As one of the world’s biggest oil exporters, Saudi Arabia’s trade links are well established and have a global reach. The revenue raised from outgoing shipments of this resource fund the government’s social and infrastructural programmes, and are therefore central to the Kingdom’s economy. Saudi Arabia’s non-oil exports, however, are considerably smaller than its non-oil imports, and reducing the non-oil trade deficit is a central pillar of Saudi Vision 2030, the strategic blueprint that is guiding the economic and social development. Boosting investment inflows is an overarching part of the effort: to this end, Saudi Arabia is overhauling the laws and regulations that govern foreign investment, and taking steps to improve the general business environment – measures that have made the Kingdom the world’s top-reforming country in the eyes of the World Bank. At the same time, the Kingdom is considerably increasing its volume of investment made abroad, with the figure rising from $7.3bn in 2017 to $21.2bn in 2018, according to the UN Conference on Trade and Development (UNCTAD) (see analysis).
In February 2020 the government announced that the Saudi Arabian General Investment Authority (SAGIA) would be absorbed by the new Ministry of Investment led by Khalid Al Falih, who headed the old Ministry of Energy, Industry and Mineral Resources. The new ministry will build off the work accomplished by SAGIA in recent years to promote the Invest Saudi brand and launch an initiative of the same name aimed at developing the investment environment in the country through attracting qualitative investments.
Oil Trade
Saudi Arabia’s standing as a trading nation rests largely on the crude oil it ships around the globe. With oil reserves of 297.7bn barrels, according to the BP’s “Statistical Review of World Energy 2019” report, the Kingdom owns more than 17% of global stocks. In 2018 it was the world’s second-biggest oil producer, accounting for around 13% of total supply. The Kingdom retained its title as the globe’s largest oil exporter, sending approximately 367.4m tonnes abroad that year. The majority was destined for Asia, with India, China and Japan taking 39.3m, 56.7m and 57.4m tonnes, respectively. Europe and the US are also important clients of the Kingdom’s hydrocarbons industry, each accounting for over 40m tonnes of exports in 2018.
The scale of the Kingdom’s oil and gas activity means that it is a central component of the wider economy, accounting for more than three-quarters of total export earnings in the third quarter of 2019, according to the General Authority for Statistics (GaStat). The Kingdom’s trade balance is thus largely dependent on the average price of oil in any given year. In 2012, when oil prices were close to their all-time highs, the Kingdom’s trade surplus stood at SR873bn ($232.2bn). Since then, oil prices have softened and along with revenues, with the Kingdom posting a trade surplus of SR597.5bn ($158.9bn) in 2018. However, the spread of Covid-19 in early 2020 led factories worldwide to halt production, slowing demand for oil and likely impacting the year’s trade flows. This carries with it significant fiscal implications, given the importance of the Kingdom’s oil revenue to its current account (see Economy chapter).
Diversifying export composition is thus a key component of Vision 2030. One of the three central pillars of this strategy is to establish Saudi Arabia as an “epicentre of trade and the gateway to the world”, taking advantage of its strategic location that connects Europe, Asia and Africa. This effort calls for a wholesale restructuring of the country’s economy, increasing nonoil government revenues from SR163bn ($43.4bn) at the time of the plan’s formation to SR1trn ($266.3bn) by 2030, and boosting the share of non-oil exports in the non-oil GDP from 16% to 50%.
Non-Oil Growth
For the third quarter of 2019 the Kingdom’s mineral exports – mostly oil – accounted for nearly 77% of total exports, according to GaStat. The next biggest category was plastics, rubber and related articles, making up 7.8% of total export value; followed by chemical products (7.1%); base metals (1.6%); and vehicles, aircraft, vessels and associated transport equipment (1.5%). Boosting non-oil exports is a strategic priority for the government. However, according to the Saudi Export Development Authority (SEDA), non-oil exports actually declined slightly over the past year, from SR215.7bn ($57.4bn) in the first 11 months of 2018 to around SR202.7bn ($54bn) in the corresponding period of 2019.
The Kingdom’s National Transformation Programme (NTP), the first of 13 Vision Realisation Programmes to be published under the umbrella of Vision 2030, established several trade targets for 2020, including increasing the value of non-oil commodities exports from a baseline of SR185bn ($49.3bn) to SR330bn ($87.9bn), and boosting the number of Saudi exporters from 1190 to 1500. In early 2020 SEDA posted a revised target for the year of SR310bn ($82.6bn); while lower than the NTP’s earlier goal, it is a significant increase from 2019. Several government ministries and bodies are collaborating to achieve this target. SEDA has launched a SR120m ($32m) motivation programme in cooperation with the Private Sector Stimulus Office, offering nine World Trade Organisation (WTO)-compliant incentives that cover expenses incurred in the export process.
The Ministry of Commerce has initiatives that include establishing an export processing zone and an electronic platform for exporters, while the Ministry of Economy and Planning is improving the framework that supports export processes. Some of this effort involves regional partnerships. In February 2020 the Saudi Fund for Development signed an agreement with UAE export credit company Etihad Credit Insurance to finance and provide credit insurance for non-oil exports of both countries. The deal will see the two firms cooperate in areas that include insurance, reinsurance, collections, commercial information and credit opinions, and is primarily intended to assist local small and medium-sized enterprises.
Import Reduction
While oil price fluctuations have caused the value of the Kingdom’s exports to change significantly in recent years, the value of the Kingdom’s imports has remained relatively static. In 2019 merchandise imports to the country totalled SR541.3bn ($144bn), up from SR514bn ($137bn) in 2018. The scale of the Kingdom’s oil exports means that when it comes to assessing progress in diversifying the economy and reducing reliance on imports, the most useful data point is the proportion of imports that is covered by nonoil exports. The amount of imports covered by Saudi Arabia’s non-oil export activity rose from 24.1% in 2015 to 40.1% in 2018, according to GaStat. Strengthening this trend by raising the level of domestic production is one of the goals of Vision 2030, and a number of manufacturing areas – such as pharmaceuticals and renewable energy – has been identified to help meet this goal (see Industry chapter).
Trade Agreements
As it sets about the task of boosting non-oil exports, the Kingdom’s strategic planners have a host of bilateral and multilateral trade agreements to capitalise on. Saudi Arabia has been a member of the WTO since 2005, and its position within the Greater Arab Free Trade Area grants it privileged access to 17 countries in the MENA region. As a member of the GCC, Saudi Arabia benefits from the Customs Union agreed by the bloc in 2003, as well as free trade agreements (FTAs) the GCC has signed with nations such as Singapore. The GCC is working to secure similar arrangements with a number of other countries and economic blocs, including Australia, China, India, Japan, Jordan, Korea, New Zealand, Turkey, Mercosur, the Association of South-East Asian Nations and the EU. Many of these negotiations have spanned decades, but the GCC has made more timely progress with the European Free Trade Association (EFTA), comprising Norway, Ireland, Liechtenstein and Switzerland: a long anticipated EFTA-GCC FTA came into force in July 2014, introducing a wide-ranging framework that covers trade in goods and services, government procurement and competition. Individually, Saudi Arabia signed a trade and investment framework agreement with the US in 2003 aimed at improving legal protections for investors; boosting intellectual property protection; creating more transparent and efficient Customs procedures; and increasing transparency in government and commercial regulations.
Infrastructure Boost
The government’s plans to boost trade include enhancing the infrastructure that supports it. This effort involves calling on the private sector to participate in developing new rail projects and increasing efficiency at the major international gateways of Jeddah Islamic Port and the King Abdulaziz Port in Dammam, as well as the commercial ports at Yanbu and Jubail, and the facilities at Jizan, Dhiba and Ras Al Khair. New logistics zones, meanwhile, aim to boost connectivity and attract investment. The Kingdom opened the Al Khomra Logistics Zone at Jeddah Islamic Port in October 2019. The 2.3m-sq-metre facility is the country’s largest, and forms part of a wider plan to establish the Kingdom as a global logistics centre. This effort is being guided by the National Industrial Development and Logistics Programme, which targets SR1.6trn ($426.1bn) of investment over the decade to 2030, some SR135bn ($35.9bn) of which is earmarked for the logistics sector. Other emerging logistics centres in the Kingdom include King Abdullah Economic City and the new city of NEOM, a giga-project in the country’s north-west that is planned to include a logistics zone.
Foreign Direct Investment
As the biggest economy in the GCC, the Kingdom has long been a destination of interest for global investors. The recent liberalisation of the Kingdom’s stock exchange and its recognition by leading index providers has meant that portfolio investment, rather than foreign direct investment (FDI), has garnered headlines in the global financial press of late. “The relatively recent inclusion of the Saudi stock exchange on the MSCI and FTSE indices is set to increase foreign capital inflows and broaden investors’ exposure to Saudi Arabia’s economy,” Tariq Al Sudairy, managing director and CEO of Jadwa Investment, told OBG. Investment via swaps and buy-orders from qualified foreign investors resulted in SR91bn ($24.2bn) in portfolio inflow in the year to November 2019. Passive flows are expected to increase in 2020, supported by the late-2019 initial public offering by Saudi Aramco (see Capital Markets Chapter).
While this is a welcome development, alleviating the non-oil trade deficit is more directly aided by increases in FDI. One of the goals of Saudi Vision 2030, therefore, is to increase FDI into the country from 3.8% of GDP in 2016 to 5.7%. Achieving this ambition, however, will mean breaking away from the global trend of stagnant FDI flows in recent years. According to UNCTAD, net FDI to the Kingdom fell to $1.4bn in 2017, down from $7.5bn the year before, though it immediately rebounded. Invest Saudi reports that FDI investment inflows rose to $4.2bn in 2018, well on their way to prior levels. Additional increases were seen in 2019, with FDI reaching $3.5bn in the first three quarters, representing a 10.2% increase over the same period of 2018. The UNCTAD reports that 2019 saw an overall yearly FDI increase of 9%, with several deals being struck outside the oil and gas sector.
Total FDI stock in the country, meanwhile, has remained static in recent years, standing at $231.5bn in 2016 and $230.8bn in 2018. According to the latest data from The Arab Investment and Export Credit Guarantee Corporation, the most important sectors from an FDI perspective in 2017 were the chemicals industry, which accounted for 30.8% of the total that year, followed by real estate (27.7%); coal, oil and gas extraction (7.9%); the automotive industry (7.1%); and hotels and tourism (6.9%). In terms of the main investing countries in 2017, the UAE accounted for the largest share, with approximately 21.9% of the total, followed by the US at 20.3% and France at 9.1%.
Business Facilitation
Improvements to the legal framework underpinning FDI into the Kingdom have also been geared towards attracting inward investment. In pursuing this goal, the country starts from a strong base that includes a history of political stability; good relations with nations that possess large pools of potential investor capital; and strong assessments from major credit ratings agencies (“A-” from Standard & Poor’s, “A” from Fitch and “A1” from Moody’s, as of the first quarter of 2020). Beyond its general advantages, the government has also rolled out several investor-focused incentives, including a scheme by which foreign companies are eligible for low-cost funding from the Saudi Industrial Development Fund for up to 50% of a project cost, and a new framework that allows investors to secure permanent residency in Saudi Arabia (see analysis).
These steps, and others, are helping the Kingdom to improve its ranking on the World Bank’s influential ease of doing business index – an effort that is being overseen by the Ministry of Investment. The country carried out a record number of business reforms in 2019, and that year the ministry issued more than 1100 foreign investor licences to recipients in a score of different countries, representing a 54% increase from 2018. These efforts resulted in the Kingdom being named the most-improved nation in the world in the “Doing Business 2020” report. Saudi Arabia placed 62nd out of 190 countries in the ease of doing business ranking with an overall score of 71.6 out of 100 – a significant improvement from its ranking of 92nd in 2019. Its moves to improve protection for minority investors resulted in it ranking third globally in this area, a level comparable to Singapore and New Zealand – the two easiest places to do business in the world.
Elsewhere, the launch of a new online platform has resulted in numerous efficiency gains: for example, local businesses now need just 100 days to obtain all necessary authorisations to build a warehouse, at a cost of approximately 1.9% of the value of the warehouse – half the regional average of 4.4%. Similarly, it took nearly half the time for businesses to obtain electricity connections in 2019 than it did in 2018. The biggest improvement over the year, however, came in the area of starting a business. According to the World Bank, it now costs only 5.4% of income per capita for an entrepreneur to start a business in the Kingdom, considerably lower than the MENA average of 16.7%.
Legal Matters
The legislative framework governing FDI in the Kingdom has undergone a process of liberalisation for some years, most notably through the removal of minimum capital requirements that were originally attached to agricultural, industrial and services projects. The Kingdom has also opened more sectors to 100% foreign ownership, adding film distribution, communication services, rail, air and space services to accompany the liberalised engineering, education and recruitment sectors. More recently, the introduction of a new insolvency law in August 2018 has made it easier for indebted companies to maintain their operations while rescheduling their debts, thereby improving investor protection.
The nation’s legal infrastructure is enhanced by a commercial courts system in place since 2019 in Riyadh, Jeddah and Dammam, as well as a number of specialised commercial chambers in the public courts of main cities.
Outlook
The onset of the Covid-19 pandemic in the first quarter of 2020 has slowed economic activity and reduced investor sentiment around the world, thus its effect on the Kingdom’s trading activity and inward investment is yet to be seen. However, the process of legislative and regulatory reform that has altered the nation’s trading and investment landscape in recent years is expected to continue to long-term benefit. The government’s goal, according to Vision 2030, is to rank within the top-20 countries on the ease of doing business index – a feat that will require additional revision and innovation in the decade to come.
With an increasing number of international investors tapping into Saudi Arabia’s more open and streamlined business environment, non-oil activity is expected to grow organically. However, large investments by the government and partnerships with the private sector are slated to help move the process along, leading to a more even non-oil trade exchange in the long term.
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