Saudi’s capital markets will have to play a key role in bridging the financing gap as the kingdom continues to roll out new development projects, given that banks in the kingdom, despite their strong capital, cannot finance all Vision 2030 projects.
That’s what Standard & Poor’s (S&P) expects in its latest report seen by Economy Middle East.
The report coincided with the release of the Purchasing Managers’ Index (PMI), which showed business conditions in Saudi Arabia’s non-oil economy improved in November, reaching its best level in more than seven years.
According to the report, the Saudi government is focused on economic reform, and the Vision 2030 plan outlines different paths to diversify away from hydrocarbons through programs, initiatives, and budget allocations, which has led to important project announcements across various corporate sectors.
Saudi Public Investment Fund (PIF) is a key force behind Vision 2030
Standard & Poor’s sees the PIF as a catalyst for the Kingdom’s economic transformation and the realization of Vision 2030.
It owns $620 billion in assets.
The investment fund and its portfolio companies aim to help grow the kingdom’s annual non-oil GDP by about 7 percent.
Its latest five-year strategy is:
- Invest at least $40 billion annually in local projects and investments;
- Cumulatively contribute approximately $320 billion to non-oil GDP through its investment companies;
- Increase assets under management to more than $1.07 trillion; create 1.8 million direct and indirect jobs by the end of 2025.
It is noteworthy that Vision 2030 includes several ambitious goals and investment expectations, including:
- Raising the private sector’s contribution to GDP to 65 percent (currently 40 percent);
- Increasing the contribution of FDI to GDP to 5.7 percent (from 3.8 percent);
- Increasing the contribution of non-oil exports to GDP to 50 percent (from 16 percent);
- Reducing the unemployment rate to 7 percent (9.7 percent as of Q2 2022), and being among the top 10 most competitive economies in the world.
According to S&P, the 2030 goals are ambitious, and “even if they are not fully met, we expect the country to make some progress. The productive capacity of the non-oil economy could increase as a result.”
Rising oil prices
Higher oil prices helped Saudi Arabia’s strong recovery in 2022, “but growth will slow in 2023 due to supply cuts agreed under OPEC+,” Standard said.
Apart from higher oil prices, increased oil production and strong non-oil momentum have also helped the economy grow this year. GDP rose for the sixth consecutive quarter, growing by 8.6 percent year-on-year in the third quarter of 2022, according to preliminary estimates published by the General Authority for Statistics.
Saudi Arabia is set to become one of the fastest-growing large economies in the world in 2022.
Standard expects real GDP growth of more than 7 percent this year. The return to fiscal surpluses is estimated at 6.3 percent of GDP in 2022 and 3.5 percent in 2023.
With Brent oil expected to average around $100 per barrel in 2022 and remain high until 2023, the IEA expects the current account to post such large surpluses this year and beyond.
It estimated that the current account surplus will reach a very large surplus of 13.7 percent of GDP in 2022, the highest level since 2013. It also expected the surplus to narrow to 5.9 percent on average during the period 2023-2025 as oil prices ease.
S&P said banks will not be able to meet the investment financing needs of the Kingdom’s corporate sector, and capital markets will have to play a key role in bridging the funding gap as the Kingdom continues to roll out new development projects such as NEOM, which is expected to go public in 2024.
High interest rates
“Higher inflation and interest rates have not yet impacted, but they will affect growth if this continues,” S&P said.
Despite the effects of the conflict between Russia and Ukraine on global food and fuel prices, inflation in Saudi Arabia is below the global average and is expected to remain under control due to administrative controls on fuel and food prices, as well as the peg to the dollar.
S&P expects inflation to reach 2.5 percent in 2022, before rising to 2.7 percent in 2023 and averaging 1.9 percent in 2024-2025.
