SAUDI ARABIA: THE PAST, THE PRESENT AND THE WAY AHEAD S E L E C T E - PowerPoint PPT Presentation

ECONOMIC DIVERSIFICATION IN SAUDI ARABIA: THE PAST, THE PRESENT AND THE WAY AHEAD S E L E C T E D E C O N O M I C I S S U E S I N S A U D I A R A B I A I M F D e l e g a t e s M A Y 1 4 , 2 0 1 4 S A M A Q u a r t e r l y W o r k s h o p , R i y a d h

ECONOMIC DIVERSIFICATION IN SAUDI ARABIA: THE PAST, THE PRESENT AND THE WAY AHEAD 2  Motivation  Diversification in Saudi Arabia’s Economy over the Past Decade  Experiences with Economic Diversification in Commodity (Oil) Exporting Countries ( Malaysia, Indonesia, Mexico, Chile )  Business Environment: How Does Saudi Arabia Compare to other Countries? ( business environment, export promotion, labor market regulation, education )  Policies to Support Further Economic Diversification in Saudi Arabia.

Motivation … so why diversify? 3  Reliance on oil revenues makes the economy vulnerable to swings in oil prices  Competitive tradeables sector will help boost productivity and growth  More jobs need to be created for the young and growing population  Put in place an economic model that will support the country as oil reserves eventually dwindle.

Diversification in Saudi Arabia’s Economy over the Past Decade A. Economic production, sources of growth 4  Historically, and contrary to expectations, Real GDP: 2004-2013 non-oil GDP in Saudi Arabia has been (constant prices, 1999=100, Billion Riyals) dominant 1,400 GDP 1,200  a huge pickup — in level — over the past 1,000 non-oil decade 800 private (non-oil) 600  Real growth in the non-hydrocarbons sector 400 oil 200 has outpaced growth of oil, yet has - decelerated as of late. 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013  Deceleration in Non-hydrocarbons growth across the board, several sectors.  Strong correlation between hydrocarbon and non-hydrocarbon activity in nominal terms, relatively weaker in real terms

Diversification in Saudi Arabia’s Economy over the Past Decade B. Labor market structure: employment and wages 5 Employment of Saudi Nationals by Sector (2013) Agriculture  Since 2008 through 2013, Saudi Arabia added over Mining and refining 2% 3% 2% 2.7 million new jobs to the economy, of which 1 5% Manufacturing 3% million for Saudi citizens … but most in the public Utilities 6% 5% Construction sector. 3% Trade and tourism 71% Transport and  Cross-sectoral distribution of jobs lacked diversity. Communication Finance, business and real estate Community, social services  Differentials in relative wage structures and number Average Monthly Wage of hours worked between the public and private job 1/ in the Public and Private Sector (Riyals) markets are a cause of potential labor market Public sector Private sector imbalance. Private sector, Saudi nationals 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 - 2008 2011 2012 1/ Average wage in the public sector is computed as total wages and compensation from the government budget divided by number of civil service employees (includes public administration and defense, education and health employees). Average wage in the private sector is sourced from GOSI.

Diversification in Saudi Arabia’s Economy over the Past Decade C. Trade: Exports 6 Exports of Goods and Services (USD billion)  Diversification into non-hydrocarbon exports 450 has progressed somewhat; the share of non- Total Exports, Services 400 hydrocarbon trade to non-oil output has picked Total exports, G&S 350 300 Non-oil exports, G&S up and non-oil commodity exports have been 250 200 impressively strong, albeit starting from a 150 narrow base. 100 50 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012  Yet, exports are driven primarily by hydrocarbons (hydrocarbon-related products). Saudi Arabia Export Structure (sophistication) 1/ 2012  The level and growth in services exports still 0.6% 1.1% 1.3% weak, and restrictions on services trade exist. Agriculture, foodstuff, animal products 12.7% Minerals and fuel  Also, the degree of sophistication in non-oil Chemical products, plastics exports is low (food, base metals, etc). Base metals 84.3% Other 1/ 1/ Including re-exports.

Diversification in Saudi Arabia’s Economy over the Past Decade C. Trade : Exports (cont’d) 7 Export Product and Real Sector Diversification  Export concentration has increased since 2000, (Theil index, 1990-2009) 5.6 0.7 in opposite direction to improvements in Real sector 0.7 diversification 5.4 diversity witnessed in real sector activity. 0.6 (RHS) 5.2 0.6 0.6 5.0  Export quality remains low, has fallen in recent 0.6 4.8 0.6 years, and is highly correlated to oil price Export product 0.5 4.6 diversification 0.5 developments. 4.4 0.5 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008  Trade diversification (regional penetration) Export Quality remains weak: (1990-2010) 0.7 100  over half of exported products geared 90 0.6 towards Asia. 80 0.6 70 0.6 60  exports to GCC comprise only 7 percent of 0.6 50 total exports. 40 Oil price 0.6 30 (avg., US$ 0.5 20 per barrel, 0.5 10 RHS) 0.5 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Diversification in Saudi Arabia’s Economy over the Past Decade D. Financial Assets 8 SAMA: Breakdown of Total Assets (Percent of GDP) Investment in foreign securities  Financial diversification improved: SAMA has Deposits with banks abroad T otal assets Avg. Oil Price (US$ per Brl, Right scale) managed to accumulate sizeable reserves over 120.0 120 100.0 100 the years — as large as the size of the economy — 80.0 80 investing most reserve assets abroad. 60.0 60 40.0 40 20.0 20  Local banks, however, diversify less of their 0.0 0 assets abroad. 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: Saudi Arabian Monetary Agency (SAMA).  … reflected positively on the Net International Net International Investment Position: Breakdown (Percent of GDP) Investment Position (NIIP), which has Other investment, net Direct Investment, net Reserve assets Portfolio investment, net improved over time, and remains strong, yet NIIP 140 still a function of hydrocarbon export 120 100 performance. 80 60 40 20 0 -20 -40 2007 2008 2009 2010 2011 2012 Source: Saudi Arabian Monetary Agency (SAMA).

Experiences with Economic Diversification in Commodity (Oil) Exporting Countries 9  Only a handful success stories: Experience from 4 commodity exporting countries: Mexico & Chile (Latin America); and Malaysia & Indonesia (Asia).  In general, diversification attempts have been difficult, and prolonged.  Historic experiences of these countries sheds some light on a number of key obstacles on the path towards diversification:  problem of the state and hydrocarbons sector being (remaining) driving forces in the economy,  natural resource-based industries and import substitution were not always sustainable as growth drivers,  heavy industrialization policy has not always been successful.  Successful diversification seems to have come as oil production horizon shortens.

Experiences with Economic Diversification in Commodity (Oil) Exporting Countries Malaysia Indonesia Mexico Chile P P State intervention to spur growth in targeted sectors P P Technological transfers to improve competition P P Import substitution P P P P Export promotion: P P - Attracting FDI / foreign capital - Human and capital development / training and skills P P P upgrading / encouraging innovation P P - Establish free zones P P - Provide tax incentives P - Reduce trade barriers P - Export subsidies P - Exchange rate devaluation P - Attractive wages (conducive business environment) P - Join FTAs P P SME development / focus Tapping non-traditional sectors (utilizing oil windfall to P P P diversify other sectors) P PPPs to develop new firms Source: Cherif and Hasanov (2014).

Experiences with Economic Diversification in Commodity (Oil) Exporting Countries 11  Dutch disease: a common problem in oil exporting countries. Appreciating real exchange rates crowd-out the tradable sector.  This traditional Dutch- disease doesn’t seem a problem in Saudi Arabia. Flexible labor markets have kept wage pressures in the non-tradable sector under control. Real exchange rate not overvalued.  However, oil revenues may crowd-out tradable production in other ways.  Specifically, the transfer of oil revenues to the population through public employment and spending on goods and services may skew incentives away from private sector employment (for individuals) and exports (for firms).

Business Environment: How Does Saudi Arabia Compare to other Countries? 12 Business Environment Pros Cons ● 18 th most competitive economy globally out ● Weak on contract enforcement (ranks 127 of 144 countries 1/ globally) ● Short time span to start a business (25 ● Weak on resolving insolvencies (ranks 106 days, down from 70) globally). ● Low startup costs (55 of GNI per capita, ● Relatively high services trade restrictions down from 60 %) index (GCC economies highest worldwide) ● Strength of investor protection ● Trade and transport-related infrastructure (“logistics performance index”) fares better 1/ According to the Arab Global Competitiveness Index (2013).