Saudi Arabia’s new economy: Projecting power in an unstable region
As the Future Investment Initiative summit gets going in Riyadh, GRI presents a special 3-part series on risks and opportunities in the Kingdom. Our concluding segment assesses the outlook for economic reforms, and whether regional conflicts will put everything at risk.
The Kingdom of Saudi Arabia is well into its generational transformation of the economy and society. Vision 2030, an ambitious reform plan aiming to diversify the country away from oil dependency, was launched by the young Crown Prince Mohammed bin Salman in 2016 and has been executed by a framework and targets set out in the enabling National Transformation Plan. Since then, reforms have been announced and carried out at break-neck speed.
Saudi Arabia’s fundamental indicators
As we saw in Part 1, Saudi Arabia certainly has the potential to be the next global destination for investors. It is the GCC’s largest economy with a GDP of about $650 billion USD. To place this in perspective, the combined GDP of the rest of GCC (UAE, Qatar, Bahrain, Kuwait and Oman) is $750 billion.
Saudi Arabia also has the largest population in the region with 32 million people. This is about 48% more than the total combined population of the other GCC countries.
KSA’s GDP per capita is $23,370 in 2017 and is forecast to hit $28,864 in 2021, which is three times higher than the regional MENA average, according to BMI Research.
To top it all off, Saudi Arabia has the youngest population in the region with 51% under the age of 25 years and 70% under 30, and is one of the world’s fastest urbanizing countries.
These demographic indicators have driven household spending. Household income levels in Saudi Arabia are currently at $271 billion and set to reach $347 billion by 2021, with total household spending is expected to grow at 5.8% from 2017 – 2021.
Along with the highest number of households – 5 million – compared to the rest of GCC and the youngest consumer group in the region with a median age of 28 years old, the Kingdom holds a favorable consumer market.
These indicators bode well for numerous industries such as retail, real estate, tourism, entertainment, healthcare, education, transportation, mining and financial services. As Saudi Arabia seeks to increase FDI as a percentage of GDP from the current 3.8% to 5.7% by 2030, as well as improve the private sector’s contribution to the economy from 40% to 65%, the aforementioned sectors provide opportunities to achieve these goals.
Measures taken to open up the economy
Since 2015, the government has opened up the Tadawul Stock Market to foreign investors, even allowing them to participate in IPOs for the first time. It has loosened rules for licensing asset management and other investment firms, reduced requirements to obtain management activity licenses and lowered the minimum net assets required to be considered an investment company. Work experience and certification requirements to be considered a specialized investor have been approved and broadened. Foreign investors can now obtain business visit visas within 24 hours.
In light of this change and within the last 12 months alone, Citigroup has entered the market and received a license to operate in 2017, Goldman Sachs has received an equities license, Blackstone has unveiled a $40 billion infrastructure fund and General Electric (GE) has agreed to participate in as much as $3 billion of investments across industries in Saudi Arabia.
A business improvement online platform named Miras has been established as a one stop shop for investors seeking to do business in the Kingdom.
Furthermore and most notably, the government has allowed 100% foreign ownership for retail and wholesale businesses, education, healthcare and engineering.
In line with Vision 2030, the National Center for Privatization & PPP was established to spearhead the privatization efforts of state assets ranging from environment, water and agriculture, transport, energy, industry, mineral resources, housing, education, health, IT and religious tourism. It is estimated that about $69 billion of government contracts are at risk of being abandoned across these sectors if not privatized, according to PwC.
To improve the legal framework, a critical concern for foreign investors, the government is finalizing a Bankruptcy law in late 2017 to protect investors from debts incurred while undertaking new enterprises, encouraging private sector activity and foreign investment.
In the real estate sphere, as previously mentioned, Real Estate Investment Funds and Real Estate Investment Trusts have recently been introduced in 2016, as part of the Kingdom’s efforts to improve real estate contribution to GDP from 5% to 10% annually and allow non- resident foreign investors to trade in REIT units and invest in REIFs.
While the initial attempt to enter the FTSE Russell Index failed in 2017, accession in it as well as the MSCI Emerging Markets Index is expected in 2018 and would be significant wins for the Kingdom, leading to a jump in the quantity of foreign direct investment in the country. Other GCC countries experienced a doubling of FDI once they were included.
The liberalization of the market in tandem with socio-economic reform will, as we saw in Part 2, yield a mix of domestic and exogenous risks, including oil prices, reform execution amidst slow growth, conservative resistance to social reforms and royal succession – but also in relation to foreign policy, notably towards Yemen and Qatar.
The wild cards: Qatar and Yemen
The most visible foreign policy issues that the Kingdom has been drawn into over the past couple of years are the war in Yemen and the Qatar blockade, both led by the Saudis.
After decades of cautious diplomacy, the new Crown Prince has taken an aggressive, nationalist foreign policy stance and led a coalition to fight a proxy war against Iranian backed Houthi rebels in the poor neighboring state of Yemen. The war has been at an impasse over the past two years while costing the Saudi budget billions and thousands of Yemeni lives in the process.
The dispute with Doha, which includes an embargo imposed by Saudi Arabia, the UAE, Bahrain and Egypt, is in a similar deadlock. Embolden by support from the Trump Administration after a fruitful visit from the new US President earlier in 2017, HRH Crown Prince Mohammed bin Salman decided to tackle the Qataris head on. The Saudis embarked on the campaign ostensibly as a reprisal for the tiny gulf nation’s support for Islamist extremists and ties to Iran – with which it shares the world’s largest gas field.
However, this conflict could actually be the strongest indication yet of the Saudi and Emirati contempt for political Islam and the threat it poses for their monarchies, ever since the Arab Spring of 2011. Qatar’s Al Jazeera network has long been a thorn in the side of the GCC heavyweights, promoting political Islam and support for the Muslim Brotherhood. This is also exemplified by the crackdown on Saudi clerics – with large social media followings – who were supportive of mending relations with Qatar, took part in the anti-government Islamic Awakening movement in the 1990s or have ties to the Muslim Brotherhood.
The blockade may inadvertently push Qatar away from the GCC, undermining the alliance’s influence, and steering them into the arms of Iran and Turkey. Qatar has taken a hit in the conflict, however, as they experienced about $30 billion in capital outflows, trade dropped 40% and they had to utilize 23% of their GDP to support the economy during the first two months of the embargo.
These two conflicts have the potential to exacerbate regional instability, which in turn would put all the hard-earned gains from Saudi’s economic reforms at risk. US mediation by Secretary of State Tillerson has yielded little, and a phone call between the Qatari and Saudi leadership was fruitless. However, risk here is low to moderate as Qatar will be keen to make amends and hope for a reasonable solution in due course to release pressure on the economy ahead of their World Cup hosting, and the Saudis will look for an opportunity to show further leadership and shore up the GCC bloc.
We hope you enjoyed this series! Look back at Part 1 (the opportunities) and Part 2 (the risks).
