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Saudi Arabia Means Business
The rally in oil prices has pushed crude above Saudi Arabia’s break-even level and the Gulf state said it expects to record a budget surplus of $23.99 billion this year after years of deficit
Saudi Arabia held celebrations on 22 February 2022 to commemorate, for the first time, the foundation of the kingdom nearly 300 years ago. The anniversary marks the day Mohammed ibn Saud, founder of the first Saudi state, took over the emirate of Diriyah in 1727.
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Since 2016, Saudi Arabia has undergone a breakneck transformation, restructuring and opening economic activities and rethinking the role of foreign investors under Crown Prince Mohammed bin Salman’s Vision 2030, the blueprint for his country’s future that aims to diversify the economy away from heavy reliance on oil revenues.
The Gulf state’s efforts to diversify the economy are critical to sustainable growth and Moody’s indicated that the country’s credit rating could be upgraded if the country moves away from oil faster than planned.
The International Monetary Fund (IMF) projected that Saudi Arabia will see 4.8% economic growth in 2022 from a 2.4% rebound last year after it contracted in 2020 due to the fallout from the dual shocks of COVID-19 and low oil prices.
Crude oil prices, a major driver for the Saudi economy, have soared to their highest since 2014 in the first quarter of the year driven by escalating geopolitical tensions in the Middle East as well as the sanctions that were imposed by the US and its allies on Russia oil imports in March following the invasion of Ukraine.
The rally in oil prices has pushed crude above Saudi Arabia’s break-even level. The Gulf state, which needs oil at about $72 a barrel to balance the books, said it expects to record a budget surplus of $23.99 billion this year after years of deficit.
Though Saudi Arabia is still reliant on oil and gas, which accounts for 80% of its total goods exports and total revenues, the government is diversifying the economy with a strong focus on foreign investment, tourism, technology and the financial services sectors.
The government has unveiled several initiatives to spur growth in the non-oil economy including “Made in Saudi” and the new “Shareek” – a $1.3 trillion investment program to enhance the collaboration between the public and private sector. Meanwhile, Public Investment Fund (PIF), the driving force behind Saudi Arabia’s economic growth and diversification, plans to double its assets under management (AuM) to $1.07 trillion by 2025.
Financial matrix
Banking sector
Saudi Arabia’s financial services industry is the linchpin of Crown Prince Mohammed’s economic diversification drive. A robust banking sector able to finance new industries is seen as key to efforts to boost the dynamism of the private sector and accelerate growth.
The government launched a national development program in 2018 to increase the total size of financial assets to GDP ratio, boost the share of capital markets assets and raise SMEs’ bank financing.
Saudi Arabia was relatively slow in transforming its sector compared to its Gulf neighbours, but the pandemic is forcing the Gulf state’s central bank to accelerate the licensing of digital banks, a trend that has taken off with the spread of financial technology in the Middle East. The Saudi cabinet approved the licensing of the country’s third digital bank, called D360 Bank, in February. The digital bank has a capital of $440 million and is backed by a Derayah Financial Company-led consortium and it counts the PIF as “one of its key investors.”
Last June, the cabinet also approved the licensing of the country’s first digital banks STC Bank and Saudi Digital Bank, which have a capital of $667 million and $400 million respectively. The creation of digital banks is part of a financial development program contained in Saudi Vision 2030.
The Saudi Central Bank (SAMA) is also encouraging consolidation in the banking and insurance sectors to create stronger entities that can support the role the private sector plays in advancing the government’s economic diversification agenda.
Moody’s said last December that regulatory measures and “giga-projects” in Saudi Arabia as part of its Vision 2030 will drive credit demand and raise the private-sector debt, thus supporting credit growth in 2022.
Following the tie-up between the National Commercial Bank and Samba
Equity markets
Saudi Arabia registered more listings than any of its oil-rich Gulf neighbours last year. State-backed companies in the Gulf state are stepping up efforts to boost Tadawul All Share Index (TASI) while supporting the governments’ economic diversification efforts.
The record public offering by Aramco in 2019, which saw the world’s most valuable energy company raising nearly $30 billion, paved the way for more Saudi Arabian companies backed by the kingdom’s $580 billion wealth fund to take the lead in new listings on the Middle East’s biggest stock exchange.
PIF-backed digital security firm Elm raised $820 million in an offering in Riyadh in February 2022. Saudi Tadawul
– International Monetary Fund
Financial Group into Saudi National Bank (SNB), a banking giant with $244 billion assets in 2021, the Saudi approved the tieup of the county’s two state-run pension and unemployment insurance funds in June 2021.
Merging General Organization for Social Insurance and the Public Pension Agency is expected to create an entity with around $29 billion worth of local and foreign stocks, with stakes in the Gulf state’s top two lenders, SNB and Al Rajhi Bank.
SAMA extended a deferred payment program to support private sector financing in March for another three months until June 2022 as part of measures to stem the impact of the pandemic on the economy. Group, the owner and operator of the Gulf state’s bourse, divested a 30% stake last December to raise $1.01 billion via an IPO that was 121 times oversubscribed. “Saudi Arabia’s TASI was up for the sixth consecutive year in 2021 and recorded the second biggest return in the GCC during the year that reached 29.8%,” said Kamco Invest.
Saudi Arabia’s prominent offerings in 2021 also include ACWA Power’s $1.2 billion flotation and the IPO of stc Group’s internet services unit, Arabian Internet and Communications Services Co., which raised around $966.4 million.
Debt markets
Saudi Arabia, which revised its forecast for this year’s budget deficit to 1.6% of
GDP from 4.9% in its preliminary budget statement, is forecasting revenues of as much as $241 billion in 2022, a 4.5% increase compared to earlier projections.
The Saudi government tapped international debt markets with a $5 billion dual-tranche dollar-denominated bond in January 2021, a $1.8 billion eurodenominated bond in February and raised $3.25 billion by issuing dual-tranche bonds as the economic recovery continues as the pandemic eases and oil prices soar.
Moody’s upgraded Saudi Arabia’s outlook to stable from negative in November 2021, citing the country’s ability to reverse most of its 2020 debt increase while preserving fiscal buffers. The rating agency said that it “expected fiscal improvement over the next several years will be facilitated by higher oil prices, although the stable outlook also takes into account the expectation that oil prices will remain volatile.”
Realizing Vision 2030
Saudi Arabia, the Arab world’s largest economy, is expected to witness sustainable growth on the back of the government’s continued efforts to increase spending efficiency and enhance public-private partnerships.
“The ongoing implementation of Vision 2030 initiatives, mega projects and domestic spending by the Public Investment Fund will boost investment and combine with higher oil production to support a broad-based recovery in the domestic non-oil sector,” said KPMG.
Saudi Arabia launched the “Shareek” program last March, a $1.3 trillion investment program that seeks to bolster the collaboration between the public and private sector while mobilising the Gulf state’s biggest listed firms such as Aramco, stc Group and SABIC to help wean the Kingdom from its dependence on oil revenues.
The initiative is part of $3.2 trillion worth of investments planned by 2030 and includes $8 billion from PIF and $1.07 trillion under a new government investment strategy that is yet to be revealed.
Crown Prince Mohammed unveiled a new strategy for the Gulf state’s National Development Fund last month that will see the country injecting more than $151.94 billion into the economy by 2030. Under the new strategy, the fund will also help Saudi Arabia triple non-oil GDP to $161.3 billion in the same period.
The Saudi wealth fund, with around $580 billion AUM on behalf of the government, is financing several mega-projects that are currently under development in the kingdom including the $500 billion futuristic NEOM City, Qiddiya, and the Red Sea Development Company’s mega tourism project.
Saudi Arabia transferred 4% of Aramco shares worth $80 billion to PIF to bolster the sovereign wealth fund’s strong financial position and high credit ratings in the medium term. The fund received the fifth-
highest credit rating “A1” from Moody’s in February while Fitch assigned PIF its “A” credit rating ahead of its plans to tap the international bond market for the first time.
The Gulf state’s investments through PIF include more than $1 billion investment in electric carmaker Lucid Group, a 3.75% stake in ride-hailing giant Uber Technologies and a host of local mega-projects such as the $500 billion futuristic NEOM City, Qiddiya and the Red Sea Development Company’s mega tourism project.
Structural reforms
Saudi Arabia is pushing through social and economic reforms as part of Crown Prince Mohammed’s broader strategy to modernise the country and attract foreign investment under Vision 2030. The structural reforms that are being introduced by the government are beginning to have a positive impact on the economy and non-oil growth is picking up.
The Gulf state said last November that it had granted citizenship to a group of expatriates including doctors, clerics and academics, becoming the second country in the region to introduce a formal naturalisation programme for foreigners.
Last February, the Kingdom unveiled plans to approve a set of new draft laws designed to enhance the efficiency and integrity of the country’s judicial system, a step that would eventually lead to an entirely codified law.
The government also plans to cease doing business with companies and commercial institutions that base their Middle East headquarters in any other
country in the region from 2024, signalling its desire to attract more investors. The move saw more than 40 multinational companies including Baker Hughes, KPMG and Schlumberger receiving licenses last October, part of the authorities’ ambitious goal to turn the world’s biggest oil exporter into an investment powerhouse and a global hub for business and talent.
Saudi Arabia is introducing new incentives, revamping regulations and plans to create special economic zones to boost foreign investment and convince multinationals to relocate to Riyadh. The kingdom is also championing sustainability following the launch of the “Saudi Green Initiative” last year as the country aims to reach zero-net emissions by 2060.
– Kamco Invest
