Saudi's Soaring Economy

The outlook for Saudi Arabia's Economy is favourable

The outlook for Saudi Arabia's Economy is favourable

Barclays’ Capital (BarCap) has recently released projections that Saudi Arabia’s economy will have the second-fastest growth rate among G20 countries for the fourth quarter of 2012. It will also be fourth overall, after Qatar, China, and Peru. Heading into 2013, the country is projected to sustain a growth rate of 5.5 percent—dropping its place in the global rankings, but remaining respectably well above the emerging market average projection of 3.5 percent and the 1.3 percent projected growth in advanced economies.

This bodes well for new investment in the region: with BarCap also projecting that the European market will contract, and with markets in the West and Japan being rocked by repeatedly rocked by fraud and scandal and requiring new rounds of stimulus packages, investors are increasingly looking to emerging markets such as Saudi Arabia.

A report issued by the International Monetary Fund (IMF) on 27 September shows that over the past decade (and for the first time in history), emerging economies have spent less time in downturns and had longer periods of expansion than advanced economies such as those in the West—a remarkable stability. Despite its dependence on a single commodity—one of the main predictors of economic instability used by the IMF in its report—Saudi Arabia has sustained an average growth of over 3 percent for the last eight years.

[inset_left]Several factors have likely contributed to this. The most obvious is the strength of the world oil market: the export of oil accounts for 92 percent of Saudi GDP.[/inset_left]

Several factors have likely contributed to this. The most obvious is the strength of the world oil market: the export of oil accounts for 92 percent of Saudi GDP. As growth in oil-based economies is tied closely to commodity prices—and with OPEC Reference Basket prices recovering significantly since the global economic collapse in 2008 and remaining at or over US$100 per barrel over the last year—it would be easy to assume that this growth is fragile, and linked closely to high oil prices. But the global investment bank is also projecting that growth in the non-hydrocarbons sectors in GCC economies will remain at around 5.5 percent over the next year, showing increasing diversification in those countries.

This means that there must be other factors contributing to the Kingdom’s impressive economic growth. Having learned a tough lesson during a financial crisis in the 1980s, during the recent global downturn the country has reacted to the reduced market for its exports (which currently account for 23 percent of GDP) by stimulating the domestic economy through public investment programs, countercyclical economic policies, and legal reforms designed to facilitate doing business in the country.

It has invested heavily in public infrastructure and further opening the domestic market to private lending by enacting significant reforms to the mortgage law. In response to Arab Spring protests in the region that were sparked in large part by high unemployment and poor living standards, in 2009 the king announced that US$400 billion would be spent on improving infrastructure and creating more jobs for Saudi nationals. (About 80% of the current workforce are foreign nationals, according to a report by the World Monetary Fund.)

The Kingdom is also actively promoting growth in the real estate sector, with the hope of encouraging knock-on effects in its retail and services sectors. In addition to a US$36 billion social security package announced by King Abdullah in March 2011—which includes the provision of interest-free mortgages and the writing off of certain debts owed to the state lender—the Kingdom has streamline the procedure for obtaining building permits and approved new mortgage regulations for private borrowers this July. (The law is intended to simplify approval and foreclosure procedures and ensure that all such transactions remain Shari’a-compliant.)

There remains, however, one major area where the country needs to improve: the codification and enforcement of its commercial law, which should promote confidence in business transactions both domestically and with foreign investors. But even here, major reforms are underway: since his ascension to the throne in 2005, King Abdullah has overseen some of the most business-friendly legal changes in his country’s history. This has included the establishment of commercial and appeals courts in the major cities and of regulatory agencies to oversee a number of sectors (including the capital markets), as well as winning approval for the codification of the company law. The king’s government has also set up a Unified Office for the registration and administration of companies that make it easier for ordinary Saudis to run small businesses.

Overall, the Kingdom’s economic prospects are brilliant: not only does the world oil market remain strong, but diversification efforts are growing ever stronger. Reforms that have been enacted both as part of the Kingdom’s ascension to the World Trade Organization in 2005 and under King Abdullah’s modernization program will likely underpin and stabilize economic growth. They should also bring more Saudi nationals into employment within the country—especially as the reforms have focused (amongst other things) on promoting entrepreneurial activity. All signs are positive: the 2012 Doing Business report released by the International Finance Corporation and the World Bank rank Saudi Arabia as the 10th best place in the world to start a business (as well as being 12th best country overall).

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