Despite the bleak global economic backdrop, this Persian Gulf kingdom has managed to stay ahead of the curve thanks to careful economic planning, efforts towards economic diversification, long-term investments in infrastructure and education, and high commodity prices.
The country’s macroeconomic framework is an ideal to aspire to for other nations.
Between 2008 and 2012, Saudi Arabia had the third-fastest growing economy in the G-20, after China and India. In only 13 years, between 1999 and 2012, the kingdom’s gross domestic product (GDP) increased fivefold.
According to the International Monetary Fund (IMF), it has the strongest fiscal position among developed economies, which consists of the lowest debt-to-GDP ratio and one of the highest fiscal balances. The outlook for the future is also positive, as the non-oil private sector is expected to grow by 7.6 per cent in 2013 and the overall GDP by 4.4 per cent.
Generous budget surpluses fuelled by high energy prices and a strong banking sector characterised by high liquidity help to support a gamut of large-scale infrastructure projects, such as the construction of six economic cities to boost economic diversification and a financial city in the north of Riyadh, as well as numerous medical cities and education and research clusters.
The past three years alone have seen the inauguration of such state-of-the-art facilities as the new campus of the Princess Nora bint Abdul Rahman University, the largest women-only university in the world, and of research hubs like the King Abdullah University for Science and Technology (KAUST) and King Abdullah Petroleum Studies and Research Centre (KAPSARC).
In such a context there is little wonder that business optimism and investor confidence are high. Everything seems to point towards a positive future outlook for the Saudi economy and, while energy continues to account for the lion’s share of it, investors are rushing to take advantage of the developments in construction, real estate, transportation, manufacturing, education and research, healthcare facilities, telecommunications, IT, logistics, retail and hospitality.
According to a National Commercial Bank (NCB) survey from February 2013, the construction sector held the most optimistic outlook, followed by manufacturing, trade and hospitality, finance and real estate.
Patrice Couvegnes, the Managing Director of Banque Saudi Fransi, the sixth-largest bank in the country, explains: “This market is very promising. The sheer size of the country – it is the same size as Western Europe – and of its economy – it is the Arab world’s largest – makes it attractive for foreign investment. The economy is flooded with liquidity and the government’s large-scale projects help boost economic growth. This is an economy with an excess of reserves, an economy that averages annual growth of 4 per cent and with budget surpluses thanks to high oil prices.”
The World Bank Doing Business Index, which ranks Saudi Arabia among the top 22 locations in the world in 2013, acknowledges the positive changes in the legislative framework that facilitate the operations of private companies.
As a World Trade Organisation (WTO) member country with free trade agreements with some of the most developed economies in the world (including the United States, the European Union, and numerous Asian and Middle Eastern countries), very attractive fiscal incentives, competitive labour costs, subsidised electricity and energy costs, and a fast-growing economy, Saudi Arabia is understandably the most attractive investment destination in the Middle East measured by the amount of incoming foreign direct investment (FDI).
Some barriers to investment still exist, particularly as far as property ownership and the local participation requirement are concerned. Moreover, foreign companies can only trade on the local stock exchange, the Tadawul, through indirect financial instruments.
A strong and prosperous Saudi Arabia is highly important to regional and global security. Home to almost a fifth of the world’s proven fossil fuel reserves and 2.2 million barrels per day of spare capacity, the country has the unique ability to increase its energy output in order to make up for shortages elsewhere and to stabilise fuel prices, something that it has resorted to on occasion, most recently during the Arab Spring.
Furthermore, Saudi Arabia’s political and economic stability have turned it into a redoubtable economic and diplomatic partner for Europe and the USA in a region otherwise known for its volatility and its anti-Western sentiments.
For all its success, the Saudi economy is facing structural challenges that need to be addressed in order for it to continue developing sustainably. First and foremost among these challenges is the shortage of skilled local workers, coupled with a high unemployment rate among Saudi nationals.
Approximately a third of the country’s current population of 27 million is made up of foreigners, who account for 90 per cent of private sector workers. This challenge is further compounded by the fast growing and young population, which means that the number of graduates entering the workforce increases every year.
Unemployment among those under 30, who make up a staggering 64 per cent of the population, stands at 27 per cent, dangerously similar to the unemployment rates present in North African countries. According to estimates of the Human Resources Development Fund (Hadaf), as many as 2 million Saudis will be unemployed towards the end of 2013.
Another important challenge concerns the delicate balance the country strives to attain between ensuring water and energy security. Saudi Arabia may be energy rich, but its fast growing and increasingly industrialised economy, coupled with its rapidly expanding and highly urban (83.6 per cent) population, is placing unprecedented pressure on the power grid.
In the past five years, the demand for electricity has grown at an average rate of 6 per cent, reaching 8 per cent at peak times. If it continues to grow at this pace, it will double by 2030, turning Saudi Arabia into a net importer of energy.
Desalination accounts for about a fifth of the total energy consumption in the kingdom and as such is one of the main culprits for the increase in the demand for power. Ensuring a stable supply of potable water in the desert country requires approximately 0.3 million barrels of oil equivalent per day, which generate a fifth of the global supply of desalinated water.
Desalination is key to ensuring the country’s water security, as it accounts for half of the kingdom’s municipal water supply. The demand for water mirrors that for power – it is increasing fast as a result of urbanisation and high economic and population growth, so ensuring a stable supply of it in the future will require significant investment.