Allianz Trade, the worldwide leader in trade credit insurance, has recently updated the economic scenario for Saudi Arabia. The country has been recording solid growth amid moderate inflation rates, but its economic structure remains unbalanced.
Following the historic agreement with its Arabian Gulf neighbor Iran in March, a key factor of geopolitical instability seems to be removed from the Saudi risk parameters, and will be translated into holistic growth.
” Saudi Real GDP grew by +8.7% in 2022 and we expect growth to increase by +4% in 2024. This is more than all other countries belonging to the Gulf Cooperation Council (GCC). The strong rise in global oil prices provided substantial fiscal buffers, tampered the current account deficit of non-oil sectors and freed additional liquidity at relatively low rates for local companies, resulting in low insolvency rates. However, the Saudi economy has still potential for more growth,” stated the report.
Diversification difficulties
Saudi Arabia’s strengths are well known, as a long-standing oil producer with spare capacity to increase output when needed. The Kingdom was nearly unscathed by the international crises of recent years with no major consequences on inflation and exchange rate and is now acting as a stabilizing force across the region.
There is still room for improvement in relation to KSA’s dependence on international oil prices and shipping routes, with limited economic diversification aside from energy-adjacent sectors. Good relations with neighbors and OPEC members are also crucial given the growing divide in disposable revenues and accrued resources.
Data transparency, pluralism and governance also require additional efforts as they remain below the average of high-income economies.
The fiscal balance should remain manageable despite the reduction in oil revenues. Saudi Arabia’s annual current account balance shifted to substantial deficits in 2015-2016, after 15 years of elevated surpluses, and posted another deficit in 2020 due to the pandemic-related oil price slump. As we expected, the current account surplus widened in 2022, reaching 16% of GDP, and is likely to remain in the double digits in 2023. Foreign exchange reserves held at the central bank have reduced over the years from a peak of USD746bn in August 2014 to USD450bn in mid-2020, and they have been relatively stable around that level since. Despite the decline, they are still sufficient to comfortably cover debt maturities.
Innovation drive
Since hydrocarbons account for around 30% of GDP and 70% of exports, environmental sustainability can become a driver of long-term growth and efficiency gains. Renewable power generation is booming in the Kingdom, but nominal capacity remains lower than that of UAE.
Account surpluses are usually accompanied with a build-up in hard currency reserves and assets under the sovereign wealth fund and serve to finance mega-projects like Neom, a region that will contain numerous cities, resorts and technological developments, such as The Line, a 170-kilometer linear city that is expected to accommodate 9mn people into lined skyscrapers, 500 meters high and 200 meters apart.