Importance of Economic Diversification for Saudi Arabia

Published: June 20, 2012

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Editor’s Note:

The Group of Twenty (G20) key industrialized and developing countries concluded their Summit in Los Cabos, Mexico this week with commitments to promote global economic growth and jobs. The G20 Leaders Declaration recognized the global recovery has continued to face a number of challenges:

“Financial market tensions are high. External, fiscal and financial imbalances are still prevalent, having a major impact on growth and employment prospects and confidence. Clearly, the global economy remains vulnerable, with a negative impact on the everyday lives of people all over the world, affecting jobs, trade, development, and the environment.”

The G20 leaders, the “premier forum” for international economic cooperation, resolved to act together to strengthen recovery and address financial market tensions. G20 member Saudi Arabia, the only member from the Middle East, was cited specifically for its energy security role in supporting economic stabilization and the global recovery, “We welcome Saudi Arabia’s readiness to mobilize, as necessary, existing spare [oil] capacity to ensure adequate supply. We will also remain vigilant of other commodity prices,” noted the Leaders Declaration. That role in boosting global prosperity has long been recognized by Saudi officials as exemplified by Dr. Mohammed Al-Jasser, Minister of Economy and Planning who told the US-Saudi Business Opportunities Forum last December, “Saudi oil policy has contributed immeasurably to global economic stability. Keeping a comfortable oil production spare capacity has dampened instability in oil as well as financial markets.”

Meanwhile Saudi Arabia itself has been buoyed by a program of reforms that have included diversification and better integration in global economic structures and schemes. As Dr. Al-Jasser said on the topic of Saudi fiscal focus and approach to financial stability:

“We have for many years used a counter-cyclical approach, i.e. paying down our government debt during the upswing of the cycle, and in our case the upswing cycle is higher oil revenues be it through prices or quantities, or both, and running budget deficits during the downswings in order to cushion the economy so it does not go into a tailspin as when oil prices sometimes do. For example, between 1999 and 2007, government revenue mostly from oil rose from 30 of GDP to 70 of GDP, but government spending stayed at around 30-35 percent level. We use the upswing to run budget surpluses and prudently reduce our government debt to GDP from 100 percent to around seven percent now, and at the same time replenish our foreign exchange reserves. The result was that we were able to shirk the global recession of 2008-2009, and briefly run a budget deficit in 2009.”

Today we are pleased to present for your consideration an article by Paula Mejia writing for The Majalla on the significance of diversification in the Kingdom’s economic future. She addresses the question of Saudi vulnerability to the global economic slowdown and its exposure in the face of potential oil market instability. SUSRIS thanks The Majalla for sharing this insightful article with you.

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Hedging Bets: The Importance of Economic Diversification for Saudi Arabia

Paula Mejia | The Majalla

In the context of a difficult global market, with oil prices dropping, Saudi Arabia has become increasingly exposed due to the limited structure of its economy. Economic diversification will be necessary to ensure the future stability of the Saudi economy. Fortunately, the country demonstrates high potential in a number of sectors, which could be developed to protect the country from future shocks in the oil market.

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Saudi Arabia’s role as a leading producer of oil has put it in a position of great responsibility. Through the prudent management of its resources, Saudi Arabia has managed to provide important support to the global economy during a period of high instability, including through its actions in stabilizing the global oil market. According to the International Monetary Fund’s most recent findings following a visit to Saudi Arabia, such practices allowed for higher imports and increased worker remittances, which together with financial assistance created positive spill-over effects in other economies in the region and beyond.

Saudi Arabia’s economic performance has been strong and its outlook remains positive. Nevertheless, the country’s growth is expected to slow from 7.1 percent in 2011 to 6 percent in 2012. And while the oil sector will remain a fundamental aspect of the country’s economy and its important geopolitical position, Saudi Arabia’s high reliance on the oil sector also puts the country at risk from future shocks in the oil market.

Already the European debt crisis has had an impact on Saudi Arabia’s economy. Oil prices have slumped as a result, with Brent crude falling around 20 percent due to a weakened global stock market, the reduction of a political risk premium resulting from improved relations with Iran, and increases in the global stock of oil. These events have been followed by the abrupt fall of TASI, the Saudi stock market, significant decreases in consumer spending, and rising inflation.

Yet, in spite of the weakening state of the global economy and the inevitable impact that it has had on Saudi Arabia’s economy, the country shows promise in a number of sectors, which if exploited further could provide an alternative lifeline to the country.

In a clear break from past trends, Saudi Arabia’s private sector is growing. This trend can be in part explained by the increase in bank lending to private sector. In year-on-year terms, lending growth was at its highest since March 2009. More specifically, bank lending to private sector rose by 1.1 percent in April to reach 13.5 percent in year-on-year terms, according to a recent report by Jadwa Investment. Increased lending opportunities are crucial for the growth of the private sector, as they provide entrepreneurs and SMEs with the possibility to pursue new ventures. In advancing the opportunities available in the private sector, increased lending also creates important positive spill-over effects in the rest of the economy, such as the creation of more jobs.

Further demonstrating the potential areas of growth in Saudi Arabia’s economy, non-oil exports and imports grew significantly in March of this year. Petrochemicals and refined products led non-oil exports. That the country’s refined products have been the fastest growing category of exports bodes well for Saudi Arabia’s future growth.

Countries that focus on exporting a wide variety of products, especially products of higher levels of sophistication that have a higher added value, boast higher levels of growth. If Saudi Arabia continues on this trend, it could see a similar positive trajectory to other countries that have pursued this approach to growth, such as South Korea.

According to the IMF’s study, many of the positive trends currently being observed in Saudi Arabia result from the government’s positive and prudent management of the economy. The Saudi government is well placed to continue to build on these advances and it is most likely to achieve success if it further reforms the economy, rendering its business environment more favorable. In addition to sustaining its reform agenda, the IMF has called on Saudi Arabia to support the growth of its financial sector, primarily by implementing Basel III, strengthening risk management, and promoting capital market development.

[Originally published by The Majalla on June 20, 2012. Reprinted with permission.]

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Paula Mejia

A contributing writer for The Majalla based in Tunisia. As a freelance journalist and consultant for the African Development Bank, her work has focused on the economic and social challenges in Africa, with a special focus on Egypt, Tunisia and Libya. She is a graduate of the London School of Economics, L’Institut D’Etudes Politiques de Paris and the University of Chicago.

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About The Majalla

THE MAJALLA offers an array of articles addressing the most important issues facing the Middle East and the world today. From political analysis of developing stories, to debates between world class intellectuals, and interviews of leading political figures, our magazine is dedicated to providing the public with informative analyses of the current events shaping the global order. [Source: The Majalla.com]

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