BEYOND OIL

Saudi Arabia 2015 | ECONOMY | FOCUS: ECONOMIC DIVERSIFICATION

Although on the agenda for decades, the low price of oil has highlighted the urgent need for Saudi Arabia to make serious gains in its diversification plans. Oil revenue still makes up roughly 80% of the government budget and 90% of the Kingdom's total exports; however, many of the country's long-term investments are beginning to bear fruit.

Economic diversification—whether in Saudi Arabia or its similarly oil-dependent GCC neighbors—has been on the agenda for decades, and the lower oil prices plaguing the end of 2014 and the first half of 2015 have only served to emphasize the urgency of the matter. On the other hand, high oil prices in previous years have done well to hide real, robust growth in Saudi Arabia's non-oil private sector. According to a report from Jadwaa Investment, non-oil private sector GDP grew an average of 7.2% over the last five years, with 2015 slated for a still robust 5.3%.

While many of the government's ambitious megaprojects for economic diversification have their budgets tied to oil revenue, work has not stalled due to the Kingdom's large reserves, which stood at over $750 billion at the beginning of 2015. One of the faces of the Kingdom's massive non-oil investments is the King Abdullah Economic City (KAEC). The 25-year project will cost over $100 billion, is the world's only publically traded city, and will be one of the world's top 10 container ports. The massive city outside Jeddah is banking on attracting private sector investments in shipping, logistics, manufacturing, and real estate, as well as the multitude of other commercial opportunities necessary to support a city that is being advertised as being as large as Washington DC. A recent $200 million Mars confectionary factory commissioned in KAEC at the end of 2014, which the government hopes to be the first of many, is a testament to the attractiveness of the economic cities investments. KAEC is just one of six planned economic cities throughout the Kingdom to promote non-oil industrial and economic growth with friendlier business environments.

Industrially, Saudi Arabia is already well-established in plastics and petrochemicals, due to the cheap availability of the feedstock. Ideally, Saudi Arabia hopes to grow in more value-added industries, such as from plastics to packing, or leveraging its large bauxite ore reserves for aluminum and beyond to auto manufacturing. However, even with a large domestic market, a young population and a centrally located geographical position, the manufacturing industries that Saudi Arabia is most likely to successfully promote are those that are energy-intensive and can take advantage of the Kingdom's cheap electricity. As this would still indirectly make these newer industries related to Saudi Arabia's oil, manufacturing is just part of the strategy for the country's true independence from hydrocarbons. Realistically, hydrocarbons will play the starring role in the economy for quite some time, but the Kingdom's large tech-savvy youth population—some estimates put the percentage of under-25 Saudi nationals at 60%—suggest that telecommunications, IT services, and a general shift toward a knowledge-based economy could be an area of massive potential for Saudi Arabia's economic diversification.

Perhaps a better indicator of the Kingdom's economic diversification prospects can be seen in Tadawul (Saudi Stock Exchange) and its long-awaited opening for Qualified Foreign Investors. None of the top five listed company's by market cap— Saudi Basic Industries (SABIC), National Commercial Bank, Saudi Telecom Co. (STC), Al Rajhi Banking and Saudi Electricity Company (SEC)—are directly related to oil production, and foreign investors are surely observing the multitude of market opportunities now available to them.
May's highly publicized and anticipated Euromoney Saudi Arabia conference highlighted a number of opportunities for prospective international investors, including in sectors such as healthcare, insurance, and consumer goods. Interest from foreign investors is said to be high, even if the effects are not felt immediately, and the opening of Tadawul to qualified foreign investors—and an estimated $40-50 billion in foreign inflows—represents a major step in the government's long-term and multi-pronged approach to diversifying the economy. Tadawul's eventual membership in MSCI's emerging market index, possibly by mid-2017, would represent another important step forward.