A welcome improvement was seen in the Kingdom’s economic fortune in 2018, with GDP growth of 1.2% in the first quarter marking the first expansion of the national economy after five consecutive quarters of contraction. Overall, the economy grew by 2.2% for the year, compared to a contraction of 0.7% in 2017. Firming oil prices have enabled the government to produce two record-breaking budgets for 2018 and 2019, and the private sector is poised to benefit as the projects outlined in the nation’s ambitious development strategy begin to take shape with its help.

Saudi Arabia’s long-term goal of securing enough private investment to shift the nation’s primary engine of growth away from state spending, however, remains a work in progress. Three years after the launch of Saudi Vision 2030, the nation’s blueprint for economic and societal transformation, the government’s ability to effectively distribute oil revenue across all sectors remains the key determinant of the Kingdom’s fiscal health.


The roadmap by which Saudi Arabia’s economic evolution is being directed was revealed in April 2016. Vision 2030 sets out sweeping regulatory, budget and social reforms that will be implemented over the coming decade as the nation sets about reducing its reliance on crude oil production and export, which accounted for 43.5% of GDP in 2018, according to the General Authority for Statistics (GaStat). Key initiatives include a privatisation programme which will see the divestment of a number of state-owned giants, the creation of one of the world’s largest sovereign wealth funds, more Saudi citizens employed by the private sector and the increased participation of women in the workforce.

If the strategy’s goals are met, this reform process will establish the Kingdom as one of the 15-largest economies in the world, supported by a broader range of exports than today’s hydrocarbons-heavy portfolio, a more productive small and medium-sized enterprise segment, and completely overhauled finance, tourism and industrial sectors. The population, meanwhile, will benefit from a redesigned and refocused education system, a wide range of employment opportunities in the private sector, and a depth of entertainment and cultural activities.

Many of the shorter-term objectives of Vision 2030 are being pursued under the National Transformation Programme (NTP), a more detailed policy document that outlines how government ministries are to work towards the Vision 2030 goals. The NTP sets out a range of items to be completed by the end of 2020, including a reduction in spending on public wages from 45% of the budget to 40% and a tripling of non-oil revenue.

Also published in 2016, the NTP served to kickstart the Kingdom’s reform process, but it has since receded in importance as officials have begun to roll out the remaining 11 of its 12 Vision Realisation Programmes (VRPs), which provide sectoral roadmaps to the goals of Vision 2030. First announced in April 2017, the VRPs cover the entire socio-economic spectrum, from the heritage and lifestyle initiatives contained within the Quality of Life Programme 2020 (see analysis), to the industrial, housing, human capital and financial spheres.


Vision 2030 and its VRPs are being implemented across government entities, with each ministry responsible for attaining predetermined objectives. These far-reaching plans are a costly undertaking. The National Industrial Development and Logistics Programme, for example, is perhaps the largest VRP in terms of scale and cost, as it seeks to channel funding into the manufacturing, mining, energy and logistics sectors through more than 300 separate initiatives. The overall objective is to boost the contribution of these four sectors from the 17% of GDP recorded in 2016 to 33% of GDP in 2030. The price of achieving this increase is approximately SR1.6trn ($426.6bn), according to the government’s estimates. The plan aims to meet this cost through investment from companies around the world.

Other programmes come with similar price tags, which the authorities again hope to meet with the help of private sector capital. Herein lies Saudi Arabia’s biggest challenge: transforming an economy that has been driven by public sector spending since the 1950s, when first significant oil revenues began to flow, into one in which private investment serves as the primary engine of growth. In order to attain this outcome, however, Saudi Arabia will need to overcome a trend of declining foreign direct investment (FDI) inflows and rising capital outflows. According to the “World Investment Report 2018” by the UN Conference on Trade and Development, net FDI into the Kingdom dropped to $1.4bn in 2017, down from $7.5bn the previous year.

Furthermore, the balance of FDI as a whole remains negative due to high capital outflows. A September 2018 report by London-based consultancy Capital Economics noted that net capital outflows were equal to approximately 5% of GDP in the first three months of 2018, compared to less than 2% of GDP in late 2016. However, some of this volume may be the result of the Kingdom transferring money abroad to make investments in other countries, while market observers have pointed out that a number of large transactions could be skewing the figure, such as Shell Arabia’s sale of its 50% stake in Saudi Petrochemical Company to government-owned partner Saudi Basic Industries Corporation (SABIC) – the Kingdom’s diversified manufacturing company – for $820m in August 2017. Still, companies and individuals choosing to move money abroad is a factor, according to the report.

Improving the business environment is one way to boost FDI levels. Saudi Arabia ranks 92nd out of 190 countries in the “Doing Business 2019” report by the World Bank, where it scores well in areas such as protecting minority investors and registering property, but less well in starting a business, trading across borders, obtaining credit and resolving insolvency. All categories are being addressed by Vision 2030 and the VRPs, and the government expects the Kingdom’s performance in the index to reflect these efforts over the medium term.


Other ways in which Saudi Arabia can attract private sector investment is by divesting some of its state-owned assets, or by linking foreign investors and operators with state-owned companies through public-private partnerships (PPPs). The partial privatisation of Saudi Aramco was, until recently, the flagship initiative of the authorities’ privatisation drive. By early 2018 a strategy was in place to list shares in the national oil giant on the Saudi Stock Exchange (Tadawul), but with no action taken by the end of the summer, questions were raised about a possible cancellation. Addressing speculations in January 2019, Khalid Al Falih, the minister of energy, industry and mineral resources, said the Saudi Aramco initial public offering (IPO) was now being eyed for 2021.

While the flotation of Saudi Aramco has seen multiple delays, the Kingdom’s privatisation programme is advancing more rapidly in other areas of the economy. In fact, the opening of some state-dominated industries to private sector investment predates the Vision 2030 strategy. In the aviation sector, for example, the General Authority of Civil Aviation has gradually retreated from its role as both regulator and operator to one of regulation only, with private capital moving into airport construction and operation, as well as aviation services.

The privatisation drive initiated by Vision 2030 represents a significant amplification of this trend. “The privatisation process undertaken by the government will create business opportunities for many, and open the door for greater margin gains for both foreign investors and local companies,” Abdulaziz Mohammed Al Namlah, managing director of holding firm Amnest Group, told OBG.

Short-Term Plans

The National Centre for Privatisation and Public-Private Partnerships (NCP), established in 2017, is overseeing the various privatisation programmes, assisting the different supervisory committees, and developing the policies and strategies needed to fulfil the government’s objectives. The areas targeted by the NCP for this process are laid out in Vision 2030: environment, water and agriculture; transport; energy, industry and mineral resources; labour and social development; housing; education; health; municipalities; telecoms and IT; and the Hajj and Umrah industries. In April 2018 the Council of Economic and Development Affairs approved the Privatisation Programme Delivery Plan, which outlines in more detail how the state will privatise at least five of its assets or services before the end of 2020, generating a total revenue of between SR35bn ($9.3bn) and SR40bn ($10.7bn).

The transfer of ownership from public to private sector will take a number of forms, including IPOs, full or partial sales of assets, management buyouts and PPPs – a new framework for which is expected to be rolled out in 2019 (see analysis). Assets available for privatisation include the partial sale of the Saline Water Conversion Corporation, the full sale of four flour mills and a number of sports clubs, and the privatisation or transfer to PPPs of Saudi Post services and a range of transport projects.

By transferring certain institutions and functions, the government hopes to achieve net savings of between SR1bn ($266.6m) and SR1.2bn ($319.9m) from asset sales, and between SAR25bn ($6.7bn) and SR33bn ($8.8bn) from privatisation and PPP projects, as per a 2019 report by local firm Jadwa Investment. It also aims to create 10,000-12,000 private sector jobs, though these will likely be transfers from the public sphere rather than new positions.

In addition to the larger state assets being offloaded per the Privatisation Programme Delivery Plan, Saudi ministries are privatising assets and services according to their individual mandates under the NTP. The Ministry of Education, for example, said in 2018 that it will hand over 25 public schools to the private sector as part of its Independent Schools initiative, which aims to place 6% of the nation’s schools into the hands of private operators by 2020. The Ministry of Health, meanwhile, intends to reach its NTP target of improving access to health services by increasing the private sector’s share of total health care spend from 25% to 35% by 2020. Furthermore, the Financial Sector Development Programme, another VRP under Vision 2030, aims to develop deeper capital markets through more IPOs and security listings, encourage government entities to privatise through IPOs and privatise the payment system SADAD, which is owned by the Saudi Arabian Monetary Authority (SAMA), the central bank.

Public Funds

Saudi Arabia’s bid to establish the private sector as the main force of the economy is a long-term aim; in the shorter term the government has sufficient capital reserves to continue being a catalyst for development. The Kingdom has a number of funds that can act as economic engines, the largest of them being SAMA Foreign Holdings, a pool of currency reserves derived from the Kingdom’s oil revenue and controlled by the central bank. In early 2019 the fund had $515.6bn worth of assets under management, making it the world’s sixth-largest sovereign wealth fund (SWF), according to the US-based SWF Institute. The fund is focused on cash deposits, fixed-income instruments and equities.

The Public Investment Fund (PIF) is a more visible tool within the Kingdom’s economic armoury. Established in 1971 to support strategically important projects, it holds approximately $150bn worth of assets in listed Saudi companies, including the country’s biggest bank and telecoms operator. The PIF is to play a leading role in the economic transformation of the country, and current plans aim to increase its assets to $2trn by 2030. It is a common strategy in the GCC to pour hydrocarbons revenue into a SWF that invests both locally and globally in order to diversify the economy and ensure that wealth is passed on to future generations. Regional funds own a large array of assets in developed markets – from football teams to prime real estate.

The plan to raise $100bn for the PIF through the partial sale of Saudi Aramco has, however, yet to be carried out. Therefore, other funding options are being considered in 2019, including the possibility that Aramco will buy as much as 70% of the PIF’s stake in SABIC, valued at around $100bn. Other fundraising options for the PIF include the sale of stakes in some of its Saudi-listed companies or borrowing from banks to invest in diversification efforts. The PIF has already shown its willingness to raise debt: in September 2018 the fund revealed it had secured $11bn in its first international loan.

Fiscal Matters

Saudi Arabia’s deep reserves have helped it mitigate the negative effects of the oil price decline, which began in late 2014. Nevertheless, the fiscal deficit was a record SR367bn ($97.8bn) in 2015, equal to about 15% of GDP, which compelled the government to liquidate some foreign assets to meet spending commitments. The 2017 budget included details of the Fiscal Balance Programme that initially sought to balance the budget by 2020 – it has now been revised to 2023 – and included measures promoting non-oil revenue growth and enhanced spending efficiency.

Gradually improving oil prices throughout 2017 and the first three quarters of 2018 brought about an improvement in the fiscal scenario, and allowed the government to narrow the budget deficit. In 2018 oil revenue rose by 38% over the previous year, and, as oil accounts for nearly 70% of total revenue, this improvement was the determinant factor in narrowing the deficit to around 4.6% of GDP.

The budget for 2019 is an expansionary one for the second year running. Total anticipated expenditure is SR1.11trn ($295.9bn), an increase of SR76bn ($20.3bn) over 2018. The majority of anticipated outlay is accounted for by capital spending, which is to be directed towards the private sector as part of a stimulus plan (see analysis).

The IMF foresees the fiscal gap narrowing further in 2019 to around 1.7% of GDP. The speed at which the deficit is addressed is of central concern to the Ministry of Finance, which must balance the need to spur the economy through public spending with the desire to reduce the budget gap. The ministry made its policy intentions clear by holding a pre-budget briefing in September 2018. Having announced an expansionary budget aimed at boosting growth and creating jobs, Mohammed Al Jadaan, the minister of finance, said the budget was also “yet another step in cutting the deficit gradually in the medium term, until we rebalance the budget entirely by 2023” – a few years later than the original target of 2020.

Bridging the Gap

Beyond its financial reserves, the Kingdom has recourse to other means by which to bridge its fiscal deficit. In 2016 the Kingdom held its first international bond sale, attracting $17.5bn in a heavily oversubscribed offering. In April 2017 the country diversified its funding base further with the well-received issuance of its first dollar-denominated sukuk (Islamic bond), sold in two $4.5bn tranches with tenors of five and 10 years.

The Kingdom’s successful entry into the global debt market is significant from a local liquidity perspective, in that it allows the government to draw down less of its deposits held with domestic banks. In addition, it eases the pressure on the local sovereign debt issuance programme, which also drains liquidity from the financial system. In early 2019 the Ministry of Finance revealed its intention to issue a $7.5bn international bond, and Jadwa Investment foresees around SR30bn ($8bn) worth of further international issuances for the year. Assuming no repayments, the company expects government debt to stand at SR678bn ($180.7bn) at the end of 2019, a comfortable level of about 22% of GDP.

Inflation & Monetary Policy

The Kingdom’s journey of economic reform has yet to have a significant impact on inflation. Rising fuel prices due to lower state subsidies, the introduction of excise duties in 2017 and the onset of value-added tax in 2018 have boosted non-oil revenues at the cost of only a modest rise in inflation, which increased by 2.5% in 2018 after a contraction of 0.8% in 2017, according to Jadwa Investment. In a July 2018 Article IV Consultation report, the IMF said it expects inflation to moderate to 2% in the medium term.

The existence of a currency peg between the riyal and the dollar means that Saudi Arabian monetary policy is coordinated closely with the decisions of the US Federal Reserve. One of SAMA’s main priorities is to ensure that there is not a large discount between the two currencies to guard against currency flight. In 2018 Saudi interbank rates fell below their US-dollar equivalent for the first time since the global financial crisis of 2008-09, raising the risk of high capital outflows. The central bank therefore departed from its usual policy of shadowing US Federal Reserve decisions and pre-emptively raised its repurchase and reverse repurchase rates by 25 basis points each in March 2018, to 2.25% and 1.75%, respectively. The policy, however, remained in line with the US Federal Reserve’s stated goal of gradual monetary tightening. SAMA has also raised the possibility of draining excess liquidity from the banking system that is partially causing local interbank rates to lag behind their US-dollar equivalent, for example, by allowing government deposits placed with the commercial banking segment in 2016 to mature without rolling them over.

Rising Costs

While economic reform promises long-term benefits for the Kingdom’s private sector, in the short term it is being compelled to make some challenging adjustments. A shake up of the energy market, for instance, has resulted in higher costs for businesses. The first phase of reform, which began in 2015, saw prices of natural gas, petrol, diesel and electricity rise by as much as 80%. The second phase was announced in early 2018 and saw prices of high- and low-grade gasoline rise from SR0.90 ($0.24) per litre to SR2.04 ($0.54) and from SR0.75 ($0.20) per litre to SR1.30 ($0.35), respectively.

Saudi Arabia’s bid to increase the number of citizens in the workforce is also raising costs for the private sector. The introduction of a 2018 levy on expatriate workers is both a labour market reform tool and a revenue raiser for the government. At the same time, it is a hurdle to growth for companies operating on low margins or requiring high levels of foreign manpower. Companies in particularly vulnerable sectors, such as construction, real estate and the hotel industry, need to develop efficiencies elsewhere to maintain profitability.

The levy ranged from SR300 ($80) to SR400 ($107) per foreign worker per month in 2018, is now SR500-600 ($133-160) for 2019 and will be SR700-800 ($187-213) in 2020. According to a February 2018 report by local consultancy Al Rajhi Capital, the impact of the expat levy will range from 0.1% of revenue in the telecommunications sector to 4.1% in the hotel and tourism industry. Furthermore, the total cost of the expat employee levy is estimated to reach some SR18.8bn ($5bn) in 2018, SR37.4bn ($10bn) in 2019 and SR56.1bn ($15bn) in 2020.


The government has also sought to increase the number of nationals in the workforce through a process of Saudiisation, an official policy to replace foreign workers with citizens that mandates the percentage of nationals a company should have in each position. First implemented in the mid-1990s, the extended period of low oil prices from 2015 has returned Saudiisation to the top of the government’s agenda. The latest version of the scheme was introduced in 2016 in a bid to inject new momentum into the process and open up 1.2m private sector job opportunities to citizens. This complements the objective of the Ministry of Labour to reduce the unemployment rate to 10.5% by 2022, a target that will involve both an increase in the number of jobs available and the continued replacement of foreigners by Saudis. The figure stood at 12.8% in 2018, according to GaStat.

As a result, companies are faced with the higher wage demands of nationals, as well as the extra effort to recruit, train and retain suitable candidates. The government has demonstrated its determination to enforce the policy. For instance, in the second half of 2018 the Communications and IT Commission said that it had ordered Mobily, one of the Kingdom’s mobile telecoms providers, to suspend the sale of new prepaid and postpaid packages due to having an insufficient number of Saudi citizens in executive positions (see ICT chapter).


Firming oil prices and an expansionary budget have resulted in a positive outlook: in October 2018 the IMF lifted the Kingdom’s GDP growth prediction for 2019 by 0.5% to 2.4%. However, transitioning the economy to be fuelled by the private sector has yet to gain momentum. Private businesses, faced with Saudiisation targets, new taxes and higher utility bills, are struggling to fulfil the role that the government’s development strategy asks of them, and FDI levels remain lower than hoped.

Portfolio investment, however, is a more promising prospect in the near term, as the Tadawul was upgraded to emerging market status by MSCI in 2018 and is set to benefit from inclusion on the Emerging Market Index in 2019 (see Capital Markets chapter).