Saudi Arabia is the largest economy in MENAP. It outperforms most of the region on per capita income, creditworthiness and ease of doing business. But the slump in oil prices is weighing on growth. Until recently it was the world’s largest oil producer, and it remains the biggest exporter of oil. The strong run-up in oil prices over much of the last decade has benefitted the oil-dependent economy. But equally, the current downturn poses risks.
The oil sector is roughly 45% of economy and makes up 80% of government revenues. Low oil prices are weighing on growth and forcing the government to cut back on spending. Authorities are also planning to issue a US$15m sovereign bond to fill the widening budget deficit. The IMF expect growth over the next five years will average 2% p.a., down from the 4% experienced over the last decade.
‘Vision 2030’ is Saudi Arabia’s plan to reduce the dependence on oil over the coming years. The country’s admission to the WTO in 2005 and opening up of insurance, retail, communication and transport services to foreign investors have been major impulses of non-oil development. But the population of 27m still faces infrastructure, housing and job shortages. The problems in the labour market are mainly due to a heavy reliance on foreign labourers. The government is committed to reducing this reliance and ramping up spending on infrastructure and housing.
Saudi Arabia has become a high-income country in the last decade, with GDP per capita forecast to reach US$25,000 by 2019. Yet it lags fellow oil producers Qatar, Kuwait, United Arab Emirates and Bahrain.
Saudi Arabia enjoys an investment grade credit rating and an OECD country credit grade of 2. These suggest a relatively low likelihood that it will be unable or unwilling to meet its external debt obligations in a systemic sense (though, needless to say, individual debtors can and do default).
The business climate is better than the regional average, ranking 82 out of 189 economies on the World Bank’s ease of doing business gauge—which measures regulation and red tape relevant to a domestic small to mid-sized firm. The country outperforms on most metrics, but lags the region on resolving insolvencies and starting a business.
The country scores in the top half on most of the World Bank’s governance gauges. The monarchy controls the government and most laws are based on Islamic principles, often limiting freedom of expression. Not surprisingly, Saudi Arabia scores poorly on ‘voice and accountability’.
Saudi Arabia is Australia’s 29th largest trading partner and second largest export destination in the Middle East behind the UAE. Australian merchandise exports to Saudi Arabia were worth US$2.1b in 2014-2015, and include passenger cars, meat and dairy.
Saudi Arabia is the largest market for Australian motor vehicle exports, with the likes of Toyota Australia and Holden answering demand. But with the closure of Ford, Holden and Toyota in coming years, vehicle exports will obviously diminish.
Australia is Saudi Arabia’s 8th largest source of agricultural imports, but there is scope for Australian firms to gain greater market share, particularly as the expanding middle class start to demand higher quality proteins and grains. Saudi Arabia’s solid population growth, projected at 1.5% p.a. over the next decade, will present further opportunities for Australian firms involved in dairy, animal feed, beef and sheep farming.
Service exports to Saudi Arabia were worth A$355m in 2014-2015 driven mainly by education. Tertiary education accounts for the lion’s share of Saudi student enrolments funded mainly by the King Abdullah Scholarship program. Enrolments peaked at more than 13,000 in 2010, but fell to 10,000 in 2015.
Imports from Saudi Arabia were worth US$386m in 2014-2015, down 44% from a year earlier.
Bilateral investment between Australia and Saudi Arabia is minuscule, but the Saudi push to develop agriculture could benefit Australian firms with the knowhow, while large scale infrastructure developments and an increasing push into precious and base metal mining will pave the way for Australian contractors and engineering firms.
Department of Foreign Affairs