The Economic Diversification of Saudi Arabia: Opportunities for Investors 

Saudi Arabia, one of the world's leading oil exporters, is currently undertaking economic diversification to achieve sustainable development and reduce dependence on hydrocarbons while improving productivity and fostering innovation. This process seeks to lower dependency while simultaneously improving productivity and encouraging creativity and innovation.

 

Crown Prince MBS unveiled Vision 2030 in 2016, hoping to diversify Saudi Arabia away from hydrocarbon-dependent economies, but the coronavirus pandemic threatens this strategy and reduce job creation in Saudi Arabia.

 

The Pandemic

 

Economic diversification of a nation is one of the key principles for sustainable development. Diversifying an economy helps it remain resilient against shocks while developing economic activities to meet basic needs of its population - this is particularly significant for nations reliant on finite natural resources like oil as it serves as their sole source of national income.

 

As the global economy begins its recovery from pandemic impacts, GCC governments have renewed efforts to diversify away from hydrocarbons. Saudi Arabia in particular has made strides toward this end; Crown Prince Mohammed bin Salman launched Vision 2030 plan aiming at turning its economy into one characterized by diversity by 2025.

 

Diversification can help economies reduce their susceptibility to fluctuations in commodity prices and international demand fluctuations as well as shifts in global supply-chain relationships. Furthermore, diversification can contribute to economic growth by increasing productivity, stimulating investment and encouraging entrepreneurship - it is therefore no surprise that more governments are adopting diversification as an objective policy goal.

 

Saudi Arabia needs to diversify, but to do so will require substantial private sector investments and the development of a knowledge-based economy. Accomplishing this goal won't be simple, though; several obstacles stand in its way - with recruitment of skilled labor being perhaps the biggest issue: Saudi's traditional education system simply does not prepare students for private sector jobs requiring high levels of complexity and analytical abilities.

 

Access to credit for small and medium enterprises will hamper non-oil sector expansion, while high unemployment will add further challenges to diversification efforts - this is particularly concerning given that 54% of the population under 25 years old constitute youth. Therefore, diversifying the economy with new job opportunities must become a top priority to sustain long-term socioeconomic development in this region.

 

The Vision 2030

 

Saudi Arabia has one of the most oil-dependent economies worldwide. Due to volatile global energy prices, budget deficits, and the entry of young Saudis into the workforce, it was no surprise when Vision 2030 was proposed as a way out. Vision 2030 proposes diversifying economic growth away from oil into non-oil business sectors like banking, IT, tourism and others.

 

MbS, better known by his initials, has quickly amassed power since becoming deputy crown prince a decade ago and his political future may hinge on whether Vision 2030 succeeds or fails.

 

Vision 2030 seeks to increase non-oil economic output from 40% of GDP to 60%, an ambitious objective.

 

Vision 2030's primary aim is to shift growth away from state-owned companies and toward the private sector. The plan proposes expanding financing sources for private businesses, expanding funding options for them, developing the Kingdom's financial market through parallel stock exchange and derivative market, and increasing local capital participation in foreign investments.

 

It also aims to strengthen labor market policies in Saudi Arabia by offering flexible work arrangements, introducing Saudi-based internship programs, and strengthening contractual relations between employers and workers. Furthermore, the Kingdom aims to bolster its industrial base by localizing production of goods and services; one key initiative includes creating a system of government procurement that promotes local content; another involves setting up a military industries company which works to increase rates of localization within defense sectors of the Kingdom.

 

Vision 2030 project already presents several obstacles to its goals. Rental and property costs in Riyadh have driven away many young Saudis, creating cultural divides. For future success, diversifying beyond oil export revenues will be key in diversifying Saudi's economy further.

 

The Future of Oil

 

Saudi Arabia has made efforts to diversify its economy away from oil, but eliminating Saudi's dependence on petroleum in two generations would be nearly impossible. A rapid energy transition probably wouldn't see petroleum consumption peak until after 2050 and even renewable technologies may not grow at a speed required to keep global temperatures from surpassing 1.5 degrees Celsius limit, especially among developing nations that rely more heavily on fossil fuels as they expand economies.

 

Even if oil production peaks eventually, it would take some time for alternative energy sources and infrastructure decommission to replace this oil source - with demand dwindling, Saudi Arabia would experience its economy suffering as demand fell off drastically - as evidenced by its pandemic, depending on crude oil as an economic engine is vulnerable to sudden price changes beyond anyone's control.

 

Mismatch between oil revenues and development plans led to misplaced spending, rather than investment in productive structures, leading to current spending rather than investments in productive structures. Furthermore, unwillingness to reduce production in order to stabilize international prices caused the Kingdom to produce more than its market could absorb, leading to imports that outpaced domestic supply resulting in higher oil prices overall.

 

Saudi Arabia stands out as an OPEC producer by being able to quickly increase production when any international markets experience shortfalls; furthermore, one of its lowest cost producers. Unfortunately, many other OPEC members cannot do this at short notice and many are running low on reserves.

 

As such, it's imperative that Saudi Arabia's leadership be committed to reforming the economy so it becomes less reliant on oil and more resilient against price fluctuations in global oil markets. That is why in 2016, Crown Prince Salman launched Vision 2030; an initiative focused on knowledge-based industries as a route towards prosperity and economic diversification with ambitious goals designed to foster education and research initiatives as well as increase employment. Public Investment Fund has supported this endeavor with billions invested into local start-ups, solar/wind projects, transportation services, transportation services as well as transport/housing sites over time.

 

The Future of Saudi Arabia

 

Saudi Arabia traditionally channeled financial windfalls from previous oil booms into infrastructure projects and giving handouts to its citizens, but now sits atop an abundance of cash and is searching for ways to diversify away from hydrocarbons. In April 2016, its government unveiled an expansive set of economic reforms known as Vision 2030 with an aim of diversifying Saudi Arabia's economy beyond oil while still taking advantage of its substantial reserves.

 

Vision 2030's goals include attracting foreign investment, increasing participation of small and medium businesses, and creating jobs through mega-projects developed by the government. These mega-projects aim to boost domestic consumption through industries such as petrochemicals, mining, tourism (including religious tourism), transportation, entertainment and entertainment - driven by PIF which owns the company that will build NEOM on Red Sea as a tourism and technology hub that will open by 2025.

 

Saudi Arabia also hopes to establish a knowledge-based economy through education, research and development and investments in non-oil sectors such as tourism. This goal can help achieve economic diversification goals while creating more sustainable future growth prospects.

 

Vision 2030's key aim is to enhance education quality across Saudi Arabia. This can be accomplished through increasing university enrollment, adopting modern curricula, and offering generous student scholarships. A quality education will allow Saudis to compete effectively in global marketplace and contribute positively towards national prosperity.

 

Vision 2030 plans aim to reduce our reliance on imports by increasing local production and building a skilled labor force, encouraging private sector investment and supporting entrepreneurial activity across new economic sectors. To do so effectively, private sector investments must be encouraged as well as support entrepreneurship within specific fields of the economy.

 

These efforts should be guided by the universally acknowledged need to diversify beyond hydrocarbons, with entrepreneurs and market signals playing a leading role in deciding where investment should take place. While limiting government lending to sectors with plausible high projected rates of return, government should invest in broad infrastructure that supports private sector expansion.