi consulate in Istanbul.
Some also feel the Saudi legal framework for settling commercial disputes remains inadequate. Others balk at the insistence that, from 2024, government institutions will only give business to foreign companies, including banks, whose Middle East headquarters are in Saudi Arabia. “I don’t see many expats leaping at the chance to relocate from Dubai to Riyadh,” says one regional consultant.
Any serious threat to US relations after the assassination of Mr Khashoggi appears to have passed, after the downplayed March release of a US report incriminating the crown prince in the murder. President Joe Biden has stopped short of sanctioning him.
The bilateral tone is reflected in the belated announcement of a joint venture between Google Cloud and Aramco to deliver cloud infrastructure to Saudi Arabia. Negotiations were started back in 2018, but suspended in the wake of the murder.
While FDI disappoints, public borrowing — including international bond issuance — has increased. The budget envisages public debt increasing by SR83bn to SR937bn, or 32.7% of GDP. That compares favourably with last year’s 34.3% but less so with the 22.8% debt level of 2019 or, indeed, the 13.1% of 2016. To accommodate the increase, in 2020 the permissible national debt ceiling was raised from 30% of GDP to 50%.
Domestic policies
With expenditure trimmed by 7%, in spite of increased tax and non-tax revenues, the budget deficit was reduced from last year’s 12% to 4.9%. However, spending priorities remained unchanged, the government said.
The crown prince has introduced new taxes as well as reorganising subsidies. While fuel subsidies were reduced and a 5% value-added tax (VAT) imposed in 2018, a cost-of-living allowance was granted to public employees. That allowance was scrapped in July 2020 and VAT trebled to 15%.
Whatever his reputation abroad, the crown prince is popular with many younger Saudis, who like his social agenda
The economy is in recovery mode, with final GDP figures for the fourth quarter of 2020 showing quarter-on-quarter growth of 2.5%, compared with a 2% increase the previous quarter. A voluntary cut in oil production should end at the beginning of May, and recovery in the two major oil-consuming economies — the US and China — should be positive for prices. The Hajj and Umrah pilgrimages will once again be permitted, though the spread of Covid-19 in south-east Asia may dampen numbers.
Capital Economics says that vulnerable Saudis should have had at least one vaccine dose in the second quarter, allowing restrictions to be eased and giving a lift to the non-oil sector. Tight, but not ‘austere’, fiscal policy will still hold back the recovery, it believes, forecasting 2.3% GDP growth for this year. There are no question marks over the dollar peg, Mr Tuvey believes.
Whatever his reputation abroad, the crown prince is popular with many younger Saudis, who like his social agenda. This also has an important economic impact, as women join the workforce and spend more. One regular traveller to the country reports the construction of a women’s cloakroom within a Riyadh office. “They hadn’t needed a ladies’ [toilet] before because there hadn’t been any women in the workplace,” he observes.
“Things are changing,” believes Ravi Bhatia, Standard & Poor’s sovereign analyst on Saudi Arabia. “Women are more able to join the economy and there is a lot of new spending by women in areas like retail.”
The credit rating agency recently affirmed the country’s A-/A-2 long- and short-term ratings, with a stable outlook. Mr Bhatia forecasts that the current account will return to surplus and the fiscal deficit will narrow.
