World  Business and Economic Analysis 



Saudi Arabia entered 2023 on the back of its fastest economic expansion in over a decade, with its growth rate exceeding that of other G20 countries in the face of a variety of macroeconomic headwinds. Factors buffeting Western economies as a result of Russia’s invasion of Ukraine, not least higher energy prices, proved to be a boon for the Kingdom, lifting oil sector activity by 15.4% over the course of the year (see Energy & Utilities chapter). Additional revenue has helped generate a rare fiscal surplus, which in turn offers the government more leeway as it continues to finance efforts to diversify the economy and grow the non-oil sector. Despite slowing growth in 2023, the Kingdom remains a dynamic place to do business, both for major firms engaging with its large government-owned players, and smaller companies looking to benefit from steady private sector growth.

Structure & Oversight
The World Bank classifies Saudi Arabia as a high-income country, with a per capita income of $30,400 in 2022 and a population of 32.2m people. The monarch and the government are situated in the capital, Riyadh, which together with Jeddah houses just under a third of the Kingdom’s population. Dozens of smaller cities, including the Islamic holy cities of Makkah and Medina, are scattered around the vast country.

The king presides over the Council of Ministers, or the Cabinet, which includes heads of a range of ministries with responsibilities directly or indirectly relating to the economy. The Majlis Ash-Shura, or Consultative Council, has an advisory role in the government and can interpret existing laws or propose new legislation to be passed by the ruler.

Crown Prince Mohammed bin Salman bin Abdulaziz Al Saud took the reins as prime minister in September 2022 after 87-year-old King Salman bin Abdulaziz Al Saud, who has been in power since 2015, ordered a Cabinet reshuffle. In doing so, King Salman continued an ongoing transfer of power that formalises his son’s stewardship of the government. The crown prince is pioneering the restoration of diplomatic ties with multiple countries in line with Vision 2030, an economic diversification plan with the central focus on growing the domestic non-oil economy, particularly the tourism and hospitality sectors.

In March 2023 the government of Saudi Arabia signed a deal with its counterparts in Iran to resume diplomatic ties after a seven-year freeze, following China-brokered talks in Beijing. The détente comprises the revival of cooperation and security agreements, which could boost economic advancement for the region. Stable relations will also allow two of the Middle East’s biggest economies to refocus more of their resources on domestic affairs, rather than regional security concerns.

The Kingdom is structured around 13 provinces, each headed by a governor, who is aided by a deputy and advisory council. Key ministries include the Ministry of Economy and Planning, the Ministry of Finance, the Ministry of Human Resources and Social Development, the Ministry of Energy, the Ministry of Investment (MISA), the Ministry of Commerce, and the Ministry of Industry and Mineral Resources.

Funding Growth
The Public Investment Fund (PIF) – the sixth-most valuable sovereign fund in the world, with assets of $607.4bn in 2022 – is increasingly positioned as the vehicle through which the government drives economic activity, both domestically and beyond the Kingdom’s borders. The PIF launched initiatives in March 2023 aiming to increase its contribution to local content to 60% of its portfolio by 2025, with a focus on localising technology.

The fund holds investment portfolios across 13 strategic sectors, and spearheads the implementation of giga-projects. These include NEOM, a 26, 500-sq-km city that will be entirely powered by renewable energy in line with the Kingdom’s aim of lifting the contribution of renewables to half the overall energy mix by 2030. This strategy spans 58 GW of wind and solar and $270bn worth of investment by 2030.

The Red Sea Project to build a new luxury tourism destination along the eponymous coastline; the Qiddiya sport and wellness mega-complex; the Roshn homeownership scheme, which involves more than 200m sq metres of integrated neighbourhoods and housing; and the Diriyah tourism development, housing the At-Turaif mudbrick city, a UNESCO World Heritage site, complete the giga-project portfolio.

Other critical institutions include the Saudi Central Bank (SAMA), the Capital Market Authority (CMA), and two subcabinets established by King Salman in 2015 and headed by the crown prince – the Political and Security Affairs Council and the Economic and Development Affairs Council, which formulates economic policy in order to fulfil the goals of Vision 2030.

Finalised in 2016, Vision 2030 represents an ambitious but necessary roadmap to guide the Kingdom away from its reliance on oil. One area of success has been lifting the workforce participation rate of women to 37% by 2022, outstripping the target of 30% and helping to support the development of the domestic labour force.

There are 2.2m Saudis working in the private sector, which is the highest number on record and denotes an important change in perceptions. As of August 2023 more than 90% of unemployed citizens said they would accept private sector work, whereas in the past many would have held out for public sector roles. Progress on lowering the unemployment rate has also been encouraging, with the rate for Saudis falling from 15.4% in early 2020 to 8% at end-2022, and the overall rate at a long-time low of 4.8%.

Robust GDP growth of 8.7% in 2022 helped drive the fall in unemployment, and pushed nominal GDP beyond the $1trn mark for the first time to make Saudi Arabia the world’s 17th-largest economy. Oil activities expanded by 15.4%, the non-oil sector grew by 5.4% and government activities achieved a growth rate of 2.6% over the year. Crude petroleum and natural gas activities achieved the highest contribution to GDP, at 32.7%, followed by government services activities at 14.2% and manufacturing excluding petroleum refining at 8.6%. While growth in the private sector’s contribution to GDP has been less pronounced – reaching 43% as of November 2022 versus a target of 65% – a number of new and ongoing initiatives should help move the needle on this target in the coming years.

Looking ahead, the IMF forecasts GDP growth will moderate to 1.9% in 2023 due to a slowdown in oil production mandated by cuts agreed by the Organisation of the Petroleum Exporting Countries (OPEC), before rebounding to 3.4% in 2024 as those cuts unwind. Saudi crude production reached a record 10.6m barrels per day (bpd) in 2022, helping drive an 800,000 bpd increase in crude oil exports compared with 2021, with overseas shipments exceeding 7m bpd for the first time since 2017. Ongoing investment in refining capacity saw throughput in the first 10 months of 2022 average 2.7m bpd versus 2.5m in 2015 (see Energy & Utilities chapter).

Investment in domestic refining, along with efforts to diversify the economy, helped reduce trade as a share of GDP to 59% in 2021, down from 96% in 2008. In 2022 oil exports were valued at SR1.2trn ($327bn), up 68.1% on the year, accounting for almost 80% of overall outbound shipments. Non-oil exports rose by 13.7% to SR316bn ($84.2bn) and overall exports increased by 49.9% to SR1.54trn ($411bn). Imports of merchandise were up 24.2% to SR139bn ($37bn), as overall imports reached SR712bn ($189bn), versus SR573bn ($153bn) in 2021. The balance of trade consequently reached a surplus of $221.6bn at year end versus $123bn in 2020.

Saudi Arabia is party to multiple international trade agreements, and has been a member of the World Trade Organisation (WTO) since 2005. In 2019 the Kingdom entered into the Agreement on Liberalisation of Trade in Services among Arab States, which extended commitments made under WTO membership to loosen restrictions on services trade across the region. Otherwise, the Kingdom tends to negotiate trade deals under the GCC umbrella, most recently signing a deal to liberalise trade in goods by removing or reducing tariffs with the European Free Trade Association in 2015.

Several new agreements are on the drawing board, including a GGC free trade deal with the UK, talks regarding which are ongoing. While a GCC-China free trade agreement has been mooted for decades, there are indications that China is pushing for a deal to be finalised, with the scope expected to extend beyond energy to cover areas such as digital and technology services, and direct and indirect portfolio investment. The Kingdom has been strengthening economic ties with China, with Aramco in March 2023 agreeing to supply two Chinese companies with a combined 690,000 bpd of oil, while taking a 10% share of Rongsheng Petrochemical worth some $3.6bn. The oil giant is also developing a refinery and petrochemical project in the north-eastern province of Liaoning, in the city of Panjin, as part of the joint-venture company Huajin Aramco Petrochemical. Both deals serve to lock in China as a long-term customer for Saudi crude and its by-products. Saudi Arabia is a signatory to the Belt and Road Initiative, which facilitates investment in infrastructure and digital capabilities by Chinese companies.

China is Saudi Arabia’s leading trade partner; bilateral trade was worth $87.3bn in 2021, with imports totalling $30.3bn and exports valued at $57bn, driven by China’s appetite for Saudi crude – which accounts for a fifth of the East Asian country’s total crude purchases – and plastics. Textiles, electronics and machinery are among the top imports from China.

That said, the UAE remains the largest customer for Saudi exports, with India, Egypt and the US the other primary destinations. The US is the Kingdom’s main supplier of imports behind China, followed by the UAE, India and Germany. Oil and related products dominate exports, while vehicles are the top import, with telephones and gold – mainly from the UAE – also featuring prominently. Travel and transport are the top services exports, and rank second and third for imports behind government services, which account for over one-third of the total by value.

Stabilising Effects
Saudi Arabia’s strong trade performance, in tandem with higher global energy prices, helped Aramco record $161bn in annual net profit in 2022, the highest ever by a listed company. Energy costs have driven an uptick in global consumer prices, but Saudi Arabia has proved resistant to inflation, which averaged 2.5% in 2022 and remained at roughly the same level in early 2023. The setting aside of about SR10bn ($2.7bn) to secure strategic supplies of essential goods and services – as well as subsidies allocated to Aramco to facilitate an energy price ceiling within the Kingdom – helped keep a lid on domestic prices.

Monetary policy also played a part, with SAMA tracking the US Federal Reserve in implementing interest rate hikes amounting to 400 basis points throughout the course of 2022, taking the Saudi repurchase agreement rate to 5% by year end. This helped to ease pressure on the Saudi riyal, which maintains a peg with the US dollar, in global currency markets. The government has predicted that inflation will fall to 2.1% in 2023. Ayman Al Sayari took over as governor of the central bank in February 2023, while his predecessor, Fahad Al Mubarak, was appointed adviser to the royal court. As growth moderates, a key goal for Al Sayari will be to ensure that small and medium-sized enterprises (SMEs) receive adequate bank funding (see Banking chapter).

Fiscal Policy
Saudi Arabia recorded a budget surplus of SR104bn ($27.7bn) in 2022, roughly 2.6% of GDP, as higher oil prices boosted government revenue by 31% to SR1.3trn ($339bn). This was the first budget surplus the Kingdom had recorded in almost a decade, with the budget deficit averaging 9.9% of GDP between 2015 and 2020.

The surplus, which was largely earmarked to be lodged as central bank reserves – among the 10th largest in the world, valued at more than $400bn in March 2023 – is a testament to the success of fiscal consolidation measures, particularly the 2020 increase in value-added tax (VAT) to 15% after its introduction in 2018, and the adherence to a medium-term fiscal stability programme that has helped rein in government expenditure. Revenue from oil hit SR857bn ($229bn) in 2022, up 52% from the previous year. Non-oil revenue rose by 19% year-on-year in the fourth quarter, versus a 17% increase for the oil sector, boding well for diversification efforts.

Total government spending in 2022 was up 12% to SR1.2trn ($319bn), with current expenditure 14% over budget, and capital spending 64% higher than planned due to larger outlays on military and security, as well as health care. Total public debt stood at about SR990bn ($264bn), roughly equivalent to 24.9% of 2022 GDP – significantly lower than mature economy peers. This is expected to fall slightly in 2023 to 24.6%, or SR951bn ($254bn), amid a continuation of fiscal stabilisation measures.

The Council of Ministers has approved total expenditure of SR1.11trn ($296bn) for 2023, on estimated revenue of SR1.13trn ($301bn) for a forecast surplus of SR16bn ($4.3bn), or 0.4% of GDP. Large outlays are approved to instigate structural economic changes in line with Vision 2030 goals, and to rebalance the monetary tightening necessitated by the US Federal Reserve’s aggressive monetary policy. As regards the former, the government plans to direct spending towards the aforementioned giga-projects, as well as key programmes such as the National Transformation Programme, the National Industrial Development and Logistics Programme, the Quality of Life Programme, the Pilgrim Experience Programme and the Saudi Green Initiative.

Saudi Arabia accrues considerable fiscal revenue despite a 0% individual income tax. Aside from the aforementioned VAT, the exchequer derives income from corporate income taxes of 30-85% on natural gas and oil activities, and 20% on non-oil activities, applicable to the share of profits of non-GCC shareholders or individuals doing business in the Kingdom.

Zakat – a payment under Islamic law that is used for charitable or religious purposes – is imposed according to the nationality and residence of investors.

Driving Investment
In 2022 Saudi Arabia issued 4358 investment licences, up 53.9% compared to 2021, reflecting the Kingdom’s efforts to establish itself as a leading investment destination in the GCC. However, foreign direct investment (FDI) in the Kingdom dropped by nearly 60% from $19.6bn in 2021 to settle at $7.9bn in 2022, the first contraction in five years. That said, the 2021 figures were elevated by the $12.4bn deal by Aramco to sell a large minority stake in Aramco Oil Pipelines, as well as a recovery in deal flows following pandemic-induced stasis.

Efforts are under way to increase FDI figures from 2022 levels. The Investment Promotion Authority came into being in August 2022 to help fulfil Vision 2030’s goal of attracting $100bn in FDI per year. A new investment law in the works is slated to level the playing field for foreign investors, endowing their investment with a status equal to those of domestic players under the law in terms of licensing, permitting, registration and project approvals. In the meantime, the government is bolstering its Programme HQ, launched in 2021 by MISA and the Royal Commission for Riyadh City, which aims to encourage multinational firms to relocate their base of operations to the Saudi capital.

In May 2023 Mohammed Al Jadaan, the minister of finance, announced that Saudi Arabia would provide a permanent VAT exemption on transactions between entities within and between special economic zones (SEZs). It also plans to offer permanent exemption for social insurance tax for the employer as well as for transactions between companies in SEZs. A 20-year tax discount will be offered to all businesses within the zones, which include King Abdullah Economic City and the King Abdullah Financial District.

In the meantime, the government has been encouraging the PIF and government-owned companies to spearhead investment, with localisation and self-sufficiency top of mind. The Shareek initiative, under which domestic companies receive government support for investment in Vision 2030 target sectors, is of key interest to investors. The first wave carries an aggregate project value of $51bn and should help lift GDP by more than $125bn before 2040, creating approximately 65,000 local jobs.

Some 28 companies were enrolled in the programme as of mid-2023, with SR192bn ($51.2bn) worth of support for investment earmarked for eight major companies. First among these is Aramco, which is developing five projects, including the $11bn Amiral petrochemical complex with TotalEnergies. The site is due to come on-line in 2023, producing 1.7m tonnes of ethylene and 1m tonnes of polyethylene each year. Other Aramco-led initiatives include a steel plate manufacturing facility, a cloud project that aims to facilitate the entrance of Google Cloud services to the Kingdom, an engine-building project, and a casting and forging operation.

Meanwhile, electricity firm ACWA Power is aiming to build the world’s largest green hydrogen plant, with $8.4bn in investment, under its NEOM Green Hydrogen joint venture with US-based industrial gases company Air Products. Financing for the plant had been secured, and engineering, procurement and construction agreements had been signed as of August 2023. Ma’aden, a mining company, is being backed to implement a phosphate project in Wa’ad Al Shamal, while petrochemicals manufacturer SABIC is pushing to establish both a catalyst manufacturing centre and a liquid methionine and ammonium sulphate plant, with the latter tipped to create more than 20,000 jobs. The first round of Shareek-backed investment, which overall seeks to unlock SR5trn ($1.3trn) in domestic investment capital by 2030, is advancing progress towards the goal of increasing the private sector’s contribution to GDP to 65%, and non-oil exports to half the total.

At the same time, the Kingdom’s various giga-projects are continuing to attract new investment capital. In March 2023 NEOM announced that it had awarded €1.4bn in contracts to Italy’s Webuild and joint-venture partner Shibh Al Jazira Contracting to design and build 57 km of a high-speed railway.

The year 2023 should also see the first Red Sea Global venues open their doors, with the St Regis Red Sea Resort, the Nujuma Ritz-Carlton Reserve and Six Senses Southern Dunes welcoming their first guests. The built-for-purpose Red Sea International Airport is also poised to launch its first flight, beginning with a seaplane terminal, before opening to international air carriers later in the second half of 2023.

Elsewhere, the new King Salman International Airport, located in Riyadh, is earmarked to be built following the unveiling of its master plan in November 2022. The project will span six parallel runways, hosting 185m passengers per year by 2050, up from the 29m who entered via the Kingdom’s airports in 2022. The new airport is expected to contribute SR27bn ($7.2bn) annually to non-oil GDP.

The airport plan tracks the Kingdom’s efforts to establish itself as a regional centre for logistics, an ambition furthered by the 2022 opening of an inaugural Special Integrated Logistics Zone (SILZ) in Riyadh next to King Khalid International Airport. The SILZ aims to dispatch goods just four hours after they enter the zone, versus the 24-hour window common in other GCC SEZs.

One key Vision 2030 target is to grow SMEs’ contribution towards GDP to 35%, from about 20% in 2023. The SME General Authority (Monsha’at) oversees the sector, which comprised 1.1m companies at end-2022, double the number registered in 2017, with some 45% of Saudi SMEs headed by women.

SME Bank, launched in 2021 as a standalone digital financing portal, wields SR10.5bn ($2.8bn) in capital to finance direct and indirect lending, as well as financial guarantee programmes that aim to promote sector growth. In 2022 the Council of Ministers greenlit the transfer of the SME Financing Guarantee Programme, known as Kafalah, from Monsha’at to SME Bank. Aramco is also working to nurture smaller companies via its Taleed Programme, which aims to deliver financial solutions to existing and new businesses through five funds and 20 initiatives, with a combined capital exceeding SR3bn ($800m).

The government is working to improve the regulatory environment for SMEs. In June 2022 it signed a new Companies Law that aims to galvanise all aspects of the economy by removing restrictions on the incorporation, practice and exit phases, as well as on company names (see Legal Framework chapter). SMEs are also now given priority where possible in government tenders and procurement, though some analysts suggest more could be done to improve visibility of the government’s project pipeline. SME exporters are also receiving support from the Saudi EXIM Bank and the International Islamic Trade Finance Corporation to digitalise their offerings and reach new markets.

Improvements in local human capital also serve to support SME growth. Saudi Arabia ranked first globally for the percentage of students enrolled in post-secondary non-tertiary education under technical and vocational training programmes, according to the 2022 UN Development Programme Global Knowledge Index (see Education & Training chapter). “As Saudi Arabia nurtures talent at home, the competition for skilled individuals has intensified, underscoring the need for innovative strategies to nurture valuable expertise,” Hussein Fares, CEO of Abdulla Fouad Group, told OBG.

The trajectory of the Saudi economy depends to a large extent on price and demand dynamics in the global energy market, though the non-oil economy now plays an increasingly important role in stimulating wider economic growth. At the halfway stage of Vision 2030, the Saudi economy is pursuing a balance of old and new, with the energy sector continuing to localise and expand, even as the various giga-projects provide opportunity for smaller companies to benefit from public incentives. Despite lower FDI levels in 2022, the CMA had more than 70 applications from companies seeking to list on the country’s two equity markets as of mid-2023, illustrating the depth and strength of interest in participating in the Kingdom’s continuing growth story.



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کتاب عملیات بانکی در عرصه بین الملل -سرفصل ها،ضمائم ،توصیه صاحب‏نظران ارزی و مدیران ارشد بانکی

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