MarketLine Case Study

Saudi Arabia Vision

2030
Policy promises much, but core
aims will be hard to achieve
Reference Code: ML00030-019

Publication Date: April 2019

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OVERVIEW
Catalyst
Saudi Arabia has attempted to wean the economy of being heavily reliant on oil for a while. Previous iterations of
economic reform have come and gone, yet there has been little progress to report. Now, however, the Vision 2030
strategy (originally announced in 2016) is being enacted in what is an extremely ambitious attempt at not only creating a
sizable non-oil based economy but shifting the country from being mainly public sector to private sector. Vast sums of
money are being invested and big social changes are taking place. However, major problems must be overcome for
success to be attained.

Summary
Ambitious policy decisions are essential due to fundamental economic issues

Even though the Vision 2030 idea has attracted criticism for its failings, the need for ambitious economic reform is stark.
Not only is the public sector bloated (at the expense of development in the private sector) but horribly inefficient too. So
far the state has survived on oil revenue, but even being home to vast oil reserves has been insufficient to cater for
domestic state spending, or to solve the longstanding unemployment problem and reliance on cheap foreign labor.
Failure to solve the economic problems caused by a lopsided jobs market has been a lasting criticism of how the Saudi
economy has been managed off the back of being a world leading oil exporter. Reforms need to create 1.2 million jobs in
the private sector to meet the self-imposed target of 9% unemployment for native citizens by 2022.

Elsewhere, fundamental to the need for the degree of economic reform envisioned under the 2030 policy is the problem
of the national finances being beholden to the international price of oil. Some changes have occurred. Even though
alterations to the law will not provide instant results, they are essential to the long-term fortunes of the country and could
help bring about an upturn in foreign direct investment by reducing the risks investors face.

Big changes caused by Vision 2030 will bring long-term gain

Much attention has been placed on the policy announcements made at and soon after the launch of Vision 2030 in 2016,
but the hoped for gains will most likely develop over a long time frame. Even though the centralization of power to the
ruling family remains a central feature of the power structure, new rules and regulation enacted by the Crown Prince
should help divert economic power away from the House of Saud and towards those running businesses (even if political
th
power is being centralized in his hands). In terms of business freedom Saudi Arabia sits 59 on the World Economic
Freedom Index, largely thanks to the extent of state involvement even in the private sector, much of which depends on
state contracts.

The relative paucity of genuine private industry places the country behind the United Arab Emirates. Moving up the
rankings means attracting foreign capital, which in itself is only sensibly possible when the institutes of state more closely
resemble those which multi-national companies are used to dealing with. Problematically, though, inward investment
remains frustratingly low – a situation not helped by the behavior of the government on the international stage in non-
economic related matters. As 2018 came to a climax Saudi Arabia had a level of FDI congruent with that of Kazakhstan –
another state heavily dependent on oil but of far reduced importance to the international oil market.

News that Saudi Aramco – recently announced as the most profitable company in the world after registering a net
income of $111.1bn in what was the first publically available financial filings the firm has made in its four decade long
history – would issue an IPO made the company subject to feverish media and investor attention. But years on, the IPO
has yet to emerge and it may never happen at all. Much rests upon a $2tn target valuation the Crown Prince has in mind.

Despite transformative plans, Vision 2030 has problems

Saudi Arabia Vision 2030 aims to diversify the economy from an excessive reliance on oil, lifting the country from being
th
the 19 largest in the world to lying in the top 15. Doing so demands a dramatic reforming of jobs, investment and the
degree of state involvement in economic affairs. Conjuring different sources of major revenue besides oil will help the

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ruling House of Saud to support political legitimacy. Achieving this goal through economic transformation demands much
of the project succeeds, but such is the extent of change the Vision 2030 policy envisions attaining the final goal of not
being dependent on oil exports requires most or all of the investment activity to perform as desired. Much rests on the
price of oil and future demand for fossil fuels on a long-term basis. A high oil price would help relieve the economy,
buying the government time to undertake reforms for which it has received some criticism for attempting to enact too
quickly to keep risks down to a more acceptable level.

A serious problem with the Vision 2030 strategy is the scale of state involvement. This is somewhat surprising due to the
primary intention of the strategy initiated in 2016 was to grow the private sector, allowing the country to flourish in sectors
beyond the production of oil.

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TABLE OF CONTENTS
Overview ............................................................................................................................................................................. 2

Catalyst............................................................................................................................................................................ 2

Summary ......................................................................................................................................................................... 2

Ambitious policy decisions are essential due to fundamental economic issues .................................................................. 7

Radical development of Saudi Arabian labor market needed from Vision 2030 strategy ................................................ 7

Economic problems are stark, causing need for drastic policy change ........................................................................... 8

Reforms to help boost non-oil economy were needed a while ago, now it will be harder to cause lasting change ...... 9

Failing to take steps to raise more money earlier now presents serious social issues ............................................... 10

Big changes caused by Vision 2030 will bring long-term gain ........................................................................................... 11

Political change brought about by Vision 2030 is essential for economic progress ....................................................... 11

Government policy changes will help to develop private sector economy but problems remain .................................... 12

Issues regarding developing foreign direct investment linger, hurting prospects for non-oil economy .......................... 13

Crown Prince should accept a lower valuation of Saudi Aramco ................................................................................... 14

Growth of tourism will be central to success of Vision 2030 .......................................................................................... 16

Despite transformative plans, Vision 2030 has problems .................................................................................................. 17

Scope of Vision 2030 means attaining success will be exceptionally tough .................................................................. 17

Too big to fail is a very real possibility for Vision 2030 strategy ..................................................................................... 18

Massive state investments demands success be struck or worse problems await .................................................... 18

Early signs points towards much more needing to be done for Vision 2030 to succeed as planned ......................... 19

Conclusions....................................................................................................................................................................... 20

Vision 2030 is vital to future economy but much work remains to be completed to attain success ............................... 20

Appendix ........................................................................................................................................................................... 21

Sources ......................................................................................................................................................................... 21

Further Reading ............................................................................................................................................................. 21

Ask the analyst .............................................................................................................................................................. 22

About MarketLine .......................................................................................................................................................... 22

Disclaimer ...................................................................................................................................................................... 22

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LIST OF TABLES
Table 1: Heritage World Economic Freedom Index 2018 .................................................................................................. 11

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LIST OF FIGURES
Figure 1: Saudi Arabia unemployment (%) 2000 to 2018 .................................................................................................... 7

Figure 2: Value ($bn) of Saudi Arabia crude oil industry 2012 to 2017 ............................................................................... 9

Figure 3: Saudi Arabia VAT system .................................................................................................................................. 10

Figure 5: Saudi Arabia GDP ($bn) 2008-2016 .................................................................................................................. 13

Figure 6: Saudi Arabia construction industry value ($bn) 2010 to 2017 ............................................................................ 14

Figure 7: Saudi Aramco..................................................................................................................................................... 15

Figure 8: Saudi Arabia travel and tourism industry ($bn) 2013 to 2017 ............................................................................ 16

Figure 9: Vision 2030 ........................................................................................................................................................ 17

Figure 10: King Abdullah Financial District in Riyadh ........................................................................................................ 19

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AMBITIOUS POLICY DECISIONS ARE ESSENTIAL
DUE TO FUNDAMENTAL ECONOMIC ISSUES
Even though the Vision 2030 idea has attracted criticism for its failings, the need for ambitious economic reform is stark.
Not only is the public sector bloated (at the expense of development in the private sector) but horribly inefficient too. So
far the state has survived on oil revenue, but even vast oil reserves have proven insufficient to cater for domestic state
spending, or to solve the longstanding unemployment problem and reliance on cheap foreign labor. Making the economy
function better in regards to bankruptcy law and other areas suggests administrative problems are now winning more
attention. Even though many arguments could be made about how the government is implementing Vision 2030, that
drastic and lasting alterations to the economic structure of Saudi Arabia are required means such policies are going to be
vital for decades to come.

Radical development of Saudi Arabian labor market needed

from Vision 2030 strategy
Despite the publicized problems regarding the fine print of the 2030 policy raising concerns and problems, radical action
to correct longstanding issues has been needed for a while. Much of the economy depends on foreign labor. The public
sector may be stocked with Saudis but it is notoriously inefficient. Two years ago, there were approximately 7.4 million
foreign workers in the country, now that figure has reduced by over one million. A lot have left following the imposition of
levies on the hiring of foreign workers, but it was over reliance on foreign labor that helped to create conditions under
which large chunks of the economy had to import workers to fulfill job requirements – traditionally the public sector has
garnered the attentions of the native population. Resultantly, the economy is suffering from lower consumer spending
even though many of those to have left the country were not high earners. The Saudi Central Bank reported February
2019 saw a decline of 2.2% compared to the previous year. Although this problem is recent, it has emanated from an
over reliance on oil to fund social programs and state subsidies to industry. Problematically, the government website for
Vision 2030 states the goal is very much long-term, but the labor market problem is much more immediate.

Figure 1: Saudi Arabia unemployment (%) 2000 to 2018

6.5
6.3
6.1
6.0 5.8
5.7 5.8 5.7
5.6 5.6 5.5 5.6 5.6 5.7 5.5
5.5 5.4 5.4
5.3
5.1
5.0
4.6 4.6
4.5

4.0
2018
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017

SOURCE: World Bank

MARKETLINE

Unusually for a government ruling as the House of Saud does, there has been tacit public acknowledgement of there not
having been enough change from government regulation to ignite activity in the economy, leaving it vulnerable to being
uncompetitive on the international stage.

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Committee reform and the creation of new departments tasked with examining existing rules are welcome, but that such
a public admission had to be made reveals the extent of economic problems festering. Not only does the government
need to diversify the economy but sources of employment too. Nearly two-thirds of the native population is employed by
the government, and the public sector accounts for one third of total employment – the OECD average is 18%. For a long
time the need to find employment for Saudis entering the workforce each year has become harder to fulfil. Changing this
is one of the big tests Vision 2030 must pass if it is to be reasonably declared successful by the time 2031 rolls around.

Failure to solve the economic problems caused by a lopsided jobs market has been a lasting criticism of how the Saudi
economy has been managed of the back of being a world leading oil exporter. Reforms need to create 1.2 million jobs in
the private sector to meet the self-imposed target of 9% unemployment for native citizens by 2022. Deterring firms from
hiring foreign workers hardly appears to be an adequate solution given the pressure it places on the private sector jobs
market. Labor born and raised in Saudi Arabia over the past decades has normally shunned the private sector, preferring
instead to pursue a secure and well-paid career path in the public sector. Such were the returns on oil extraction that until
recently the government was not compelled to spend serious political capital on changing social norms to attract workers.

Construction has been hurt by the departure of expats of late more than any other segment: 45% of employees are
expats and the industry accounts for 60% of those who have returned to their home country. Even the oil sector is mostly
foreign. Whether Vision 2030 succeeds in bringing about such change remains to be seen, but such a radical strategy is
required to initiate an alternative culture among the employable workforce. Since the start of 2017 the number of Saudis
in employment has barely grown – just 100,000 are believed to have entered the workforce and unemployment has risen
by 0.2%. Given nearly 60% of citizens are aged younger than 30 years, equipping them with the skills to enter
employment should be easier than if they were much older.

Economic problems are stark, causing need for drastic policy

change
Fundamental to the need for the degree of economic reform envisioned under the 2030 policy is the problem of the
national finances being beholden to the international price of oil. Certainly, Saudi Arabia is the leading member of OPEC
but the group only holds so much influence over prices and this has been diminished by the resurgence of the United
States to become the leading oil exporter. Low oil prices, therefore, represent a very serious problem for the desert
kingdom. Combined with reluctance from foreign investors to enter the country (a trend scarcely helped by the now
infamous imprisoning of 30 leading figures in the Ritz-Carlton hotel in Riyadh in what was a game of high-stakes power
politics), low oil prices leave the country surprisingly vulnerable given its reputation as a big force in international energy
production.

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 Figure 2: Value ($bn) of Saudi Arabia crude oil industry 2012 to 2017

140 128.9
127.6
120 114.3

100
77.1
80
67.2
60 54.7

40

20

0
2012 2013 2014 2015 2016 2017

SOURCE: MarketLine
MARKETLINE

Problems surrounding foreign direct investment are concerning for the ruling family. For the first three-quarters of 2018
foreign direct investment was $2.4bn; whilst still lower than it needs to be, the figure did at least rank as an improvement
on the 14-year low registered in 2017 when FDI stood at just $1.4bn. But even the amount of investment received in
2018 was below the 2016 level ($6.4bn) and what had become the accepted norm. The downgrade in non-oil growth for
2019 announced by the International Monetary Fund (IMF) hardly came as a surprise. Enabling growth in this part of the
economy to speed ahead of the oil economy demands inflows of money far exceeding what Saudi Arabia is currently
receiving. Although according to the government Vision 2030 is intended to be a long-term option, the need for the
strategy to have an impact immediately is growing stronger.

Reforms to help boost non-oil economy were needed a while ago, now it will be
harder to cause lasting change
Some changes have occurred. Even though alterations to the law will not provide instant results, they are essential to the
long-term fortunes of the country and could help bring about an upturn in foreign direct investment by reducing the risks
investors face placing money in the country. Had reform occurred when the need emerged the kingdom would be in a
significantly better situation now owing to enough time having passed for material developments to have taken place
successfully. Now, for the self-imposed targets to be reached, or even got close to that point, the Crown Prince requires
Vision 2030 to be a fast-acting remedy. In scaling back the public sector much rests upon the development of the private
sector; in practice that entails granting potential investors the required degree of confidence in the Saudi Arabian state
that they are likely to see a return on equity risked.

Bringing about change in the private sector is going to be tough. Much of private industry depends on state contracts,
meaning in practice the role of the state in propping up growth and sustaining wealth far exceeds even the reach of what
is an excessively large public sector. Between 2003 and 2015 government spending rose every single year, helping to
deter those in power from enacting radical changes to economic underpinnings. Worse still, during this time there were
period where the oil price breached $100 per barrel, which in theory should have flushed the country with the funds
required to perform the overhaul now being attempted. In many ways the period where an oil price north of three figures
became normal now ranks as a big missed opportunity. Goldman Sachs, the investment bank, recently announced oil will
not reach $80 per barrel for a while yet, forcing the pace of action that needs to take place for Vision 2030 to be labelled
as a success.

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Failing to take steps to raise more money earlier now presents serious social issues
The need to raise money quickly is clear, underlining the veracity of accusations against the government about acting
late to solve problems that extend back in history a long way. For much of the post-war history of Saudi Arabia the
populace has enjoyed a degree of state support unheard of in developed western economies, but such massive state
expenditure is now coming to an end. However, the government, in order to raise much needed funds, is taking
substantially larger steps than could have been possible had expenditure not been more closely controlled years or even
decades earlier.

Figure 3: Saudi Arabia VAT system

SOURCE: General Authority of Zakat and Tax

MARKETLINE

Rising taxation and higher service tariffs (reportedly electricity tariffs for residential and commercial buildings rose 145%)
have hurt consumption. The introduction of VAT helped bring Saudi society closer to accepted taxation norms but at a
time when the government is forging ahead with big changes the downward pressure on consumption doesn’t make life
easier for King Salman. Making such reforms happen at a slower pace would have been possible had they been
envisioned earlier and at a time when the economy was in better condition to adapt. Discouraging the hiring of foreign
labor is exacerbating the consumption problem and hints at Vision 2030 attempting to do too much in too short a time
frame. Problems arising can therefore be largely attributed to the failure of previous attempts to develop the non-oil
private sector to a point at which the state could retreat from having such a prominent role in economic affairs.

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BIG CHANGES CAUSED BY VISION 2030 WILL BRING
LONG-TERM GAIN
Much attention has been placed on the policy announcements made during and soon after the launch of Vision 2030. Yet
the hoped for gains will most likely develop over a long time frame. Expected domestic industry growth, expansion of
foreign direct investment, and spread of privatization will place the country in a much better position to develop a thriving
economy outside of oil. Internal political change is also important to making this happen. Early signs suggest key aspects
of Vision 2030 are not turning out as planned and although the need for a new economic direction remains, progress
appears to be lacking.

Political change brought about by Vision 2030 is essential for

economic progress
Saudi Arabia has been ruled by the House of Saud since 1744 and the political structure has been organized to ensure
the family will continue to rule above all other considerations. The ‘social contract’ between the King and citizens
demands acquiescence to the House of Saud in return for security and rising living standards. For a long time this has
held firm but political changes caused by the reforms contained within the Vision 2030 strategy will help to bring about a
form of government more conducive to economic growth. For the plan to work as intended the political dynamic within the
desert kingdom will experience major change, but this will help create a business environment far better suited to
developing private sector enterprise.

A big problem any attempt at economic reform in Saudi Arabia has faced so far is the rigidity of the political structure and
a cultural aversion to substantial change among those inhabiting the higher echelons of power. Even though the
centralization of power to the ruling family remains a core feature of the power structure, new rules and regulation
enacted by the Crown Prince should help divert economic power away from the ruling family and towards those running
businesses (even if political power is being centralized in his hands). Moving the country up the Heritage World
Economic Freedom Index is vital if the goal of Vision 2030 is to be achieved thanks to the anticipated expansion of the
st th th
private sector. At present Saudi Arabia sits in 91 place, far below Qatar (28 ), Bahrain (54 ), and even one place lower
than neighboring Kuwait. In not being economically free Saudi Arabia imposes barriers to commerce that must be torn
down if prosperity is to grip private commerce and develop rapidly the non-oil economy.

Table 1: Heritage World Economic Freedom Index 2018

Section Ranking Section Ranking

Property Rights 81st Government Spending 123rd
Government Integrity 51st Tax Burden 1st
Judicial Effectiveness 32nd Fiscal Health 153rd
Business Freedom 59th Trade Freedom 96th
Labor Freedom 73rd Investment Freedom 134th
Monetary Freedom 88th Financial Freedom 105th

SOURCE: Heritage MARKETLINE

According to the authors of a Chatham House published essay, policymakers and government advisers said ministers
were now ‘working 60 hours a week rather than 12’ and pointed out how they are more likely to be removed from their
positions if they fail to perform as required. At the very least this points to a change in culture at the top of the power
hierarchy. It will certainly help in persuading the general population to work more hours and accept pay that is more in
keeping with limitations typically associated with private sector pay rather than the much more lucrative public sector.

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Beyond making ministers work harder, the plan should make important strides towards the creation of a society more
conducive for growth and expansion of personal wealth for the average earner. Promises of improved transparency
regarding how the ruling family communicates with the public will at least ease social angst that could conceivably cause
a counterproductive crackdown. The opening of sporting and leisure events will help create a consumer society that
much more closely resembles those developing in countries such as China and in regional neighbors too. For Saudi
Arabia this represents quite a considerably different approach, but it is one that should lead to wider progress to forging a
business environment capable of expanding quickly enough to replace the oil economy as the primary generator of
wealth.

Government policy changes will help to develop private sector

economy but problems remain
th
In terms of business freedom Saudi Arabia sits 59 on the World Economic Freedom Index, largely thanks to the extent
of state involvement even in the private sector, much of which depends on state contracts. The relative paucity of
genuine private industry places the country behind the United Arab Emirates. Moving up the rankings means attracting
foreign capital, which in itself is only sensibly possible when the institutes of state more closely resemble those which
multi-national companies are used to dealing with. The introduction of new bankruptcy law, therefore, is an important
step. Streamlining the previously labyrinthine process makes the acquiring of loans and creation of businesses easier,
helping to conjure the commercial activity needed to diversify away from the oil economy. The Financial Sector
Development Program, one of the 12 Vision Realization Programs, has made early progress in building foundations for
rapid non-oil growth. Investment research company MSCI classified Saudi Arabia as an emerging market, reducing the
perception of risk caused by laboring under a lower ranking. Being rated as an emerging market means the investing
opportunities become more visible and are pushed much more as opportunities to generate healthy returns.

Clamping down on the black market will help to engender a sense of confidence that is urgently needed if the rate of FDI
is to improve to levels needed to sustain a large non-oil based economy. Formalizing what exists as the informal
economy will be essential in changing the culture that exists among business owners because black market activities
typically engender a culture of corruption, deterring outsiders from doing business in the country. Precisely much
confidence boosting must occur before memories of the Ritz-Carlton hotel incident fade in the minds of potential foreign
investors remains unknown.

The growth in bank loans to small and medium sized businesses suggests there is enough activity to be confident of
future non-oil economic growth. Of late year-on-year growth of business loans reached 5%, previously it was 2%.
Privatization should help this progress but the rate of growth remains below the level the Saudi state needs it to be.
Furthermore, nascent privatization efforts have yet to mature and even then probably need to expand if the full potential
of the Vision 2030 policy is to be attained. However, whilst the economy is in a transitive state a certain level of
reluctance from foreign investors was always likely. To what extent reticence will evaporate as 2030 draws closer
remains to be seen.

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 Figure 4: Saudi Arabia GDP ($bn) 2008-2016

60

54 54.4
55 52.6
50.6 51.3
50 48.5

44.8 44.5
45 43.1

40

35

30
2008 2009 2010 2011 2012 2013 2014 2015 2016

SOURCE: OECD
MARKETLINE

Being home to the largest consumer market among the Arab nations should help matters, though. Despite the healthy
scale, much of the consumer market is reportedly supplied via imports instead of domestically produced goods or
services. Opening leisure facilities and the hosting of sporting events will help to improve the situation by advertising
Saudi Arabia as a place to do business. Pursuing what is a significant cultural change for the Islamic country helps to
generate the much-needed private sector jobs, reducing unemployment among the youthful population and thus lowering
the risks of what would be highly damaging social unrest from taking place. The continued implementation of quotas,
however, points towards politics still holding excessive sway over the pursuit of better economic governance. Mobile
phone shops, for instance, were informed in 2016 by the labor ministry that only Saudis were to be employed staffing
them.

Issues regarding developing foreign direct investment linger,

hurting prospects for non-oil economy
Crown Bin Muhammed has an ambition: to make foreign investors think Saudi Arabia is a safe place to plough money
into and be confident of winning a return for the risk taken. $80bn of capital flight form the desert kingdom in 2017 makes
his task harder than it need be. When money leaves the country, persuading others to travel in the opposite direction
becomes an unenviable undertaking. Introducing public-private partnerships helps to encourage outsiders to believe
lucrative returns from the big budget state contracts can be accessed. One example is the housing ministry asking the
private sector to stump up most of the $100bn needed for the construction of one million homes. For the state the
benefits extend beyond diluting risk exposure but also reducing the number of citizens who remain on the list for
subsidized housing.

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 Figure 5: Saudi Arabia construction industry value ($bn) 2010 to 2017

29 28.0
27.1 27.4
27 26.3
25.0
25
23.8
23 22.4
21.2
21

19

17

15
2010 2011 2012 2013 2014 2015 2016 2017

SOURCE: MarketLine
MARKETLINE

Problematically, though, inward investment remains frustratingly low – a situation not helped by the behavior of the
government on the international stage in non-economic related matters. As 2018 came to a climax Saudi Arabia had a
level of FDI congruent with that of Kazakhstan – another state heavily dependent on oil but of far reduced importance to
the international oil market. Between 2015 and 2018 the country averaged just $5.7bn each year; in 2017 both Oman
and Jordan proved more popular to international investors than Saudi Arabia did. Worse still, Saudi banks only paid
investment banks one-seventh of what was paid out collectively from the Middle East. That unemployment remains
stubbornly resistant to government efforts to lower it provides costly difficulties at a time when problems are numerous
but solutions are spread thin. Moreover, the number of women in the workplace has risen considerably: According to
Chatham House, in 2005 30,000 women worked in the private sector, 12 years later that figure had ballooned to half-a-
million. Expectations are that number will continue to rise. Numerous high-profile companies pulling out of ‘Davos of the
Desert’, an investment conference, following the murder of a journalist in Turkey thrust into the public sphere the troubles
Saudi Arabia is having in upping investments on a long-term basis.

If foreign direct investment fails to increase then the widespread reforms, which have spread to include social
conventions, will quickly come under pressure. Although the system of governance in the leading OPEC state may
outwardly appear unmoving, it is subject to its own variety of internal political machinations, and reports suggest a good
amount of appetite exists to resist the scale of reform being attempted. To some extent higher revenues headed to
government coffers from a value added tax helps make up for the decline, but when viewed from a long-term perspective
the drop could potentially scupper such of what Vision 2030 was created to do. Without big year-on-year hikes in foreign
money entering the country, development of domestic industry capable of generating incomes sufficiently large to
supplant oil production becomes nearly impossible. Unlike China, Saudi Arabia does not have a massive home
consumer market able to generate lucrative economies of scale to attract substantial and long lasting investments from
overseas.

Crown Prince should accept a lower valuation of Saudi Aramco

News that Saudi Aramco – which in April was announced as the most profitable company in the world after registered a
net income of $111.1bn in what was the first publically available financial filings the firm has made in its four decade long
history – would issue an IPO made the company subject to feverish media and investor attention. But years on the IPO
has yet to emerge and signs that it may never happen at all have been mounting of late. Much rests upon a $2tn target
valuation the Crown Prince has in mind.

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Even considering the financials released in 2019, the company falls a long way short of the target figure. Originally plans
were for 5% of the company to be sold, releasing $100bn of capital to fund the most ambitious economic transformation
since the emergence of China as an economic powerhouse. Vague and confusing government messages regarding what
future plans may contain are counterproductive.

Delays to the IPO are widely accepted to be the cause of a market valuation that fails to match that of the owners – the
Saudi government. Such mismatches between accepted norms and the Aramco IPO do not help fill foreign investors with
confidence that Saudi Arabia is going to behave as an advanced economy would in such circumstances, and that is
before the reputational damage is taken account of. With the centerpiece of the privatization effort taking a very different
route to that which was originally announced, there are precious few examples of shares in state assets being sold on
the open market. Because privatization forms a large part of Vision 2030, not proceeding with an IPO on the grounds an
inflated valuation was missed does not inspire confidence the state can act in a way befitting what it seeks to become.

Figure 6: Saudi Aramco

SOURCE: livemint
MARKETLINE

Talk of an IPO has been noticeably quiet for a while, and the company recently invested $69bn in acquiring a 70% stake
in Saudi company SABIC – a company that has a presence in petrochemicals, chemicals, industrial polymers, fertilizers,
and metals – diversification of Aramco via the purchase of other assets would now appear to be the route to which the
government will attempt to raise funds to fuel the anticipated transformation of the oil economy. In buying most of SABIC,
Saudi Aramco provided much needed funds for the Public Investment Fund (PIF) from which the government is seeking
to use revenues to diversify the economy. Vision 2030 is planned to be a spectacular spate of investments. The $70bn
Aramco paid for SABIC would match approximately the payment PIF would have received via the government had the
IPO taken place as planned with Aramco being valued at $2tn, at least according to Jason Tuvey who is senior emerging
markets economist at Capital Economics in London.

The target valuation of Aramco ought to be lowered. Even before financials were released anticipation among big
investors revealed the sale would likely be highly successful. After all, following the financial results the world found out
key details concerning how the business functions. Analysis from Breakingviews prior to the financials being released
estimated the cost of production for one barrel of oil was $9; the real figure is $7.50, a significant reduction that means
Aramco is much more cost-efficient than was expected. Overheads were believed to be $2 per barrel; they are $1.50.
Being so competitive means had an IPO been launched when it was first publicly declared, funds resulting from the sale
would have already been flushed into building the non-oil economy, and the current set of problems facing the
government could have been prevented from reaching such severity.

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Growth of tourism will be central to success of Vision 2030
Growing the non-oil economy depends on developing key markets, one of which is tourism. Prior to the 2030 reforms
coming into effect the ability of foreigners to travel to the desert kingdom was strictly limited to those travelling on a
business visa and those visiting for Hajj and other religious festivals. The official Vision 2030 website has the following to
say about the future role of tourism: ‘It envisions creating culturally appropriate amusement parks and resorts to provide
greater entertainment opportunities for its own citizens, while refurbishing and promoting its Islamic antiquities and
cultural heritage sites for visitors from other Muslim-majority countries.’ During April 2018 it was announced obtaining a
visa for foreigners would become possible. Although in the immediate aftermath it was still hard to gain a visa, the
holding of a Formula E car race in the country marked an important change in allowing foreigners into the country for
leisure purposes. Ibrahim Al Rashid, chairman of the tourism committee at Jeddah Chamber of Commerce and Industry
claimed to the Saudi press that 167 direct and indirect jobs would be created for ever $1m worth of investment put into
tourism.

Figure 7: Saudi Arabia travel and tourism industry ($bn) 2013 to 2017

50
45.1
45
41.9
39.9
40
36.3
35
31.3
30

25

20
2013 2014 2015 2016 2017

SOURCE: MarketLine
MARKETLINE

The investment being ploughed into attracting leisure tourists and furthering the consumer economy is substantial. Al-
Rashed Empire Cinema Consortium plans to build up to 30 cinemas in several cities across the desert kingdom after
receiving license to do so from the General Authority for Audiovisual Media. The company wants to gain permission to
build 40 over the next five years. Dubai-based Vox Cinemas will provide ample competition. A lot rests on rapid tourism
revenue growth. Vision 2030 aims to increase external tourist spending from $27.7bn in 2018 to $46.6bn by 2020.
According to the strategy there will be 23 dedicated national transformation initiatives. Added to this will be a $23bn
beautification project for the capital city Riyadh.

Leading Vision 2030 will be the development of 22 islands between the cities of Umluj and Al-Wajh, offering 10,000 hotel
rooms across island resorts. Built by The Red Sea Development Company (TRSDC) the project is forecast to increase
tourism revenue by $5.86bn. Employing 70,000 people, it is hoped the resort will attract over one million tourists per year.
If tourism grows at the rate hoped for the national finances will gain handsomely, but similarly if the anticipated revenues
do not materialize, one of the pillars of Vision 2030 would have failed and developing the non-oil economy would become
exponentially harder. Yet if tourism is successful then forces holding meaningful influence towards the top of the political
hierarchy would be emboldened to fight against social reforms. Harder to resist when revenues from tourism are flowing,
social change will help bring about foreign direct investment by making it more internationally acceptable to be seen
investing in the Arab state.

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DESPITE TRANSFORMATIVE PLANS, VISION 2030
HAS PROBLEMS
Saudi Arabia Vision 2030 aims to diversify the economy from an excessive reliance on oil, lifting the country from being
th
the 19 largest in the world to lying in the top 15. Doing so demands a dramatic reforming of jobs, investment and the
degree of state involvement in economic affairs, raising the prospect of the project being too big to fail and suggesting
the presence of significant problems. Diversification has long been an ambition of governments around the world for
decades – now the Saudi Arabian government must overcome issues if success is to be attained.

Scope of Vision 2030 means attaining success will be

exceptionally tough
Core to the Vision 2030 strategy is a very public ambition to bring about wholesale change across the economy. The
scale of development represents more than just transforming the economic fortunes of the nation: central to maintaining
political legitimacy for the government is the improvement of living standards for the general population, a target that has
come under heaping pressure in recent years. Conjuring different sources of major revenue besides oil will help the
ruling House of Saud to support political legitimacy. Achieving this goal through economic transformation demands much
of the project succeeds, but such is the extent of change the Vision 2030 policy envisions attaining the final goal of not
being dependent on oil exports requires most or all of the investment activity to perform as desired.

Vision 2030 is not the first time a middle-eastern state has attempted fundamental reform. Saudi Arabia has repeatedly
stated since the 1970s the intention to diversify from oil as the primary economic driver but has consistently failed to
make meaningful progress. Historically, much of the motivation has emerged from periodical decline in the oil price
causing government revenues to fall and turning internal political machinations towards finding a route to accessing
different industries and markets, only for efforts to dwindle in the face of recovering oil prices. Such is the political force
behind Vision 2030 that odds of a similar collapse in political momentum would appear to be limited compared to what
has occurred previously. Kuwait, Abu Dhabi, Qatar and Oman are undertaking similar efforts albeit on a smaller scale,
suggesting the regional movement towards developing alternative income sources is strong.

Figure 8: Vision 2030

SOURCE: Saudi Gazette

MARKETLINE

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Although many of the aspirations declared by Mohammad Bin Salman Al Saud, Crown Prince of Saudi Arabia, have no
specific goal in mind, others do. Increasing foreign direct investment (FDI) from 3.8% now, to 5.7% of GDP by 2030,
means inciting very large growth of interest from foreign nations and companies in a very short period of time. Investment
decisions tend to be taken with a long-term view in mind; with 2030 only a little over a decade away, the Crown Prince
must make progress towards investment announcements in relatively short order if the country is to hit the self-imposed
target. The jump to the target percentage is certainly a large one: working according to 2017 GDP figures, the increase in
FDI represents a change from $26bn to $39bn. Given various diplomatic troubles the Saudi government has encountered
of late – most notably the fallout from the war in Yemen and the murder of journalist Jamal Khashoggi – gaining the
required investment from abroad is an increasingly onerous task.

Increasing non-oil revenue from 16% of GDP to 50% is a similarly arduous undertaking because that entails generating
hundreds of billions of dollars in economic activity in a few short years. At present non-oil government revenue stands at
SAR163bn ($43.5bn); in a little over a decade the government wants that figure to have reached SAR1tn ($267bn). Such
is the scope of change that is being attempted, not much will need to go wrong for the strategy to miss targets – and
possibly by quite some distance too.

Too big to fail is a very real possibility for Vision 2030 strategy
Much rests on the price of oil and future demand for fossil fuels on a long-term basis. A high oil price would help relieve
the economy, buying the government time to undertake reforms for which it has received some criticism for attempting to
enact too quickly to keep risks down to a more acceptable level. The luxury of time would help ensure those left behind
by such major changes to how the economy functions are aided in some way, but if that time is not available then
pressing ahead with programs swiftly will become necessary regardless of the potential for worsening risks. Inciting hefty
growth of the private sector and transferring employment and wealth away from the public sector means the project could
easily become too big to fail, making the government hostage to its own economic policies. When governments are found
in such situations, the outcomes are rarely good. Speeding up policy may end up involving cutting the size of public
service employment to provide lucrative opportunities for the private sector to move in, but history suggests such
draconian action typically results in higher unemployment, something the Crown Prince is nervous about agitating
despite the motivation to press ahead with the Vision 2030 strategy.

Massive state investments demands success be struck or worse problems await

A serious problem is the scale of state involvement. This is somewhat surprising due to the primary intention of the
strategy initiated in 2016 was to grow the private sector, allowing the country to flourish in sectors beyond the production
of oil. Neom is to be a new city constructed using $500bn of investment from the Public Investment Fund – a sovereign
wealth fund – and is the marquee project in government efforts to construct a city that is ‘future orientated’ and among
the most technologically advanced ‘smart cities’ anywhere in the world. Similar projects elsewhere suggest caution would
be prudent. Masdar in the United Arab Emirates gained widespread attention but then failed to live up to the hype; the
King Abdullah Financial District in Riyadh cost $10bn to build but has since fallen flat. Whether Neom will be different
remains to be seen but such is the vast scale of the investment, if the project does not provide the anticipated returns
pressure will mount elsewhere in the declared transformation and potentially cause further problems.

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 Figure 9: King Abdullah Financial District in Riyadh

SOURCE: Zawya
MARKETLINE

Given the boldest parts of Vision 2030 involve massive state spending, large chunks of investment that are intended to
incite private investment and expand the economy outside of the public sector may not perform as intended. It also raises
problems around creating a thriving private sector using large sums of public investment from the top down. Neom is
supposed to attract foreign investors. Plans to have robots equipped with cutting-edge artificial intelligence performing
tasks sound futuristic but it is far from clear how the investment will cause foreign companies to risk billions of dollars
when the non-oil economy remains so dominant. Persuading large companies to put money into the country is far easier
when there is a thriving but small startup base and plenty of scope for expansion. Such a scenario helped China to
become the economic super-power it is today. Concentrating resources not on grandiose projects prone to either being
highly successful or a colossal waste of money, but instead on developing a business environment which rewards risk-
taking from local entrepreneurs and helps domestic companies grow would be a less risky and cheaper means of
increasing the inflow of foreign money.

Early signs points towards much more needing to be done for Vision 2030 to
succeed as planned
Suffering from longstanding economic problems proved no barrier to King Salman in late 2018 when he announced the
largest budget ($295bn) the government had ever signed off. Intended to support the economy, that such an action was
deemed necessary suggests early signs of progress are insufficient to cause the country to become less reliant on state
spending for economic growth. Accusations Vision 2030 is being pursued in word rather than in quantifiable actions on
the ground can now be found easily in the business press. Journalists have good reason to be so accusatory, too: The
first phase, ‘National Transformation Plan’, is due for completion in 2020 – an alarmingly close date given the seeming
lack of action to date or noticeable fundamental change in how the economy, and the state, functions.

Beyond what to the outside world are considered largely cosmetics (allowing women to drive gained the most
international attention, but allowing women to own businesses without permission to do so is by far a more important
social development even though media coverage was considerably less) there has been no meaningful change directly
attributable to what is supposed to be a transformative policy. To make progress much more action is required and even
though the strategy is young, time already feels short to solve fundamental problems.

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CONCLUSIONS
Vision 2030 is vital to future economy but much work remains
to be completed to attain success
Even though Vision 2030 contains serious problems in need of resolution, if the transformative impact is to be realized,
the ambitiousness is necessary thanks to the nature of the fundamental economic problems Saudi Arabia is confronting.
For decades the labor market has been highly dependent on the public sector employment, leading to an over-staffed
and inefficient public sector. Turning these jobs into private sector jobs will not be easy, especially given the downward
pressure on wages and other differences considered as the norm in private sector employment. At present the country is
too reliant on a healthy oil price, even though the country is a globally leading hydrocarbons player. Reforms to help grow
the non-oil economy were needed decades ago. Failure to act then helps to explain why the extent of reform being
targeted now is so far reaching. This also means the potential for social unrest – a motivating factor against previous
reform – is higher than needs be but is an unavoidable issue for policy makers.

Big changes being made to the economy should result in long-term gain for the desert kingdom. Political change is
perhaps as important as economic change, especially given the power the ruling House of Saud has over everyday
affairs. Reportedly ministers are now working many more hours previously and much more attention is focused on
performance than was ever true before. Diluting economic power of the ruling family is important if the country is to move
up the ranking on economic freedoms and become a more hospitable place for private enterprise to flourish. Although
government policy should help the private sector to develop – having historically lived off large contracts issued by the
state – the challenge of fully utilizing the consumer market potential remains unfulfilled. Serious problems attracting
foreign capital to the country persist and represent a serious threat to the success of the economic transformation the
government is seeking to make happen.

A danger for Vision 2030 is the scale of ambition is so large that even getting close to reaching stated ambitions will be a
big achievement. Already officials appear to be managing expectations, declaring that not everything set out at the
launch in 2016 may happen. The prospect of Vision 2030 being too big to fail due to the vast scale of investments going
into it is now a very real possibility. Whether huge economic change can be brought about by state lead investment from
the top down remains to be seen, but if the efforts fail then Saudi Arabia will be left with even worse problems than those
the government is seeking to resolve. Neom, a state-of-the-art new city, will cost $500bn to build. Unless a very large
return is gleaned from the investment, the city risks becoming a ‘white camel’ in much the same way previous big budget
projects in the kingdom have done so.

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APPENDIX
Sources
General Authority of Zakat and Tax

https://www.vat.gov.sa/en/about-vat/law-regulations

Heritage

https://www.heritage.org/index/

livemint

https://www.livemint.com/industry/energy/saudi-aramco-set-for-10-billion-bond-sale-touted-by-jp-morgan-s-jamie-dimon-
1554523945356.html

OECD

https://data.oecd.org/gdp/gross-domestic-product-gdp.htm

Saudi Gazette

http://saudigazette.com.sa/article/521448/Opinion/Voices/Vision-2030-A-recipe-for-economic-growth

World Bank

https://data.worldbank.org/indicator/SL.UEM.TOTL.ZS?end=2018&locations=SA&start=2000

Zawya

https://www.zawya.com/mena/en/business/story/Saudi_Arabia_to_start_first_phase_of_Neom_project-SNG_135301509/

Further Reading
Saudi Arabia and Russia oil alliance: Desert kingdom requires Russian co-operation to solve economic problems -
Analyst Insight published by MarketLine

Saudi Arabia - Wind of change in the desert kingdom will create new business opportunities - Analyst Insight published
by MarketLine

Riyadh - City Profile - City Profile published by MarketLine

Saudi Arabia: Macroeconomic Outlook Report - Country Profiles published by MarketLine

Saudi Arabia - Oil & Gas - Industry Profile published by MarketLine

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