Saudi Arabia: An Emerging Frontier?

Saudi Arabia: An Emerging Frontier?

Saudi Arabia has a solid economic track record and is taking steps to become more included in global financial markets. This includes the Morgan Stanley Capital International (MSCI) Emerging Markets Index, though the process is still in the early stages and some challenges remain.

Saudi Arabia opened its markets to international investors on June 15, 2015. It was the culmination of a journey that started in July 2014 when the Saudi Cabinet took the decision to open the markets to Foreign Direct Investment (FDI).

While this indeed is a watershed moment in Gulf Cooperation Council (GCC) scripts, all eyes are on its 2018 inclusion to the MSCI Emerging Markets Index. Apropos not being included in MSCI’s Consultation List this year, the earliest it would be is June 2016. In previous upgrades, MSCI has had one year of consultation period followed by another year from when the announcement is made before the inclusion.

So, what makes it an ideal candidate for inclusion? While the size of its economy (Nominal GDP) equals that of Turkey, its fixed peg to the U.S. Dollar makes it less susceptible to currency fluctuations than the former. With a market capitalization of half a trillion USD and an average daily trading volume (three month average) amounting to USD 1.5 billion, it dwarfs most Emerging Market countries.

The oil boom enabled it to accumulate the world’s third largest foreign exchange reserves at USD 700 billion, just behind China and Japan. Its public debt is non-existent compared to the Emerging Markets (EM) 2015 expected average of 37.4% (Source: IMF) at 1.8% of GDP. Within the GCC universe, it is the lowest.

Its young demographic is a favourable economic opportunity; a population of 31 million (Source: IMF 2015e) with a median age of less than 25 years old. What is more, nominal GDP per capita stands at a highly competitive USD 24,847 and the Real GDP expected growth rate in 2015 stands at 3% – which is in line with 2.9% for the EM universe (Source: IMF 2015e).

Yet with all its advantages, some sticky challenges remain. As oil revenues account for 85%-90% of government revenue at a stable production level of 9.6 million barrels per day, its Achilles heel was exposed as oil prices plunged 59% in the last quarter of 2014.

This has repercussions for Saudi Arabia which will face its worst fiscal deficit of circa 15% of GDP (assuming an average oil price of USD 50 per barrel – see graph):


Oil Price ($ per barrel) 50 60 70 80 90 100 110
KSA budget deficit -15 -11 -8 -6 -3 0.5 3.5


Also the fairly young workforce of nationals are primarily employed in the public sector, and the female labour force participation rate remains dismal at 18% versus 65% for men.

Addressing these labour market challenges, driving job growth, and diversifying its revenue base and economy remain key to the emergence of Saudi Arabia as global competitor economy.

About Author

Tanya Rawat

Tanya Rawat holds a MSc Finance from Manchester Business School and BSc Banking and Finance from The London School of Economics and Political Science, UOL. Her MSc thesis focused on the emerging markets; ‘Forecasting volatility of returns in the Asian arena using the ARCH family of models‘. Prior to her current role within the Macro and Strategy arm within Asset Management at Arqaam Capital, Tanya has worked in London within the financial data services industry.