Latest growth figures from Saudi Arabia—a third quarter contraction of 0.46 percent—present a mixed picture. They demonstrate that the transformation outlined by Vision 2030 began to show through in the third quarter, when an OPEC-related contraction in the oil sector was counter-balanced by strong growth in other sectors of the economy. The figures also highlighted the risks associated with growth in Saudi Arabia’s public debt.
At present, the most important contributors to the Saudi economy are crude oil production, manufacturing (dominated by downstream petrochemicals), finance and wholesale and retail trade. Vision 2030 aims to massively cut the role of oil, to bolster non-petrochemical manufacturing and to transform the country into a finance and tourism hub. Growth in non-oil industries is crucial to securing these goals.
On the surface, Saudi Arabia’s economy was hit by a 6.4 contraction in the oil sector in the third quarter, due to OPEC production cuts. Note that while oil prices fell by 24 percent during the same period, this is not reflected in sectoral GDP data because it uses production quantities and not prices; the adverse effect of the fall in oil prices is reflected in the decline in total GDP, as it leads to lower spending in other sectors.
The oil sector’s contraction was offset almost completely by a 4.3 percent rise in non-oil GDP. Finance grew by 6.3 percent, trade grew by 8 percent and construction grew by 4.6 percent.
A key driver of the financial sector’s growth was the massive growth in home loans, which was in turn the result of a state-backed housing program that encourages creditors to allocate larger proportions of their portfolios to mortgage finance, as part of the government’s commitment to increasing home ownership under Vision 2030. The first three quarters of 2019 witnessed a 254 percent increase in new home loans.
General improvements in consumer and business sentiment also played a role in boosting consumer spending, and there is the promise of even better figures in the last quarter of 2019 following the success of Riyadh Season activities and the new tourist visa in bringing tourists to the country.
From the perspective of Vision 2030 overseers, a welcome consequence of these developments is a drop in the direct contribution of the oil sector to 41.6 percent in the third quarter from 44.3 percent a year earlier. Historically, a 24 percent decline in oil prices would surely have resulted in a sharp decline in aggregate economic activity, but as the economy transforms, GDP remained almost flat as the non-oil sector prospered.
However, behind the robust growth in non-oil GDP lurks the specter of increased borrowing, as the robust growth in non-oil GDP has been partially funded by an aggressive fiscal stimulus strategy. The figures revealed that borrowing for the first nine months of 2019 increased 17.1 percent in the gross national debt compared to the end of 2018 – pushing debt to over 20 percent of GDP.
The rate of growth of Saudi public debt is unsustainable: in 2014, debt equaled a mere 1.6 percent of GDP, compared to 19.1 percent in 2018. It is not frivolous domestic spending, such as arbitrary increases in public sector salaries; instead, a significant proportion is being funneled into investments that seek to diminish the economy’s dependence on oil. Headline projects include the new Jeddah airport, which will contribute to bolstering religious tourism; and the new city Neom, which aims to be a hub for artificial intelligence and other cutting-edge technologies.
The third quarter figures and the expectation of good fourth quarter figures together pose the following question: Will the rate of return on these investments be high enough to offset the eventual need to curtail borrowing?
The unemployment rate has yet to exhibit the sort of declines hoped for by the government, but this disappointment must be tempered by the fact that women are entering the workforce at exceptionally high rates and finding jobs, meaning that the economy is in fact creating a lot of new jobs for nationals.
Thus, the economy finds itself at an important turning point. It is critical that Saudi policymakers invest well. Their fiscal frugality over the last two decades has afforded them a large buffer with which to fund their exciting projects, but the task that they have been set is very difficult. No desert economy has ever realized high levels of per capita income without dependence upon natural resources.
Other oil-based economies that have successfully diversified, such as Malaysia and Mexico, were aided by the existence of a sound, traditional industrial base. The Arabian Peninsula’s arid climate means that the Gulf countries have to create an economy from almost nothing, and it sends their transformation voyages into uncharted waters. The next five years will be pivotal for the future of the transformation project.