Thanks to a smooth management of the pandemic, higher oil prices and increased production, the Arab world’s biggest economy is rebounding with vigor.
After hitting a historic low in 2020, Saudi Arabia’s economy is back on track. GDP growth reached 6.8% in the third quarter of 2021, the kingdom’s fastest in 10 years. The oil sector grew 9% year over year, while the non-oil sector surpassed pre-pandemic levels, with 6.2% growth.
Higher energy prices and the gradual easing of OPEC+ production cuts, decided upon at the beginning of the pandemic, are the main drivers of Saudi Arabia’s rapid growth. According to S&P Global Ratings, the world’s biggest oil exporter pumped an average of nine million barrels a day (b/d) last year. In 2022, that output will reach 9.7 million b/d and more than 10 million b/d in 2023.
Increased production puts money into state coffers. This year, Saudi Arabia’s revenue jumped by approximately 10% to $248 billion from $226 billion in 2020. In December, the authorities proudly announced a budget surplus of $24 billion for 2022—a first in eight years.
“This surplus will be directed to boost governmental reserves, support development funds and [supporting] the Public Investment Fund,” said Minister of Finance Mohammed bin Abdullah Al-Jadaan when presenting the data.
Saudi Arabia’s performance is also owed to long-term austerity reforms aimed at reducing state spending. In recent years, the kingdom cut state subsidies and public sector allowances, raised import duties and tripled its recently introduced value added tax on all purchases to 15%.
Deft management of the pandemic is also supporting fiscal health. “The authorities responded quickly and decisively to the Covid-19 crisis, and the economic recovery that is underway is expected to continue,” said the International Monetary Fund (IMF) in its latest assessment of the Saudi economy. “The private-sector support programs implemented by the Saudi central bank and [other] banks provided breathing space to small and medium-size enterprises and should be withdrawn carefully.”
The government announced that the 2022 budget would imply a further 6% cut in public spending, including a 10% cut back on military expenditures, which could indicate an appeasement in the war with neighboring Yemen.
Overall, the IMF expects the Arab world’s largest economy to grow 2.8% this year and 5% in 2022. The Saudi authorities are more optimistic and announced 7.4% growth in 2022 but did not specify on which oil price they based their calculations.
Riding the Tech Wave
Saudi Arabia has been undergoing rapid change. Since 2016, Crown Prince Mohammad Bin Salman has led a series of reforms that aim to turn this highly conservative Muslim nation into an open tourist destination and business hub. Following global trends, Saudi Arabia also wants to be a digital leader. The authorities are moving fast to build a forward-thinking regulatory framework for new technologies to be deployed in the country.
One of the most promising sectors is e-commerce. Like elsewhere in the world, online purchases boomed all over the kingdom during the pandemic. According to a recent Boston Consulting Group study, Saudi Arabia’s e-commerce market value is expected to reach $13 billion by 2025 and still has a large margin to grow. The report highlights those online sales accounted for only 8% of retail sales in 2020, compared with 18% globally.
Electronic payments will help the industry develop even faster, and the transformation of the financial sector is another cornerstone of the kingdom’s economic diversification strategy. The Saudi central bank is working to enable and promote digital banking as part of its national ambition to boost e-payment to 70% of total transactions by 2030.
The most recent milestones also include the creation of Fintech Saudi, a national initiative to accelerate local start-ups in their early stages of development and a regulatory sandbox. As a result, the domestic fintech ecosystem is quickly growing in terms of the number of players, investments and size of operations. In the final quarter of 2021, Saudi Arabia issued 16 licenses to new companies, the vast majority of which are in the field of electronic payments. Major deals include a $5.5 million seed round for invoice financing solution Lamaa, led by Raed Ventures and Saudi Aramco’s investment arm, Wa’ed, in one of the largest tickets since STC Pay became the country’s first unicorn in 2020.
“Things are changing phenomenally fast. Today it’s a completely different market than it was five years ago. The financial regulatory and compliance frameworks around the fintech space will continue to evolve quickly,” says Ahsan Tahir, co-founder of Walee, a Pakistani platform that connects businesses with social media influencers and recently started working in Saudi Arabia. “For now, traditional banks, microfinance banks, payment service providers and brokerages operate on core banking systems and rails that are built on legacy technologies, which are built in a way that stops any other technology solution from integrating with them. Hence, for the fintech space to heat up in Saudi Arabia, we must look at innovative ways to make our technology stacks interoperable with these legacy infrastructures.”
To make the business environment more friendly to new financial players, the central bank took important regulatory steps, with new rules for payment services providers that allow non-bank actors to provide payment solutions and the upcoming open banking framework.
“Open banking has significant implications for incumbent banks, which have traditionally monopolized payment services” said consulting firm PwC in one of its latest Saudi reports. “They will need to abandon their conventional model, in which the bank is the sole producer and distributor of products and services. Banks will have to rethink their strategies, moving from the traditional pipeline optimization model to a co-creation platform model that involves different players in the ecosystem.”
Open banking, which requires lenders to share their data with third parties, is still a new concept in the MENA region. But, like elsewhere, it is expected to boost innovation by offering new opportunities for start-ups and existing banks to work together.
“Moving forward, we anticipate that digitalization trends and fintech opportunities will likely stimulate M&A activity in the sector,” comments Asad Ahmed, managing director and head of Middle East Financial Services at consulting firm Alvarez & Marsal. “New digital banks are well capitalized and will introduce positive competition among Saudi banks to provide customer-centric services and products and to optimize operating costs.”
Strings Attached
Saudi Arabia’s rapid transformation is stirring the appetite of foreign corporates. In October, more than 40 multinational companies—including Baker Hughes, KPMG and Schlumberger—received licenses to operate in the kingdom.
With a large young, wealthy and tech-savvy population, Saudi Arabia is a particularly attractive market for global Big Tech companies. Some of them have already started tailoring products and services to better fit the local market—like Amazon, which launched Alexa, its cloud-based voice service, in Saudi dialect. Social network Snapchat, which claims to reach 90% of the kingdom’s 13-to-34 years olds—nearly 20 million people—announced the opening of a Creator studio in Saudi Arabia in 2022. Other tech giants, including Google, Apple and Microsoft, also said they would open academies and programs in Saudi Arabia in the coming months.
While Vision 2030—the crown prince’s $3 trillion blueprint for economic diversification—attracted attention from all over the world, the country is still recovering from the reputational damage caused by the purge of hundreds of prominent businessmen at Riyadh’s Ritz Carlton in 2017 and the murder of journalist Jamal Khashoggi the following year. Foreign direct investment remains below target, and in many cases, investors still prefer to drive their Saudi operations out of neighboring Dubai to curb the risks associated with an unpredictable destination.
“Traditionally, MENA headquarters are always in Dubai, with a team focusing on Saudi Arabia that works through local partners,” says Vaidy Panchabikesan, regional sales director at Kissflow, an Indian software company that recently entered the Saudi market and plans to set up a legal entity there next year. “The Saudi market was slow through 2017-2018, but the leadership is working on fixing the challenges. It was an unpredictable country, but it is changing.”
To bring investors to settle in the kingdom, the government announced that by 2024 it will stop signing contracts with foreign companies that base their Middle East headquarters elsewhere in the region. Several companies have since applied for licenses, including PepsiCo, Deloitte, Unilever, Siemens, Philips and Novartis. But whether Saudi proves to be a good location to run business operations smoothly outside the domestic market remains to be seen.
“To be a regional hub, you need to have more liberty in terms of movement of funds, assets, intellectual property rights, human resources. If I have a regional office in Riyadh, I should be able to serve Qatar, Bahrain, the UAE, Kuwait and other countries without having to worry about anything,” says Walee’s Tahir. “That is not the case right now.” His company will consider opening a regional HQ if things change in a few years.
Strengthening Saudi Production
In addition to attracting foreign funds and talent, Saudi Arabia is also trying to build up local capacity in multiple sectors, starting with hydrocarbons. Saudis no longer want to pump oil; they also want to transform it and control the value chain.
“The authorities keep on maintaining efforts to rebalance the hydrocarbon industry away from its reliance on upstream crude production and export, toward natural gas and value-added midstream hydrocarbon activities such as refining, petrochemicals, chemicals and minerals,” notes S&P Global Ratings. “Several large hydrocarbon projects will continue to ramp up production in 2021-2024.”
Other sectors include food production and renewable energies. In December, Desert Technologies, a solar photovoltaic panel manufacturer, was the first Saudi company to sign an export deal with the United States. The company is also looking to develop business in MENA, Africa and Europe.
Growing the non-oil sector not only helps create sustainable sources of revenue; it also allows the country tackle one of its main issues—finding jobs for its population. Since the 1980s, the authorities have been trying to encourage the replacement of foreign laborers by Saudi nationals through quota policies. While the policy has been successful in the public sector, private firms often fear that local candidates might not be as well trained as foreign ones. In some cases, companies are setting up programs to teach specific skills to the workforce.
Panchabikesan sees it as an opportunity: “70% of the population is under 30, and with Saudization this will create a valuable talent pool of coders and developers. In turn, this will help us unlock more business opportunities.”
Figures suggest change is underway. In 2021, unemployment reached 11.3%—its lowest in ten years. Over the past few years, the workforce participation of women–who are now allowed to drive—increased sharply, from 20% in 2018 to 33% in 2020.
“Important labor- market reforms have resulted in a significant increase in female labor force participation and should enhance job mobility for expatriates working in the private sector,” says the IMF.
Although the future looks bright for Saudi Arabia, the economic well-being of the country is still heavily reliant on oil prices—and that variable is closely tied to how the Covid-19 pandemic evolves in the coming months.
