By Alexander Jones, International Banker
A dramatic economic transformation is currently ongoing in Saudi Arabia. As part of a 15-year project designed to realise the Kingdom’s true economic potential, the ambitious Vision 2030 has already achieved significant milestones as it strives to lower dependence on its oil-export economy and usher in the dawn of a new era of diversification and opportunity for its citizens. Now, in early 2024, having just passed the initiative’s midpoint, it is worth reflecting on the roadmap’s major accomplishments and the outlook for the largest economy (by nominal gross domestic product) in the Middle East for the remainder of the decade.
Launched in April 2016, Vision 2030 has been largely spearheaded by Saudi Crown Prince and Prime Minister Mohammed bin Salman (widely known as MBS), who has positioned the programme front and centre within many government agencies. It is mainly focused on three primary themes: (i) societal, (ii) economic/financial and (iii) global reach.
On the economic front, the strategy is unwaveringly fixed on diversifying away from oil and creating a broad cross-section of high-value job opportunities for its citizens. The desired diversification away from crude oil comes when fossil fuels have never been more scrutinised and disdained. With the eyes of the world fixed on many oil-producing nations—not least the Kingdom itself—a concerted transition away from oil and gas could not come at a more pertinent time. Indeed, after the United Nations’ (UN’s) Intergovernmental Panel on Climate Change’s (IPCC’s) 2022 research found that carbon emissions must be cut by 43 percent by 2030 from 2019 levels and reach net zero by 2050 to comply with the 2015 Paris Agreement’s global warming sub-1.5-degree-Celsius (°C) target, the Kingdom’s shift towards greener energy sources has become essential.
According to the International Monetary Fund (IMF), the diversification process is amply supported by improvements in regulatory and business environments. “As a result of a new set of laws to promote entrepreneurship, protect investors’ rights, and reduce the costs of doing business, new investment deals and licenses grew by 95 percent and 267 percent in 2022, respectively,” the Fund reported on September 28.
The IMF has also observed the crucial role played by the Public Investment Fund (PIF) (the country’s sovereign-wealth fund currently worth around $776 billion), which has provided financial backing to many of the programme’s most exciting and ambitious economic projects, as well as invested in new projects and private growth sectors that are now driving much of the country’s progress. One example of the PIF’s success can be found in the $1.3-trillion Private Sector Partnership Reinforcement Center (Shareek), which has already invested in green hydrogen, catalyst manufacturing for industrial refining and chemical production, and several tech-innovation facilities. Shareek also aims to create more than 64,000 jobs by 2040.
Although not formally part of Vision 2030, PIF’s globally renowned giga-projects have become closely associated with the programme. Some projects have commenced construction, including the Red Sea global tourism, the Qiddiya entertainment city and the Diriyah Gate heritage development initiatives. But the Kingdom’s most hotly discussed sustainability-based giga-project, Neom, has garnered the most global attention based on its unique design and sheer magnitude, alongside the distinctly light environmental footprint it seeks to cultivate with a new model of sustainable living. Again, PIF represents the overwhelming bulk of the investments in these giga-projects, with other sources of private funding expected to ramp up over the coming years.
Indeed, vast resources are being deployed across a range of projects to facilitate this all-encompassing economic transformation. “Efforts are underway to make the country a powerhouse in green energy (including hydrogen), mining, logistics and infrastructure, sports, music, tourism, digital services, finance, and entrepreneurship,” Rabah Arezki, director of research at the French National Center for Scientific Research (CNRS), and Tarik M. Yousef, director and senior fellow of the Middle East Council on Global Affairs, jointly wrote in a June 2023 article for US media publication Project Syndicate.
And it is already clearly observable that many of Vision 2030’s lofty ambitions are being realised, as is considerable progress towards achieving key economic aims. “Our assessment is that performance is solid relative to most of the 14 quantified economic targets contained within the original vision document,” PwC (PricewaterhouseCoopers) concluded in late October. “The results range from significant outperformance in some areas, such as female labour participation and home ownership, while there is room for further development in others. The areas that need focus include foreign direct investment and religious tourism, but both are already showing signs that they will improve in the coming years.”
Indeed, Saudi Arabia was not only the fastest-growing G20 (Group of Twenty) economy in 2022 at 8.7 percent GDP (gross domestic product) growth, but its non-oil-related growth also stood at a hefty 4.8 percent, with the IMF attributing the strong performance to robust private consumption and non-oil private investment, including giga-project implementations and strong growth rates in wholesale, retail trade, construction and transport. And the commitment to diversifying its economy and reducing reliance on the oil sector “has resulted in a significant transition”, the IMF added, noting that the share of non-oil activities was double that of 30 years ago, while the proportion of oil activities “declined substantially over the same period”.
“The Saudi unemployment rate is at a historical low. Amid an increase in labor force participation, total unemployment dropped to 4.8 percent by end-2022—from 9 percent during Covid—reflecting both an increase in Saudi workers in the private sector and expatriate workers (mostly in the construction and agricultural sectors) rising back above pre-Covid levels,” the IMF noted on September 6 following its consultation with Saudi Arabia ending July 20. “Youth unemployment was halved to 16.8 percent in 2022 over the past two years, while female participation in the labor force reached 36 percent in 2022, exceeding the 30 percent target set under the authorities’ Vision 2030 reform agenda.”
And perhaps most encouraging is the recognition by the traditionally conservative country that raising the socioeconomic prospects for Saudi women has been long overdue, with this acknowledgement no more clearly observed than through the greatly expanded role of female economic participation within the Vision 2030 revolution. Specifically, the Ministry of Commerce has removed guardian-approval restrictions such that women can more easily open their own businesses; it has established business centres exclusively for women across the country to open business registrations, request trademark registrations, reserve business names, practise freelancing and register business agencies.
“The Kingdom established reforms dedicated to the promotion of women’s engagement in economic development by setting an equal age for both genders, preventing gender discrimination in terms of wages, occupation, work field and hours, and enabling women to incorporate and practice commercial business without obtaining prior consent,” the Saudi government states on its website.
Nonetheless, clear downside risks to the Kingdom’s goals remain, especially given that its exposure to oil-market volatility is still significant. “Oil revenues remain decisive for maintaining budgetary balance and implementing Vision 2030 investments,” BNP Paribas recently stated, adding that the scale of funding requirements and underwhelming influx of foreign investors have prompted substantial debt issuances and sales of public assets by Riyadh. “This highly capital-intensive economic transformation will need to continue, despite persistent vulnerability to [the] oil market, which could increase with the energy transition.”
The French bank also indicated that the diversification process was taking place “rather slowly” and was still dependent on oil revenues. “The share of hydrocarbons in GDP is falling (40 percent in 2022 compared to 45 percent in 2012) in favour of the non-hydrocarbon private sector (from 38 percent to 41 percent over the same period), thanks in particular to growth in manufacturing industries excluding refining and retail and hospitality activities,” BNP’s October assessment of the Saudi economy acknowledged. “Nevertheless, it should be noted that fiscal impetus and, therefore, oil revenues, remain decisive in supporting activity, whether through infrastructure programmes (the various projects linked to Vision 2030) or budgetary support.”
To overcome the challenges expected in pursuit of further diversification, therefore, large projects need to generate more returns and boost productivity, according to Goldman Sachs, as well as cultivate environments that are more conducive to innovation and workforce skills that complement diversification strategies. “Streamlining fees and taxes faced by businesses—particularly at local and city levels—will further boost private sector development,” the US bank explained in an October report on the country. “The PIF’s growing role in the economy should continue stimulating private sector investment. Lastly, rigorous monitoring and evaluation can help minimize risks from targeted interventions and industrial policies, ensuring that these policies (which are not a substitute for broader structural reforms) attain the intended benefits.”