Naomi Waistell, an emerging markets fund manager at Polar Capital, analyses change in Saudi Arabia – a hydrocarbon country with green ambitions and which is set on a major economic transition by 2030.
The Kingdom of Saudi Arabia sits at the intersection of three continents, Europe, Asia and Africa. It has the ambition to serve as an international hub and prosper domestically, rising from the 19th largest economy in the world into the top 15. The country sees itself as an investment powerhouse with an economic capability that it needs to reshape to become more diverse and sustainable. Saudi Arabia has set a target to reach net zero by 2060, with an interim target to have 50% energy contribution from renewable sources by 2030. It seems the world’s largest oil producer is serious about change.
Will it stick?
Saudi Arabia has targeted a budget surplus of 2.5% of GDP for 2022, supported by the receding effects of the pandemic, higher oil prices and an overall increase in economic activity, with both strong hydrocarbon and non-hydrocarbon revenue due to recent reforms. Its authorities managed the pandemic well and have shown commitment to fiscal discipline, which should help to dampen the state’s natural procyclicality as it aims to reposition toward a more diversified, inclusive and green future.
Saudi Arabia’s Tadawul stock market dwarfs its CEEMEA peers, with a $2.5 trillion market cap, in part due to the vast size of Saudi Aramco which has a market cap of $2.3 trillion. Away from the oil giant, there is a large and increasingly diverse universe of companies. Recently, the Crown Prince publicly stated the Kingdom intends to list all companies currently held by the Public Investment Fund (PIF), and “aim to make Saudi one of the three largest stock markets on the planet”.
In April 2016, Saudi Arabia announced the Vision 2030 program. The scale of the ambition and targets make this one of the largest national transformation programs anywhere in the world.
However, this is not Saudi Arabia’s first economic transition plan, there was the Future Vision for the Saudi Economy, 2020, which rolled forward 10 years as the oil price crash of 2014 saw project cancellations, payment delays and plans pushed out. Saudi Arabia was forced to bring in austerity measures to battle the budget deficit, leading to knock-on effects for consumers and the non-oil economy alike.
There are signs that the leadership have learnt from the past, and that a stable Saudi Arabia requires more sweeping changes, including greater private sector involvement which will require education and job creation. The target is to increase private sector involvement from 40% to 65% of GDP by 2030 and to drive the share of non-oil exports in non-oil GDP from 16% to 50%. There seems to be a shift too in the people, from simply expecting handouts from the government towards removing red tape to enable entrepreneurialism – from banker to backer. However, real change will take time, and Vision 2030 still has many of the hallmarks of the past: vast megaprojects which are currently unbuilt or have limited occupancy and may struggle to make economic returns.
The most headline-grabbing of these has been the NEOM project, a net-zero, smart, vertical city (rather than with a traditional horizontal, flat design) built from the sand up in the hostile Arabian desert. Gargantuan in size, focusing on green energy, biotech and robotics it will be one of the leading, low-cost production and consumption bases for green hydrogen. Initial construction is focused on a linear city called The Line which runs for 170km, with capacity for a population of one million, and is forecast to contribute 380,000 jobs and $48bn to domestic GDP by 2030.
It is, of course, still a religious country. One of the ambitious targets under the Vision 2030 plan is to increase Umrah, or religious visitors, from 6.5 million to 30 million each year. There are separate ‘secular’ tourist visas and brand new luxury resorts being built, with more relaxed behavioural rules such as mixed sex dining and alcohol consumption as well as the targeted growth for religious visitors. Whether these two parts of society can co-exist harmoniously, and Saudi Arabia can continue to achieve a degree of relaxation and progress without igniting tensions, and foster something of a ‘one country, two systems’ model will be a crucial challenge for the leadership and a testament to the people.
What might not be expected about Saudi Arabia is the rise in its technological capabilities. In 2020, it ranked first in the world for 5G internet speed. More than 12,000 5G towers have been installed, covering more than 60% of major cities and more than 45% of all cities. This supports the as-fast issuance of electronic visas and business licences, as well as critically creating an environment that encourages new entrants, enables SMEs to grow, oils the access to finance and investment opportunities and increases overall SME contribution to GDP. Saudi Arabia was ranked 12th in the Venture Capital Availability index in 2020.
Plus ça change…?
All this said, there are still very significant challenges with Saudi Arabia, as an investment location and as a state. Corruption is one. We are not naïve enough to suggest that Vision 2030 is a panacea. Saudi Arabia advanced four places from 57 to 52 (out of 180) in the Corruptions Perceptions Index over 2017-21. Looking at World Bank’s Governance Indicators, the Kingdom scores above average in four of their six indicators, with their highest score in Control of Corruption (63) which looks at perceptions of where public power is exercised for private gain, including capture of the state by elites or private entities. However, Voice and Accountability scores very poorly, and this is the area which captures citizens’ ability to participate in selecting a government, freedom of expression and a free media. Despite changes, it is still the freedoms, the human rights, that, though much improved, lag global norms.
From an investment perspective these are changing times and what we know is that the investment landscape will not look the same in five or 10 years’ time, by the end of Vision 2030. Ten years ago, there were no Middle Eastern countries in the MSCI Emerging Markets Index; today, they make up 8% of the index with Saudi Arabia chief among them.
*Naomi Waistell is fund manager of the Polar Capital Emerging Market Stars Fund.