Saudi Arabia remains a conventional energy powerhouse as non-oil activities make up more than half of national output. As the Kingdom hits the halfway point of Vision 2030, a wide-ranging economic diversification strategy launched in 2016, the subsectors in which success is being achieved and those that require additional work are becoming clear.
The digital economy is driving diversification gains, particularly in service-focused sectors like education and health care, and contributed 14% of the Kingdom’s GDP, according to a 2023 survey by the General Authority for Statistics. Artificial intelligence (AI), meanwhile, is set to contribute $135bn of additional economic gains in 2030, according to international advisory firm PwC. Elsewhere, bricks-and-mortar projects that require billions of dollars of investment and complex supply chain integration are progressing, albeit at a slower pace than the digital economy.
Structure & Oversight
Saudi Arabia is a monarchy in which a Council of Ministers, or the Cabinet, is chaired either by King Salman bin Abdulaziz Al Saud or Crown Prince Mohammed bin Salman bin Abdulaziz Al Saud, who is also the Kingdom’s prime minister. If both are absent, the highest-ranking member, drawn from an array of ministry heads, can deputise in their stead.
The Council of Economic and Development Affairs (CEDA) is an important subcabinet charged with establishing governance mechanisms necessary to achieve Vision 2030 for the Kingdom, the 17th-largest economy in the world with a combined GDP of over $1.1trn in 2023. CEDA oversees the National Centre for Privatisation, which is engaged in an ongoing privatisation programme, now largely governed by a private sector participation law that came into effect in 2021.
The Saudi Central Bank (SAMA) handles the minting and printing of the national currency, the Saudi riyal, managing the Kingdom’s foreign exchange reserves, monetary policy and price stability, as well as wider supervision of the financial system. The riyal is pegged to the US dollar, reflecting the Kingdom’s resourcetrade-based revenue and expenditure pattern and the role of the dollar in international financial markets. However, this dollar peg can present challenges in maintaining appropriate interest rate policies and controlling inflation, as SAMA often mirrors the US Federal Reserve’s decisions, which may not always align with domestic economic conditions.
The Ministry of Economy and Planning (MEP) is tasked with realising Vision 2030, under which Saudi Arabia is making strong progress in diversifying its economy and reducing its reliance on hydrocarbons. Notably, in March 2024 the MEP announced that 2023 was the first year in which non-oil revenue accounted for 50% of the Kingdom’s total GDP, valued at SR1.7trn ($453bn), and achieving a key pillar of Vision 2030.
The Kingdom’s expanding population is relatively young, with 63% of Saudis under the age of 30 and the median age being 29, according to the 2022 census. Changes in population demographics are creating an urgency for the government in creating job opportunities for its young workforce.
Public Investment
The Kingdom’s sovereign wealth fund, the Public Investment Fund (PIF) has been instrumental in realising Vision 2030 targets. With approximately $925bn in assets under management as of July 2024, the PIF is funded by a blend of debt, government cash transfers and privatisations – including a 16% shareholding in the part-floated and national oil company Aramco – and income from portfolio companies. The PIF is targeting assets under management of SR4trn ($1.1trn) by 2025 and SR7.5trn ($1.9trn) in 2030. According to the PIF, it swung to a profit in 2023, making SR94bn ($25bn) from investment activities, compared to a loss of SR42bn ($11.1bn) for investment in 2022.
In February 2024 Yasir Al Rumayyan, governor of the PIF said the fund is investing $40bn-$50bn each year, and in September 2024 announced that annual investment would increase to $70bn by 2025. Approximately 70% of the PIF’s investment is expected to be focused on domestic projects, particularly on expanding the Kingdom’s role as a regional AI centre.
The PIF’s portfolio companies include several financing vehicles established to fund the giga-projects that form the centrepiece of Vision 2030, including the NEOM giga-project, the Qiddiya cultural and entertainment park, the Red Sea Global tourism regeneration project, and the Diriyah historical tourism development. However, in December 2023 Mohammed Al Jadaan, the minister of finance, said that the government was switching focus to ensure that there was sufficient human capital available to see the slated giga-projects through, adding that policymakers are flexible over timelines, and would rationalise plans where necessary.
By April 2024 it was evident that the government was scaling back plans for NEOM and the project’s landmark development, The Line, and is now earmarked to house less than 300,000 residents after initially planning to host 1.5m people. Furthermore, due to tighter global financial conditions, the Kingdom has revised its fiscal priorities, and as a result, only 2.4 km of the originally planned 170 km is expected to be completed by 2030.
The Economic Cities and Special Zones Authority handles regulation of the special economic zone (SEZ) ecosystem, which now comprises five zones: the Special Integrated Logistics Zone next to King Khalid International Airport, King Abdullah Economic City SEZ in Rabigh; Ras Al Khair SEZ, Jazan SEZ on the Red Sea coast and the decentralised Cloud Computing SEZ.
Regulations
Demonstrating a level playing field for foreign investors is crucial for Saudi Arabia as it seeks to attract international capital. Recent economic regulation is widely viewed as successfully galvanising private sector growth in line with Vision 2030 goals. Significant legislation includes the New Companies Law, which allows for the formation of simple joint-stock companies with no minimum capital requirements, that went into effect in January 2023. The legislation is expected to help boost a venture capital market that grew by 33% year-on-year in 2023, to $1.4bn.
Meanwhile, a new Saudi Civil Law came into effect in December 2023, replacing guidance that gave judges full discretion to rule on commercial disputes using sharia law. The change is viewed as significant for financial firms, which can now invest with clarity, though confidence will take time to grow as the law is applied in practice. Importantly, the new code affords shareholders a right to exit an investment through a pre-agreed clause, or the ability to force minority shareholders to join the sale of a company. Moreover, damages will now be awarded according to a contract, except in cases of fraud or gross negligence. Contractors are also newly empowered to stop work should payments fall behind.
In January 2024 a new regulation entered into force requiring foreign companies with existing overseas operations worth more than SR1m ($267,000) and planning to bid for government tenders to set up a regional headquarters in Saudi Arabia. The target is to have 480 global companies established in the Kingdom by 2030 amid efforts to accelerate multinational investment and improve economic output. Companies that take advantage of the new regulation are in line for a 30-year income tax exemption, as well as a 0% withholding tax on dividend payments to non-residents, upon receiving a licence for their regional headquarters by the Ministry of Investment (MISA).
In August 2024 a new investment law was issued that is due to come into force in February 2025. Among the key changes is a stipulation that will apply to both local and foreign investors, to harmonise the treatment of the two parties. The law also removes a requirement for investors in Saudi companies with foreign shareholders to obtain a foreign investment licence – instead, they will simply have to register with MISA. The law also promises new investment incentives, and the option for investors to use alternative dispute resolution methods to resolve disagreements among themselves.
Performance
Saudi Arabia is one of five founding members of the Organisation of the Petroleum Exporting Countries (OPEC). In June 2024 OPEC+, which consists of OPEC member countries and non-OPEC oil producing states, agreed to extend deep oil production cuts of 3.7m barrels per day (bpd) until the end of 2025, amid concerns over global demand and competition from US suppliers. Oil production remains the most important driver of overall economic growth in the Kingdom, averaging 12.8m bpd in 2023, including 10.7m bpd of total liquids, down from production levels in 2022 of 13.6m bpd, including 11.5m bpd of total liquids. Brent crude has traded at around $82 per barrel in 2024, below the break-even point that many OPEC+ members require to balance their budgets, with a weak demand outlook in China an ongoing concern. Oil production is expected to decline by 4.6% in 2024 compared to 2023, but is projected to recover with a 5.1% growth in 2025, contributing to an overall GDP expansion of 4.6% that year, according to the IMF.
Non-Oil Activities
According to estimates by the General Authority for Statistics, real GDP in 2023 decreased by 0.9% compared to the previous year, weighed down by a 9.2% decrease in oil activities, which includes oil, natural gas and refining. Non-oil and government activities expanded by 4.6% and 2.1%, respectively. In June 2024 the IMF issued an assessment of Saudi Arabia’s ongoing economic transformation, noting that prudent macroeconomic policies, transformative changes – including through fiscal reforms and in the regulatory business environment – and strong, domestic demand have supported non-oil growth, while inflation remains contained.
Headline inflation growth increased for the fourth consecutive month in October 2024 to 1.9%, down from a high of 3.4% in January 2023. This is in part due to a record-high Saudi Arabian Interbank Offered Rate. During the first half of 2024 it averaged 6.2%, making it expensive for businesses to borrow money for new investment. Inflation is expected to remain contained at 1.9%, buttressed by flexible labour policies. That said, the current account is set to swing to deficit in 2024 as investment-linked imports rise and a reduction in oil demand decreases exports.
According to the IMF, voluntary oil production cuts undertaken as part of the Kingdom’s OPEC+ commitments saw oil GDP drop 9% in 2023, resulting in a decline in overall economic activity of 0.8%. Real non-oil growth fell from 5.3% in 2022 to a still-robust growth rate of 3.8% in 2023, driven mostly by private consumption and non-oil investment, with the latter at 11.5% growth. Indeed, the private sector created more than 1m new jobs in 2023, as unemployment fell to 7.7% in the fourth quarter of 2023, near a Vision 2030 goal of 7% jobless rate for locals. A drop-off in oil activities led to the current account surplus falling to 3.2% of GDP from 13.7% in 2022, even as net tourist income surged 38% to support a record service trade surplus – that speaks to wider progress in achieving the economic diversification goals of Vision 2030. Indeed, German financial services company Allianz forecasts that the tourism and construction sectors will grow by 10% and 5%, respectively, in 2024.
Looking ahead, the IMF forecasts non-oil GDP growth to remain healthy at about 3.5% in 2024, noting that investment growth will start to increase leading up to the Saudi-hosted 2027 Asian Cup in football, the 2029 Asian Winter Games and Expo 2030. Saudi Arabia is also the sole bidder for the 2034 FIFA World Cup, cementing a pathway of keynote global events that will attract new capital, workers and visitors.
Budget & Fiscal Policy
Published in December 2023, Saudi Arabia’s budget statement forecast a fiscal deficit of SR79bn ($21.1bn) in 2024, equivalent to -1.9% of GDP. A domestic economic recovery is expected to support tax revenue to hit SR361bn ($96.2bn), up from SR352bn ($93.8bn) in 2023. Non-tax revenue remains the primary pillar of government income, slated to total SR812bn ($216bn) in 2024, down from SR841bn ($224bn) in 2023. Total expenditure is projected at SR1.3trn ($347bn), a decrease of SR24bn ($6.4bn) from a year earlier. Public debt is forecast to widen by SR79bn ($21.1bn) and could reach SR1.1trn ($293bn) in 2024.
In March 2024 Crown Prince Mohammed bin Salman announced that an additional 8% of Aramco equity, worth approximately SR615bn ($164bn) had been transferred to the PIF, taking the total stake held by the sovereign wealth fund to 16%. In the first half of 2024 as part of revenue-boosting measures, Saudi authorities issued highly oversubscribed bonds worth $12bn, and the debt capital market had expanded year-on-year to reach $408bn outstanding, as debt issuances in the first six months of 2024 equalled all of 2023.
Stable Outlook
In February 2024 international credit ratings agency Fitch Ratings affirmed Saudi Arabia’s long-term foreign currency issuer rating at “A+”, with a stable outlook, referencing its strong fiscal and external balance sheets. Gross government debtto-GDP ratio was estimated at 26.5% in 2023, and is projected to rise to 28% in 2024 and 30% in 2025. Fitch forecast the budget deficit as 2.3% of GDP in 2024, higher than the 1.9% budgeted, due to ongoing spending on public sector investment and lower oil prices.
Saudi Arabia reported a budget deficit of SR12.4bn ($3.3bn) in the first quarter of 2024, as oil sector revenue saw a modest 2% year-on-year to SR182bn ($48.5bn), in addition to a 9% increase for non-oil activities to SR112bn ($29.7bn). Total tax revenue is forecast at SR361bn ($96.2bn) in 2024, supported by an extension of the cancellation of fines and exemption of financial penalties policy until the end of the year. The initiative encourages taxpayers within the Kingdom to register with the Zakat, Tax and Customs Authority and file tax returns, by waiving certain corporate income tax, withholding tax and value-added tax penalties. Zakat is a payment under Islamic law that is used for charitable or religious purposes. The taxes on income, profit and capital gains are expected to increase significantly owing to a rise in corporate taxes as firms pay liabilities related to incomes that were witnessed during 2022, following a sharp post-pandemic economic recovery. According to the Kingdom’s budget statement, strong private consumption is scheduled to bring in SR279bn ($74.4bn) in taxes on goods and services during 2024.
The country is committed to winding down energy subsidies, however, in 2022 Saudi Arabia still spent the most among G20 members on supporting fossil fuel consumption – equivalent to $6996 per capita for a total of $253bn, according to the IMF. The government remains cautious about adjusting the ceiling on local gas prices, mindful of potential implications for social cohesion and the supportive role of low petrol prices in driving private consumption.
Trade
Saudi Arabia’s external trade position is also healthy, driven by a strong current account. Foreign reserves at SAMA totalled SR1.7trn ($457bn) in the third quarter of 2024. However, the capital and financial accounts can grow further if foreign direct investment (FDI) inflows increase to the targeted rate of 5.7% as set out in Vision 2030. In 2023 FDI inflows equalled 2.4% of GDP, equivalent to SR96bn ($25.6bn). Non-oil exports, including re-exports, declined by 13.7% in 2023. Overall, merchandise exports fell by 22.2% driven by a 24.3% decrease in oil exports, reducing the share of oil from 79.5% of total exports in 2022 to 77.3% in 2023. Imports increased by 9%, resulting in a 48.9% reduction in the merchandise trade balance surplus. In 2023 China was the leading destination for Saudi exports, receiving 16.6% of the total, followed by Japan (10.2%) and India (9.4%). South Korea, the UAE, the US, Bahrain, Taiwan, Malaysia and Singapore rounded out the top 10, collectively accounting for 65.3% of exports.
China also ranked first in imports, making up 20.9% of the Kingdom’s total imports, followed by the US (9.1%) and the UAE (6.4%). Imports from the top-10 countries – including India, Germany, Japan, Switzerland, South Korea, Italy and Egypt – comprised 62% of total imports. Key non-oil exports in 2023 included chemical products, comprising 29.7% of total non-oil exports but a decrease of 28.5% from 2022. Plastics and rubber products followed, representing 24.9% of nonoil exports and declining 24.2% from the previous year. Leading imports for the Kingdom were machinery and electrical equipment, making up 22.2% of total imports with a 24.3% increase from 2022, and transportation equipment, accounting for 15.3% of imports and rising 15.2% from the previous year.
Special Economic Zones
Notably, the Ras Al Khair SEZ located in the Eastern Province is positioned to accelerate Saudi Arabia’s role as a maritime centre, through which some 6% of global seaborne trade passes. The SEZ focuses on developing shipbuilding and repair, offshore platforms and drilling rigs, and maritime value chains, and has already received significant investment from Aramco and Saudi shipping carrier Bahri, as well as UAE-based energy firm Lamprell, South Korean shipbuilding company HD Hyundai Heavy Industries and China’s steel producer Baosteel.
Similar to the Kingdom’s other SEZs, Ras Al Khair investors benefit from a reduced rate of 5% corporate income tax – versus the 20% standard rate – for up to 20 years; 0% withholding tax permanently for repatriation of profit from an SEZ into foreign countries; and 0% Customs duties. From 2021-30 Ras Al Khair SEZ is forecast to contribute SR119bn ($31.7bn) to the Kingdom’s exports, SR5.6bn ($1.5bn) in FDI and SR82bn ($21.9bn) to GDP, as well as generate more than 80,000 jobs. King Abdulaziz Port in Dammam and the King Abdullah Port in Jeddah are also being upgraded to incorporate digital cargo-handling technology, with the aim of raising cargo processing capacity and efficiency across the Kingdom’s 290 ship berths.
As a GCC member, Saudi Arabia benefits from the Customs union implemented in 2003, which stipulates free movement of local goods among the six member states. The UK and China are among the countries seeking to secure free trade agreements with the GCC and negotiations were ongoing by November 2024.
Investment
Saudi Arabia ranked 27th in the IMD World Digital Competitiveness Ranking 2024, which assesses the capacity and readiness of an economy to adopt and explore digital technologies as a key driver for economic transformation in business, government and the wider society. The Kingdom improved three places from 2023, and progress makes it an attractive destination for venture capital investment, which valued $240m across 35 deals in the first quarter of 2024. More than half of this was attributable to Investcorp, a Bahrain-based global alternative investment firm, leading a $130m pre-initial public offering investment round in Salla, a Makkah-based e-commerce platform. Financial technology, e-commerce and retail are the leading sectors for venture capital funding in both Saudi Arabia and the wider MENA region.
From a budgetary perspective, health and social development, defence, education, infrastructure and transport are among the sectors earmarked to benefit from the largest allocations of public sector investment. Defence retains the largest funding allocation, at SR269bn ($71.7bn) in 2024, in keeping with Vision 2030 goals to upgrade and modernise the armed forces and bring new manufacturing capacity onstream. Vision 2030 aims to develop a defence sector that manufactures 50% of its needs domestically. The health and social development sector will receive SR214bn ($57.1bn) under the 2024 budget, as the government presses on with its efforts in building new infrastructure and digitalising services.
The education sector is scheduled to receive SR195bn ($52bn) in 2024, amid a focus on improving kindergarten participation, expanding school spaces and enhancing the training available to teaching personnel. As well, with respect to public expenditure on transport and infrastructure, global consultancy firm KPMG says that inflows can start to decrease due to success in attracting private investment in this area, but will still increase 2% to SR38bn ($10.1bn) in 2024.
Elsewhere, the Kingdom continues to pursue spending under its 2021 National Investment Strategy (NIS), which is driving what US investment bank Goldman Sachs calls a $1trn capital expenditure super-cycle across clean tech, metals and mining, transport and logistics, digital transformation, as well as both the upstream and downstream energy sectors. For example, the Kingdom is set to develop 58.7 GW of renewable energy capacity and 2-3 GW of nuclear capacity by the end of the decade, for a total investment of $206bn.
New oil and natural gas upstream investment continues to lead the way, however, with $245bn set for fossil fuel development. In June 2024 Aramco awarded contracts worth $26bn to advance its strategic gas expansion, which targets sales gas production growth of more than 60% by 2030, compared to 2021.
On the domestic front, the Shareek programme, launched in March 2021, aims to increase investment by listed and non-listed private firms to reach SR5trn ($1.3trn) by 2030. Shareek-listed projects benefit from financial incentives and span new manufacturing capacity for Aramco, including construction of the world’s largest green hydrogen plant by electricity firm ACWA Power, under its NEOM Green Hydrogen joint venture with NEOM and industrial gases company Air Products Qudra, as well as a Google Cloud services project, phosphate fertiliser export project, telecoms data centre and submarine cable, among others.
Labour Force
In the fourth quarter of 2023 the overall rate of unemployment, which includes expatriate labour, fell to 4.4%, down from 5.1% in the previous quarter and 4.8% for the same period in 2022. Policymakers hope that several new pieces of legislation positioned to streamline business practices will make it easier to offer employees the conditions they demand.
In an effort to steer Saudis towards jobs in the private sector to reduce public expenditure on salaries, the Nitaqat programme – also known as Saudiisation – a national initiative by the Ministry of Labour launched in 2011 makes it mandatory for companies to hire a proportion of Saudi nationals. Up to SR10bn ($2.7bn) has been deployed by the Human Resources Development Fund in employment assistance for firms to train Saudis, providing around 300,000 citizens with jobs in 2023. The programme’s stipulations vary according to the sector. For example, in March 2024, the Ministry of Labour announced that the consultancy subsector, which already has established hiring programmes in place dedicated to hiring Saudi talent, was moving to a second phase under which the rate of Saudiisation would increase to 40% from 35%. “The human resources sector plays a pivotal role in the Kingdom’s economic transformation, driving workforce development and adapting to evolving market needs,” Abdulrahman Almohaimid, CEO of Saudi-based Abdal Human Resources, told OBG. “Investing in talent through training and localisation initiatives is essential for sustaining growth and enabling international businesses to thrive.”
Recognising that small and medium-sized enterprises (SMEs) account for some 92% of its industrial sector, the Ministry of Industry and Mineral Resources is planning further measures to boost SMEs in industrial, logistics and service sectors. In 2023 the ministry launched the Nobu industrial business accelerator initiative, which has incubated 17 industrial projects. Elsewhere, Aramco’s Taleed programme is providing SR3bn ($799.8m) of funding for new SMEs, as well as creating a support programme that will serve up to 15,000 SMEs annually alongside a parallel mentorship programme.
Outlook
The forecast for the economy remains positive as global conditions show signs of improvement. A potential easing of high interest rates could support global energy demand and boost Saudi oil revenue, with a stronger recovery anticipated by 2025. This shift is also expected to facilitate the Kingdom’s goal of attracting $100bn in annual FDI by 2030.
While some giga-projects have adjusted timelines, this reflects prudent fiscal management rather than diminished ambition. The strategic recalibration aligns resources with long-term economic goals, ensuring sustainable progress towards Vision 2030. With ample financial reserves and expanding digital infrastructure, Saudi Arabia is well-positioned to continue advancing its economic diversification and development objectives.
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