The bases of that growth are well-known – perhaps too well-known, as familiarity can sometimes blind us to their significance. It is perhaps pertinent to recap them here – and the changing dynamics. The Saudi economy remains dominated by hydrocarbons, although oil and gas now accounts for less than half of GDP. Successful vertical diversification in the 1970s and 1980s means the Kingdom now has a world class profile in several heavy industries, including most prominently petrochemicals.
Additional development and diversification will mean that in the coming decade crystalline minerals such as phosphate, bauxite and copper will add a valuable third pillar to oil and gas. In addition to heavy industry, the Kingdom has also developed one of the region’s leading financial sectors, while retail and wholesale trade, logistics and services are all becoming significant elements in the economy.
Although Saudi Arabia is now engaged in greater horizontal diversification, it is this successful vertical diversification of the economy into a range of vital industrial inputs required by the world’s most dynamic growth economies which has ensured the country’s stability through the recent crisis. Saudi Arabia now occupies a significant role in the global economy, as demonstrated by its membership of the G20, the body which during the recent crisis de facto replaced the G7 as the most important global forum for economic decision-making.
Domestic growth during that crisis was sustained largely thanks to a huge government stimulus in the form of a $400bn programme of capital spending, due to be completed in 2013. Government investment remains a key driver in the Saudi economy, accounting for 15% of GDP and arguably providing the bedrock of business confidence, which means that Saudi SMEs are currently among the most optimistic in the world. Capital investment in 2011 is budgeted at $68bn – a slight decrease on 2010’s $69bn, and perhaps an indication that the government is understandably concerned about stoking inflationary pressures in a continuing low interest rate environment.
However, the growth benefits of the government’s targeted investment programmes are already beginning to be felt, as manufacturing in particular enjoys a boost from capital investment coming online at Jubail, as well as new Ma’aden facilities. 2010 growth for the manufacturing sector was 5%, while in the related field of utilities (a good indicator of overall demand) growth was even more impressive at 6%. Another key sector, transport and communications, grew at 5.6% in 2010 – again, largely due to significant government investment which is seeing new rail and land routes opening up the mineral wealth of the north-west, as well as improving connections between the main commercial hubs.
Beyond the government’s activities, the private sector has also shown signs of resilience, although bank credit to the private sector remains an area of concern – a current phenomenon across the world. Credit to the private sector from the Kingdom’s banks grew at the fairly staggering average rate of 27% per year between 2004 and 2008. Following the damage to confidence caused by exposure to the Saad Group and Hamad Algosaibi and Brothers, lending has recently grown at a much slower rate, with even a decline of 0.2% in November of last year. Following an improvement in provisioning for bad loans however, the banking sector’s confidence is expected to recover in 2011.As I just mentioned, another concern is inflation, which remains high by historic standards. Inflation in 2010 averaged 5.4% - well down from the peaks of 2008, but nonetheless something to watch. The consensus among banks and financial institutions appears to be for a very slight decline in inflation this year, though endogenous structural factors such as a lack of urban housing will keep the rental component of the consumer price index around 10%. Another peak in global food prices revealed a couple of days ago, coupled with the knock-on effect of continued quantitative easing in the US, could easily result in renewed inflationary pressures. For this reason, officials at SAMA will no doubt be keeping a close eye on global indicators in the coming months.Arguably, the biggest long-term challenge facing the Saudi economy remains dealing with the relatively high levels of youth unemployment, by matching job creation with the growing number of entrants to the job market. The Kingdom has a young and fast-growing population, with growth of around 750,000 every year, and a trend of significant increases in the major urban centres of Riyadh and Jeddah. Unemployment fluctuates according to economic cycles, though in recent years it has remained stubbornly above 10%, and there is also the specific issue of youth unemployment.
Dealing with this structural trend will require a dynamic private sector capable of generating not just raw growth but – just as important – employment growth. Equally, providing hubs for that growth other than Riyadh and Jeddah is also of fundamental importance. Hence the government’s $60bn investment in the four new economic cities, the largest of which is King Abdullah Economic City.
These are long-term projects of enormous scope, designed to permanently transform the footing of the Saudi economy. In one sense, they can be compared to the first wave of government-led diversification which occurred in the 1970s and 80s with the construction of the industrial cities of Jubail and Yanbu.
Jubail and Yanbu, which continue to expand, bequeathed the Saudi economy a legacy of heavy industrial capacity which has seen domestic players like SABIC evolve into global heavyweights. However, while vital to the Kingdom’s domestic economic capacity, the types of industry found at Jubail and Yanbu involve heavy long-term fixed capital investment, and create limited job growth.
By contrast, the Economic Cities will focus on the creation of a dynamic knowledge economy in the Kingdom, with the potential to provide high job growth for Saudi Arabia’s young population, in sectors requiring a less capital-intensive investment profile. The expectation for the four economic cities is that they will house a combined population of some 4-5 million people, and create in the region of 1million jobs.
This works out at government investment of around $60,000 per job created – a significant redistribution of hydrocarbon wealth, and a strong example of the direction that government policy is currently taking in Saudi Arabia. Rather than redistributing oil wealth directly through state sector employment and public benefits, the government is increasingly channelling investment into economic infrastructure that will create jobs and, hopefully, future growth. Indeed, SAGIA expects the four economic cities to contribute $150bn to the Saudi economy by 2020 – this works out at some $150,000 per job created: a significant return on investment.Creating the dynamism necessary to ensure such an impressive return is a two-stage process, requiring both supply and demand. The economic cities themselves are the demand side of the equation, providing quite literally the built environment which will need filling with young workers. On the supply side though, the government is also investing billions of dollars in education and skills development. Spending on HR in the Kingdom grew by over 40% in the three years between 2007 and 2010, and investment in the tertiary sector in particular has been extremely impressive. The continuation of other long-term programmes, such as the Economic Offsets Programme, will also continue to be important mechanisms for knowledge transfer between Saudi Arabia and its Western partners.
As this brief snapshot has hopefully demonstrated, the Saudi economy remains well placed to continue reaping the benefits of renewed growth in emerging markets – particularly high growth markets in Asia. This orientation of the economy toward the hotspots of global growth will ensure that the government can continue pursuing its domestic diversification strategy, and hopefully lead Saudi Arabia into the next stage of its economic development – the knowledge economy, where the Kingdom reaps the benefits not just of its natural resources, but also the dynamism of its human resources. To conclude, it is OBG’s view that the direction of the economy is positive and set to ensure the creation of a solid foundation for future sustainable prosperity.
No comments:
Post a Comment