3 QUESTIONS - Can Saudi Arabia’s economic growth be sustained?

The author is the founding director of Atli Global Consulting, and a lecturer at Bogazici University and Koc University.

ISTANBUL

In 3 questions, Altay Atli evaluates the dynamics behind the Saudi economic growth and discusses whether it is sustainable in the long term for Anadolu's Analysis Department.​​​​​​​

• What have been the drivers of growth in the Saudi economy?

Saudi economic growth during the past year was largely fueled by strong export revenues driven by high oil prices in global markets as well as high volumes of oil exported. Total exports in 2022 increased by a massive 24.8%, compared with a modest increase of 1.0% in 2021 and a substantial decline of 10.6% in 2020,[1] the year of the pandemic, while at the same the share of oil in total exports jumped from 71.9% in 2021 to 79.0% at the end of 2022.[2] Oil prices remained particularly high throughout the year, reaching a peak of $123.2 per barrel for Brent crude in March 2022,[3] due to a combination of both demand-side effects caused by the post-pandemic resumption of economic activities in major economies and supply-side effects including Russian war against Ukraine. This disrupted supplies and send commodity prices sky-high. This also disrupted the oil pact between Saudi Arabia and Russia through the OPEC+ mechanism to curb oil production to keep energy prices buoyed. With oil prices remaining high and both demand and supply effects in global oil markets working in Saudi Arabia’s favor, the country has achieved record levels of production and export. Saudi Aramco, 98.5% of which is owned by the Saudi government and producing all of Saudi Arabia’s oil, has announced an annual increase in net profits by an unprecedented 47%.[4] Compared with the overall increase of 8.7% in Saudi GDP during 2022, the growth in oil-related activities was 15.4%, while non-oil activities went up by 5.5% over the same period.[5] In short, favorable developments in the oil market boosted Saudi growth. Recently increasing non-oil activities, led by government services, manufacturing, wholesale and retail trade, have also contributed to the growth to a certain extent.

• Can this growth be sustained?

It depends. Favorable conditions in global oil markets cannot be relied on long-term. Fossil fuels are limited natural sources and the growth in the Saudi economy based on oil revenue cannot and will not last in the long run. Sustainability, in this respect, will depend on to what extent the Saudi economy can be diversified away from oil, which in turn depends on how efficiently the profits in this sector will be used in financing the development of non-oil sectors. The Vision 2030 initiative, first announced in 2016, provides the strategic framework for the diversification of the Saudi economy. It officially lists renewable energy, industrial equipment manufacturing, digital economy, mining, and tourism by planning to welcome 100 million visitors per year as “promising sectors” to be focused on. The Public Investment Fund, which is the oil-finances sovereign wealth fund of Saudi Arabia with estimated total assets of $620 billion, provides the funding for investments within the 2030 vision. However, while a strong basis for financing is certainly crucial for the success of the initiative, another vital requisite especially with respect to the growth of the private sector as the engine of development in non-oil sectors is a stable and effective business environment. Riyadh has already taken important steps in reforms related to business regulations, economic governance, and the labor market. Yet, more needs to be done to solidly establish conditions within which private enterprise can flourish and foreign investment can be attracted if the aim is to turn Saudi Arabia into a regional business hub rivaling UAE and Qatar.

• How will the recent Saudi-Iran rapprochement affect the economy?

The deal between the two countries to restore diplomatic relations after years of mutual animosity and suspicion is surely a significant development for the region. It is likely to have an economic impact as well. Only a few days after the deal was signed, Saudi Finance Minister Mohammed Al-Jadaan told international media agencies that Saudi Arabia could “start investing in Iran very quickly.” While it is too early to tell to what extent the deal will succeed, and whether the parties will stick to the mutual pledges they have, it is nevertheless clear that normalization of relations between the two regional powers would lead to a significant increase in trade and investment interactions between them. At a minimum, reduced risk of direct confrontation between two countries would contribute to the improvement of the business environment both at the national and regional levels. In the meantime, a key factor related to the Saudi-Iran deal is the fact that it was brokered by China. Despite several peace plans and proposals made in the past with regard to Syria and the Israeli-Palestinian conflict, this has been Beijing’s first attempt at mediation in the Middle East that has actually produced a concrete outcome. China has already significant economic relations with both parties, and this new position of Beijing as a mediator is likely to increase its clout in the region’s economic affairs, as well. China is one of Saudi Arabia's major oil buyers with, for example, crude oil shipments averaging 1.75 billion barrels per day in 2022. This can mean greater Chinese involvement in non-oil investment projects too, particularly in areas like high-end manufacturing and digital technologies where China has significant capabilities.

[1] Country Economic Forecast Saudi Arabia, Oxford Economics, 1 Mart 2023, https://www.oxfordeconomics.com

[2] https://www.arabnews.com/node/2255126/business-economy

[3] https://www.statista.com/statistics/326017/weekly-crude-oil-prices/

[4] https://www.nytimes.com/2023/03/12/business/saudi-aramco-record-earnings-profit.html

[5] Country Economic Forecast Saudi Arabia, Oxford Economics, 1 Mart 2023, https://www.oxfordeconomics.com

*Opinions expressed in this article are the author's own and do not necessarily reflect the editorial policy of Anadolu.