Saudi Arabia

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Saudi Arabia – February 2022

Saudi Arabia is the largest economy in the Middle East, North Africa and Pakistan (MENAP) region, and the world’s largest exporter of oil. Saudi Arabia outperforms most of the MENAP region on per capita income, creditworthiness and ease of doing business. The reliance on oil to drive output, jobs and fiscal and foreign-currency revenue leaves the country vulnerable to swings in oil production, demand and prices. Saudi Arabia remains committed to implementing reforms to diversify its economy away from oil through its Vision 2030 Program.

The above chart is a cobweb diagram showing how a country measures up on four important dimensions of economic performance—per capita income, annual GDP growth, business climate rank and creditworthiness. Per capita income is in current US dollars. Annual GDP growth is the five-year average forecast between 2022 and 2026. Business climate is measured by the World Bank’s latest Ease of Doing Business ranking of 190 countries. Creditworthiness attempts to measure a country's ability to honour its external debt obligations and is measured by its OECD country credit risk rating. The chart shows not only how a country performs on the four dimensions, but how it measures up against other countries in the region.

Economic outlook

After experiencing the dual shocks of the pandemic and low oil prices, the Saudi economy is back on track. The IMF expects Saudi Arabia to grow 4.8% in 2022, up from 2.9% in 2021. Strong global demand for oil supports production and broader economic activity. Public construction activity related to Vision 2030 development projects and recovering tourism supports growth in the non-oil sector. Plans to offer more stock in the state-owned oil giant Saudi Aramco are expected to drive international investment in Saudi Arabia. Regional geopolitical tensions and oil price volatility remain key downsides to the outlook.

After facing significant setbacks owing to the pandemic, per capita GDP is expected to reach about $25,700 by 2026, according to IMF estimates. Saudi Arabia is still marked by a high degree of social inequality and a relatively high unemployment rate among youths.

Country risk

Country risk in Saudi Arabia is low. The OECD country credit rating is 2 and the country has investment grade ratings from all three major private rating agencies. This suggests that there is a low likelihood of the country being unable/unwilling to meet its external debt obligations. That said, individual debtors and sub-sovereign entities can and do default.

The World Bank’s ease of doing business gauge ranks Saudi Arabia’s business climate 62nd out of 190 economies. In recent years, Saudi Arabia has made wide-ranging reforms, including establishing a one-stop shop for company incorporation that makes it easier to start a business. Saudi Arabia outperforms the Middle East region on most doing business indicators, except for resolving insolvencies. Foreigners may find it difficult to collect on their debts. Euler Hermes indicate late payment is common practice and late interest cannot be charged in Saudi Arabia. The legal system is also slow, costly and unpredictable.

Saudi Arabia scores in the top half of most governance indicators and has a track record of solid fiscal and economic management. That said, Saudi Arabia scores lowly on measures of voice and accountability. The monarchy controls the government and most laws are based on Islamic principles, often limiting freedom of expression.

Political risk in Saudi Arabia is low to moderate, and includes risks related to escalation of regional geopolitical tensions that can hinder oil production and trade.

The risk of expropriation in Saudi Arabia is moderate. The US investment climate statements note that generally the Saudi Board of Grievances has jurisdiction over commercial disputes between the government and private contractors. The Board also reviews foreign awards and court decisions to ensure they comply with Sharia law. This review process can be lengthy, and outcomes are unpredictable. Further, some disputes are handled through intra-ministerial administrative bodies and processes in Saudi Arabia instead of a court. The US is not aware of any cases of expropriation of foreign investment without adequate compensation, but some SMEs have had their investment licences cancelled without justification, causing them to forfeit their investments.

Bilateral relations

Saudi Arabia was Australia’s 33rd largest trading partner. Total goods and services trade amounted to $2.2 billion in 2020. Australia’s major goods exports to Saudi Arabia in 2020 included barley, beef and other meats. Major goods imports from Saudi Arabia included gold, fertilisers, inorganic chemicals and aluminium.

There is scope for Australian firms to boost agricultural exports to Saudi Arabia, particularly as the expanding middle class start to demand higher quality proteins and grains. Opportunities also exist in the extractive industries, infrastructure and education.

Education dominates Australia’s services exports to Saudi Arabia. Although enrolments in Australian educational institutions have been falling over the past ten years, Saudi students represent the largest cohort from the Middle East region. Opportunities exist in education cooperation, both to build the numbers of Saudi students studying in Australian universities, and for Australian institutions to provide education services in Saudi Arabia, including in the context of Vision 2030. Tourist arrivals slumped in 2020 and remained low in 2021. The ongoing pandemic points to another year of uncertainty for services exports in 2022.

Bilateral investment between Saudi Arabia and Australia is minimal. But investment opportunities are large, particularly in mining and agriculture. Major Saudi sovereign wealth funds are increasing their international investments, announcing their interest in oil and gas assets and renewable technologies. The Saudi Agriculture and Livestock Investment Company invested in Australian agricultural land in 2019 and is exploring further agriculture investment options.