Export potential: Work to encourage growth of non-oil sales abroad is ongoing

The changing nature of Saudi exports tells the story of the Kingdom’s efforts to diversify its economy. Encouragingly, non-oil exports have been growing more quickly than oil exports in recent years, though oil still makes up a significant majority of the country’s external sales, reflecting the size of the challenge facing the Kingdom with respect to economic diversification. To stimulate the growth of non-oil exports, the government created the Saudi Export Development Authority, which has assumed responsibility for promoting the Kingdom’s non-oil products abroad and assisting domestic companies in exporting their goods.

PRODUCT SHIFT: Exports of mineral products, which comprise mainly oil, reached SR1.07trn ($284.6bn) in 2014, equivalent to 83.2% of the Kingdom’s total exports. This represented a decrease of SR140.1bn ($37.3bn) or 11.6% for this category year-on-year (y-o-y).

By contrast, non-oil exports increased five-fold in value terms between 2003 and 2013, growing at an annual rate of 20% to reach SR216bn ($57.6bn) in 2014. This rise has boosted the share of non-oil exports in non-oil GDP by three percentage points since 2004, reaching 13.6% by 2013, according to the IMF.

Non-oil exports largely amount to oil-related products, such as chemicals and plastics. Indeed, according to data by the Central Department of Statistics and Information (CDSI), chemical and artificial resins and plastics contributed SR143.9bn ($38.3bn), or 11.2%, of the Kingdom’s total exports in 2014, marking an increase of SR12.1bn ($3.2bn) or 9.2% y-o-y.

Base metals accounted for a further 1.1% of total exports, or SR14.1bn ($3.8bn), having fallen by 20.2% y-o-y. Foodstuffs were close behind at SR13.4bn ($3.6bn) or 1% of total exports, with 41.5% of that figure being made up of livestock and animal products. Electrical appliances, paper products, jewellery, stone and cement each contributed between 0.1% and 0.2% to the total. In addition, re-exported goods saw growth of SR75m ($20m) in 2014, a rise of 0.2% y-o-y to comprise 2.4% of total exports, equivalent to SR30.4bn ($8.1bn).

SERVICES: Saudi Arabia’s export of services has traditionally been low, both in absolute terms and relative to its peers. The Kingdom’s share of total world exports of services amounted to 0.24% in 2012, with the main components being travel (70% of total service exports) and transportation (21.5%), according to World Trade Organisation data published in a 2015 IMF report. While this share of services exports is consistent with the corresponding figures for other Middle East and North African countries, it shows the Kingdom has some way to go in before it can compete with the BRICS (Brazil, Russia, India, China and South Africa) and other advanced economies. Regulation is partly to answer for this, with statistics from the World Bank’s Services Trade Restrictions Database indicating that the GCC countries have some of the most restrictive services policies in the world, particularly with respect to telecommunications and financial services.

EXPORT QUALITY: In a 2015 report, the IMF noted that the quality of Saudi Arabia’s exports remains relatively low. However, this is unsurprising given that crude oil dominates the export basket and is not a fair reflection of the quality of the Kingdom’s non-oil exports. In contrast, the IMF observed that the quality of Saudi Arabia’s exports of chemical products compares well to that of other countries, yet chemicals’ share of total exports remains too small to significantly raise the average quality of the Kingdom’s exports overall. According to Feras Abalkhail, director of marketing and public relations at the Saudi Export Development Authority, Saudi firms owe at least part of their competitiveness in non-oil exports to the dynamics of the domestic market. He argues that the strength of the Saudi market has attracted many leading international firms to the Kingdom over the years, forcing local firms to raise their standards to compete domestically, and in the process preparing them to export in due course.

GCC MARKET: Saudi exports to the rest of the GCC amounted to SR97.4bn ($25.9bn) in 2014, equivalent to 7.6% of the total value of the Kingdom’s exports. The GCC represents an important market for Saudi Arabian non-oil exports, where the high quality of Saudi products such as processed foods and construction materials finds a receptive audience.

In 2014 Saudi Arabia exported SR8bn ($2.1bn) of agricultural and animal products, SR43.2bn ($11.5bn) of industrial products and SR30.3bn ($8.1bn) of natural products to the GCC. Within the community, the UAE remained Saudi Arabia’s largest export market, absorbing SR44.4bn ($11.8bn) of Saudi goods and services. The value of imported Saudi national products (as opposed to re-exported foreign products) to the UAE rose by SR5.9bn ($1.6bn), an increase of 20% y-o-y. Bahrain follows the UAE as the second-largest export destination. It received a higher value of Saudi national products (SR31.1bn, $8.3bn) than the UAE, but a slightly lower value in total exports (SR34.6bn, $9.2bn). Oman, Qatar and Kuwait are all smaller markets for Saudi exports, accounting for SR6.5bn ($1.7bn), SR6.2bn ($1.7bn) and SR5.8bn ($1.5bn), respectively, in 2014.

EXPORT STRENGTHS: Saudi Arabia possesses a range of strengths upon which its export capacity is founded. “We have a well-established industrial sector, which has existed for over 40 years – a long time compared to that of other GCC members,” Abalkhail told OBG. Over this period Saudi firms have built up expertise that now enables them to compete at a global level.

The non-oil export categories that Saudi Arabia is targeting in particular include food, packaging, electricity, petrochemicals and construction materials – all areas in which the Kingdom has developed a competitive advantage. “Saudi Arabia has globally competitive textile producers, as well as food manufacturers and construction materials companies that are regional leaders in their fields,” Abalkhail said.

GOVERNMENT SUPPORT: The Saudi Export Development Authority, known as Saudi Exports, was established in June 2013 with a mandate to boost the Kingdom’s non-oil exports, in a step welcomed by the IMF. To develop the internal capabilities of domestic exporters, Saudi Exports provides training programmes, workshops and toolkits to local companies on subjects such as international strategy and marketing, export logistics and international export regulations.

Abalkhail told OBG that eventually Saudi Exports aspires to open offices abroad in order to better promote the Kingdom’s products and to assist exporters by providing advisory services related to commercial, technical and legal issues that their businesses might face. In the meantime, the organisation is collaborating with a range of other government agencies, such as the Ministry of Commerce and Industry, to improve the national export ecosystem at home.

FAIRS: Saudi participation at major international trade fairs over recent years illustrates the Kingdom’s growing ambitions when it comes to exports. Saudi Arabia’s pavilion at The Big 5 construction fair in Dubai in 2013 was the first time that the Kingdom had taken part in a fair on that scale. In 2014 Saudi Arabia went on to participate at a national level in 13 trade exhibitions and in 2015 the Kingdom plans to take part in 18 such fairs, ranging from the 12th International Halal Showcase in Malaysia to trade fairs in Europe and Africa.

“Local firms’ participation in these fairs has opened their eyes to what it takes to be competitive abroad, for example the need to adapt packaging to different markets,” Abalkhail told OBG. By participating at a national level at international fairs, Saudi Exports has also helped to bring disparate exporters together to enable them to share best practices with each other.

OPENING UP: Among the factors that previously held Saudi Arabia’s non-oil export volumes back was a lack of awareness among smaller local firms of the opportunities that foreign markets present. “This lack of awareness is understandable considering the rapid growth of Saudi firms’ home market in recent years. However, Saudi Exports has a role to play in addressing this by highlighting some of the risks of a purely domestic strategy, such as the potential negative impact on consumer spending that a sustained period of lower oil prices could have,” Abalkhail told OBG.

The popularity of Saudi products in Middle Eastern countries where they are prevalent bodes well for the success of a new generation of exporters emerging from the Kingdom as they pursue new markets abroad.