Saudi Arabia 2025: Navigating Economic Crossroads – Unleashing Potential, Mitigating Risks

1. Executive Summary

As of November 25, 2024, Saudi Arabia is pivotal in its economic transformation. The Kingdom's commitment to Saudi Vision 2030 has led to significant strides in diversifying the economy, enhancing infrastructure, and fostering innovation. Recent data indicates moderate GDP growth, driven by robust non-oil sector performance, particularly in technology and renewable energy. However, challenges like oil dependency, labour market alignment, and regulatory reforms persist. This report comprehensively analyses the current economic landscape, identifies strengths and weaknesses, and offers strategic recommendations for sustainable growth.

2. Key Economic Indicators

a) GDP Growth and Overall Performance

• Latest Statistics: In Q3 2024, Saudi Arabia's real GDP grew by 2.8% year-on-year, with the non-oil sector expanding by 4.2%. Saudi Arabia Statistics.
• Historical Trends: Over the past five years, Saudi Arabia's GDP growth has shown variability, influenced mainly by fluctuations in global oil prices and ongoing diversification efforts. Notably, the non-oil sector's contribution to GDP has increased, reaching 50% in 2023—the highest level on record. Saudi Press Agency
• Analysis: The consistent growth in the non-oil sector highlights the effectiveness of the Kingdom's diversification strategies under Vision 2030. However, the economy remains vulnerable to oil market volatility, underscoring the need for continued reforms to reduce oil dependency.
• Global and Regional Comparisons: The Global Economic Diversification Index (EDI) 2024, Saudi Arabia achieved an average score of 90.51, with sub-index scores of 84.11 in Output, 89.87 in Trade, and 97.54 in Revenue. Saudi Arabia Statistics. While these scores reflect commendable progress, they indicate that further acceleration is necessary to align with global benchmarks. For instance, countries like Singapore and Ireland have successfully diversified their economies by investing in digital technologies and fostering innovation, leading to enhanced trade diversification. Sama

b) Major Infrastructure Projects

• Latest Developments: The NEOM megaproject, a cornerstone of Vision 2030, has faced financial challenges, including delays and budget overruns. The project's CEO was recently replaced amid these issues.
• Historical Trends: Saudi Arabia has a history of ambitious infrastructure projects with varying degrees of success aimed at economic diversification.
• Analysis: Effective management and financial oversight are crucial for the success of large-scale projects like NEOM. Addressing current challenges is essential to maintain investor confidence and project viability.
• Global Comparison: Similar megaprojects globally have encountered challenges; however, transparent governance and stakeholder engagement have been key to their success.

c) Digital Transformation and Innovation

• Latest Initiatives: Saudi Arabia is shifting its strategy from international tech investments to developing a domestic AI ecosystem, aiming to establish itself as a regional tech hub.
• Historical Trends: The Kingdom has invested heavily in technology and innovation, with initiatives like the National Transformation Program focusing on digital infrastructure.
• Analysis: Building a robust domestic tech ecosystem requires investment, talent development, and regulatory support.
• Global Comparison: Countries like the UAE and Singapore have successfully positioned themselves as tech hubs through strategic investments and favourable policies.

d) Venture Capital and Startup Ecosystem

• Current Landscape: The venture capital scene is growing, and startups are receiving increased funding, particularly in fintech and e-commerce.
• Historical Trends: Startup funding was limited but has grown due to supportive policies and increased investor interest.
• Analysis: A vibrant startup ecosystem can drive innovation and job creation, contributing to economic diversification.
• Global Comparison: Saudi Arabia's ecosystem is nascent compared to global startup hubs, but it has the potential for rapid growth.

e) Energy Sector, Including Renewables

• Latest Developments: Saudi aramco plans to increase debt to optimize its capital structure and focus on dividend growth.
• Historical Trends: The energy sector has been the backbone of the economy, with recent shifts towards renewable energy projects.
• Analysis: Balancing traditional energy revenues with investments in renewables is crucial for sustainable growth.
• Global Comparison: Global energy companies diversify into renewables; Saudi Arabia's initiatives align with this trend.

f) International Trade and Investment

• Recent Developments: British Prime Minister Keir Starmer plans to visit Saudi Arabia to boost investment ties.
• Historical Trends: The Kingdom has been a significant player in international trade, with efforts to attract foreign investment through economic reforms.
• Analysis: Strengthening international partnerships and improving the investment climate are essential for economic diversification.
• Global Comparison: Competing with regional peers requires enhancing the ease of doing business and offering attractive investment incentives.

g) Labour Market and Workforce Development

• Current Status:
• Unemployment Rates: As of Q2 2024, the unemployment rate among Saudi citizens decreased to 7.1%, down from 7.6% in the previous quarter and 8.5% a year earlier Reuters. Female Workforce Participation: The labour force participation rate for Saudi females reached 35.4% in Q2 2024, surpassing the Vision 2030 target of 30% Reuters
• Historical Trends: Labour Market Reforms: Over the past decade, Saudi Arabia has implemented significant reforms to increase employment among citizens and reduce reliance on expatriate Labour. These reforms include the Nitaqat program, which incentivizes private sector companies to hire Saudi nationals, and initiatives to enhance female participation in the workforce Jadwa Expatriate Labour: The proportion of expatriate workers has decreased as the government promotes Saudization policies to prioritize local employment. In Q2 2024, the overall unemployment rate, including expatriate workers, fell to 3.3% from 4.1% over the same period Reuters
• Analysis: Education Alignment: Aligning educational outcomes with market needs remains a challenge. There is a need to enhance vocational training and STEM education to equip the workforce with relevant skills Jadwa. Private Sector Employment: Encouraging private sector employment among Saudi nationals is ongoing. Efforts include improving working conditions, offering competitive salaries, and providing career development opportunities Jadwa
• Global Comparison: Successful Models: Countries like Germany and Singapore have effectively reformed their Labour markets by focusing on education, vocational training, and Labour mobility. Germany's dual education system combines apprenticeships with vocational education, leading to low youth unemployment rates. Singapore emphasizes continuous learning and skills upgrading through initiatives like SkillsFuture Jadwa Labour Mobility: Facilitating Labour mobility and creating flexible Labour markets have been vital in adapting to economic changes and technological advancements Jadwa

h) Financial Sector and Monetary Policy

• Recent Developments: Moody's upgraded Saudi Arabia's credit rating, reflecting economic diversification efforts.
• Historical Trends: The financial sector has expanded with the increased participation of foreign banks and the development of capital markets.
• Analysis: A robust financial sector supports economic growth and attracts investment.
• Global Comparison: Aligning monetary policy with international best practices enhances financial stability and investor confidence.

i) Sustainability Initiatives

• Current Initiatives: The Saudi Green Initiative aims to plant 10 billion trees and generate 50% of energy from renewables by 2030.
• Historical Trends: Environmental sustainability has gained prominence, with policies focusing on reducing carbon emissions and conserving natural resources.
• Analysis: Sustainability initiatives are crucial for environmental preservation and can attract eco-conscious investors.

j) Demographic Trends

• Latest Statistics: As of 2024, Saudi Arabia's population is approximately 37.47 million, marking a 1.43% increase from the previous year.
• Historical Trends: Over the past decade, the Kingdom has experienced steady population growth, influenced by natural increase and immigration. The median age has risen, reflecting demographic shifts.
• Analysis: A growing and youthful population presents opportunities for economic expansion but also necessitates job creation and educational reforms to harness this demographic dividend.
• Global and Regional Comparisons: Saudi Arabia's population growth rate is moderate compared to regional peers. The Kingdom's focus on human capital development aligns with international trends in leveraging demographic advantages.

3. SWOT Analysis

• Strengths: Its strategic geographic location connects three continents. It has abundant natural resources, including significant oil reserves. The Ambitious Saudi Vision 2030 framework guides economic diversification. There are growing investments in infrastructure and technology.
• Weaknesses: Continued reliance on oil revenues; regulatory challenges affecting the business environment; skills gap in the Labour market; fiscal pressures from large-scale projects.
• Opportunities include Expanding the renewable energy sector, developing the tourism and entertainment industries, advancing digital transformation and AI, and strengthening international trade partnerships.
• Threats: Volatility in global oil prices. Geopolitical tensions in the region. Global economic downturns impacting trade and investment. Environmental challenges, including water scarcity.

4. Economic Trajectory

• Alignment with Global Megatrends: Saudi Arabia's focus on digital transformation, sustainability, and economic diversification aligns with global trends in innovation and environmental consciousness.
• Competitive Advantages: Rich natural resources and energy reserves. Strategic location as a trade hub. Young and growing population. Strong government commitment to reform.
• Challenges and Areas for Improvement: Reducing oil dependency. Enhancing the regulatory environment. Addressing Labour market mismatches. Ensuring fiscal sustainability of megaprojects.
• Policy Recommendations: Accelerate economic diversification. Prioritize sectors like tourism, entertainment, and technology to reduce oil reliance. Enhance Regulatory Reforms. Simplify business regulations and improve transparency to attract investment. Invest in Human Capital. Align education with market needs and promote vocational training. Promote Public-Private Partnerships. Leverage private sector expertise in infrastructure and service delivery. Strengthen Environmental Policies. Implement sustainable practices to address environmental challenges.

5. Scenario Planning

• Best Case Scenario (2025): Economic Growth: Achieve a GDP growth rate of 5.5%, driven by robust non-oil sector expansion and successful implementation of Vision 2030 initiatives. Employment: Reduce unemployment among citizens to below 6%, with increased female participation in the workforce. Foreign Investment: Attract significant foreign direct investment, particularly in technology, tourism, and renewable energy sectors.
• Worst Case Scenario (2025): Economic Growth: GDP growth stagnates at around 1%, primarily due to continued oil dependency and global economic downturns. Employment: Unemployment rates rise above 10%, with limited progress in Labour market reforms. Foreign Investment: Foreign investment declines due to regulatory challenges and geopolitical tensions.
• Most Likely Scenario (2025): Economic Growth: Achieve a moderate GDP growth rate of 3.5%, with steady progress in non-oil sectors and ongoing implementation of Vision 2030 projects. Employment: Unemployment among citizens decreases to 7%, with gradual improvements in Labour market participation. Foreign Investment: Foreign direct investment increases modestly, supported by regulatory reforms and infrastructure development.

6. Global Context

• Comparison to Global Economic Trends: Saudi Arabia's focus on digital transformation and sustainability aligns with global megatrends. However, its economic growth is closely tied to oil markets, making diversification efforts crucial.
• Impact of International Events/Policies: Global oil price fluctuations, trade policies, and geopolitical tensions in the Middle East significantly influence Saudi Arabia's economic stability and growth prospects.

7. Risk Assessment and Mitigation Strategies

• Potential Risks: Oil Price Volatility: Continued reliance on oil revenues exposes the economy to global price swings. Geopolitical Instability: Regional conflicts could disrupt trade and investment flows. Global Economic Slowdown: A downturn in the global economy may reduce demand for exports and foreign investment.
• Mitigation Strategies: Diversification: Accelerate efforts to diversify the economy away from oil dependency. Fiscal Resilience: Build fiscal buffers to withstand economic shocks. Diplomatic Engagement: Strengthen diplomatic ties to mitigate geopolitical risks.

8. Future Outlook

• 1-Year Projections (2025): Economic Growth: The International Monetary Fund projects Saudi Arabia's GDP to grow by 4.6% in 2025, driven by robust non-oil sector expansion and ongoing Vision 2030 initiatives.
• Key Indicators to Monitor: Non-Oil Sector Performance: Continued growth in technology, tourism, and renewable energy sectors. Employment Rates: Reduction in unemployment, particularly among youth and women. Foreign Direct Investment (FDI): Increased inflows, reflecting improved business climate and investor confidence. Fiscal Balance: Maintaining a balanced budget through prudent fiscal policies.
• 3-5 Year Projections (2026-2028): Economic Growth: Sustained GDP growth averaging 4.5% annually, with the non-oil sector contributing significantly. Key Indicators to Monitor: Diversification Progress: Measurable outcomes from diversification efforts, reducing oil dependency. Innovation and R&D: Advancements in research and development leading to increased patents and technological exports. Sustainability Metrics: Progress in renewable energy adoption and environmental sustainability initiatives. Global Competitiveness: Improve global competitiveness rankings, reflecting a favourable business environment.

9. Policy Effectiveness

• Current Policies: Vision 2030: A comprehensive plan aiming to diversify the economy, reduce oil dependency, and enhance public service sectors. Fiscal Reforms: Implementation of VAT and subsidy reforms to increase non-oil revenues. Labour Market Reforms: Initiatives to increase Saudi nationals' participation in the workforce, including women.
• Effectiveness Analysis: Successes: Non-Oil Sector Growth: Significant expansion in non-oil industries, contributing to GDP. Improved Business Environment: Enhanced ease of doing business, attracting foreign investments. Social Reforms: Increased female Labour force participation and social liberalization. Areas for Improvement: Regulatory Framework: Need for further simplification and transparency to boost investor confidence. Education and Skills Development: Aligning educational outcomes with market needs to address the skills gap. Fiscal Sustainability: Ensuring large-scale projects are financially viable and do not strain public finances.
• Suggested Improvements: Enhance Regulatory Reforms: Streamline regulations and improve transparency to foster a more conducive business environment. Invest in Human Capital: Focus on education and vocational training to equip the workforce with skills relevant to the evolving market. Promote Public-Private Partnerships: Leverage private sector expertise and investment in infrastructure and service delivery. Strengthen Environmental Policies: Implement sustainable practices to address environmental challenges and attract eco-conscious investors.

Conclusion

Saudi Arabia stands at a pivotal juncture in its economic transformation journey. The nation's commitment to Vision 2030 has initiated significant reforms to diversify the economy, enhance the business environment, and foster innovation. Notable achievements include the expansion of the non-oil private sector, increased female workforce participation, and substantial investments in infrastructure and technology. However, challenges persist, particularly in reducing the economy's reliance on oil revenues and enhancing the regulatory environment to attract foreign investment.

To navigate these challenges and capitalize on emerging opportunities, it is imperative to strengthen policy implementation, enhance regulatory reforms, promote public-private partnerships, invest in human capital development, and accelerate renewable energy projects. By addressing these areas, Saudi Arabia can position itself as a resilient and diversified economy aligned with global megatrends and prepared to achieve unprecedented growth in the coming years.

Saudi Central Bank – SAMA Ministry of Tourism of Saudi Arabia Ministry of Energy | وزارة الطاقة Ministry of Investment Public Investment Fund (PIF) Saudi Vision 2030 INVEST SAUDI Ashutosh Sinha CXO 2.0 Conference Zafar Sobani Pascale Mina Azhar Ahsan Hammad Hasan Reuters