Saudi Arabia is positioning itself well in the global economy. It opened its stock market to foreign investors in 2008 and thanks to strong macroeconomic fundamentals and highly positive demographics, it is becoming an increasingly attractive place to invest in.

Saudi Arabia is positioning itself well in the global economy. It opened its stock market to foreign investors in 2008 and thanks to strong macroeconomic fundamentals and highly positive demographics, it is becoming an increasingly attractive place to invest in.

The government’s $400 billion stimulus package, the largest as share of GDP among G-20 countries, and exceptional financial measures have led to a strong economic recovery. Banque Saudi Fransi, one of the country’s leading financial services providers, predicts a growth rate of 3.9%, up from 0.15% last year. It further predicts an inflation rate of 4.7% and a current account surplus of 77% for this year. Moreover, oil prices at over $70 a barrel enable the government to keep spending aggressively and still generate a significant fiscal surplus. Thanks to higher output and oil prices the Saudi Arabian Monetary Agency, the country’s central bank, was also able to bring its foreign asset holdings back to a pre crisis level. This strengthens the government’s commitment to a fixed exchange rate and keeps currency risk down. Yet, while these numbers draw a bright picture of the overall state of the Saudi economy the question remains what to invest in?

The kingdom’s fate is still strongly dependent on oil. The petroleum sector accounts for 45% of GDP and 90% of exports. Major investment projects like the Aramco-Dow Jubail petrochemical project or the Yanbu refinery show that Saudi Arabia has great potential to not merely export crude oil but to process it, adding substantial value to the economy. As petroleum is likely to remain the basis of many industrial products for years to come, this provides very promising prospects on long term economic growth. However, while the country’s main potential lies in the development of the petrochemical industry, the government is actively trying to diversify the economy. This is an  important measure if Saudi Arabia wants to become less vulnerable to shocks in the global demand for oil. These measures would also create employment opportunities for their rapidly growing population.

There are two factors besides the oil wealth that could make Saudi Arabia an interesting place for international investors.

One is the government’s intent to improve the infrastructure of the Arabian Peninsula’s largest state. Large infrastructure projects such as the Al Haramin high speed rail, a 444 km intercity rail system connecting Mecca and Medina, and investments in the Median Airport and King Abdul Aziz International Airport offer great opportunities for the infrastructure sector and boost employment.

The second argument to invest in Saudi Arabia—and at the same time the biggest economic challenge the government faces—is the country’s demographics. 38% of Saudi Arabia’s population are under the age of 15 compared to 30% in India and 18% in China. The strong population growth is great news for consumer facing companies as domestic consumption is bound to rise significantly. As Saudi teenagers grow up they will want to have cars, phones and cosmetics, making Saudi Arabia a good place for companies that provide essential and discretionary consumption goods to invest in. Domestic demand further decreases the country’s dependence on the global demand for oil.

On the other hand the Saudi government will have to make sure that this new generation entering the work force will be able to find employment. The strong, oil fuelled, welfare state made many Saudis reluctant to work in the private sectors. But as unemployment rises and many Saudis struggle to maintain their living standard, the government has to try hard to encourage private sector jobs. The other demographic challenge will be to further integrate women into the work force.

With the economic climate in Europe and the United States getting colder, investors are moving south to find new investment opportunities. As it opens up its markets, Saudi Arabia’s oil wealth and favourable demographics are likely to attract more and more international capital. To definitely put the country on the emerging markets map, the government needs to continue its path of economic reform. Encouraging private sector activities, modernizing the financial system and creating jobs will be essential if the Saudi lion wants to keep up with the dragons and tigers out there.

majalla.com