Saudi Arabia seeks diversification amid regional tensions

13 March 2024

MEED’s April 2024 special report on Saudi Arabia includes:

> GVT & ECONOMY: Saudi Arabia seeks diversification amid regional tensions
> BANKING: Saudi lenders gear up for corporate growth
> UPSTREAM: Aramco spending drawdown to jolt oil projects
> DOWNSTREAM: Master Gas System spending stimulates Saudi downstream sector

> POWER: Riyadh to sustain power spending
> WATER: Growth inevitable for the Saudi water sector
> CONSTRUCTION: Saudi gigaprojects propel construction sector
> TRANSPORT: Saudi Arabia’s transport sector offers prospects


 

Hotels in Riyadh got a fillip in early March as executives and investors descended on the capital for the Leap 2024 technology conference, held in the Riyadh Exhibition and Convention Centre, some 70 kilometres north of the city.

The event is just the sort of business gathering the Saudi authorities like to host these days as part of their efforts to remodel the economy and the country’s international reputation. Such events also provide an alternative talking point at a time when regional tensions are heightened by the Gaza war.

Some $770m-worth of regional venture capital funds were launched at the event, along with $53m in funding rounds by startups and $764m-worth of other deals, according to organisers. Among the announcements, the National Development Fund (NDF) and the Social Development Bank (SDB) unveiled SR450m ($120m) in venture capital funding for the gaming and e-sports sector.

Emerging sectors

Such activity fits in with the ambitions of Crown Prince Mohammed Bin Salman Al Saud (who is said to be a gaming fan) to attract more investment into emerging sectors.

Another key area of focus for the government is tourism. On 4 March, Tourism Minister Ahmed Bin Aqeel Al Khateeb unveiled the Tourism Investment Enablers Programme, which is designed to draw in local and international investors. As part of that, a Hospitality Sector Investment Enablers Initiative aims to attract SR42bn of investments in hotels and related areas, hoping to add SR16bn to the kingdom’s annual GDP by 2030.

It remains unclear how long it will take before there is a critical mass of activity in some of these new sectors so that they can be self-sustaining and no longer reliant on government support. The slow development of the electric vehicle sector is a case in point, with billions of dollars poured into Lucid Motors, Ceer and related businesses, but little revenues coming in.

There are some other teething problems, too. One international executive who attended the Leap summit came away frustrated with the hours it had taken to reach the venue on the clogged-up highway running from the city centre. “They’re just not ready. They’re trying to run before they can walk,” he said.

The potential of the region’s biggest economy means most businesses are willing to overlook such issues, though. On 29 February, Investment Minister Khalid Bin Abdulaziz Al Falih said that his ministry had to date issued licences to 450 foreign investors to open regional headquarters in the kingdom.

Oil-based growth stalls

The country needs more of these companies and investors to help turn around a recent slump. The economy contracted by 3.7% in the final quarter of 2023 and by 0.9% over the year as a whole.

That was reflected in the government’s finances, with a deficit of SR37bn recorded in the fourth quarter of the year. The total deficit for 2023 was SR80.1bn, equivalent to 2.1% of GDP and compares to a surplus of 2.5% of GDP in 2022, which had been the first positive balance since 2013.

According to Dubai-based bank Emirates NBD, the key differences between 2022 and 2023 were falling oil prices and output, as Opec+ members curbed production in an effort to shore up the market price of crude. Saudi output fell by almost 9% to 9.6 million barrels a day (b/d), leading to a 12% fall in oil revenues to SR754bn.

Those voluntary output cuts were again extended in early March and Emirates NBD has predicted the Saudi budget deficit will likely widen further.

Riyadh has also been trimming its longer-term production capabilities. In late January, the Ministry of Energy ordered Saudi Aramco to scrap a planned 1 million b/d increase in its maximum sustainable capacity, which had first been announced almost four years ago.

The following month, Energy Minister Prince Abdulaziz Bin Salman Al Saud told an industry conference in Dharan: “We postponed this investment simply because … we’re transitioning.”

Nonetheless, oil and gas will continue to be the central component of the Saudi economy for years to come as it remains the country’s main source of wealth. Underling that reality, the government is reported to be considering selling more shares in Aramco later this year to help fund its spending plans.

Non-oil growth

While oil-based growth is stalling, the non-oil economy is growing. Riyadh-based Jadwa Investment has predicted that non-oil GDP growth will accelerate slightly in the near term, from 4.6% in 2023 to 5% or higher in the next two years, driven by both consumption and investment.

Costs are rising for both labour and materials, though, which could undermine the prospects for such improvements. The disruption caused by the attacks on commercial shipping in the Red Sea and the Gulf of Aden by Yemen’s Houthis since November is a factor in the 25-50% increase in construction materials that has been reported in recent weeks, according to Jadwa.

Foreign policy

There are constraints on Riyadh in how it can respond to events in Yemen though, not least because Saudi Arabia remains keen on striking a deal with the Houthis that would enable it to leave the Yemeni conflict zone entirely, some nine years after it first became engaged.

That has prompted Riyadh – in common with some other Arab states – to keep a low profile regarding the Houthi shipping campaign, and the result is “a very awkward equilibrium”, according to Thomas Juneau, an associate professor at the University of Ottawa, Canada.

“Saudi Arabia and the UAE are constrained by their domestic politics, where pro-Palestinian feeling is very strong, especially in Saudi Arabia. [They are also] constrained by the pragmatic turn in their foreign policy we’ve seen in recent years,” he said.

“But also heavily constrained because they are very conscious of the prospects of Houthi retaliation, which they absolutely want to avoid. We’ve seen in the past how the Houthis can impose a cost by targeting critical infrastructure or skyscrapers or airports in Saudi Arabia and the UAE.”

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Dominic Dudley
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