SAUDI ARABIA BALANCE OF TRADE AND EXTERNAL TRADE

Balance of Trade and External Trade

Student name
Professor
Institutional affiliation
Date
 2

Balance of Trade and External Trade

Saudi Arabia has stood firm because of its excessive oil and mineral reserves. The Vector
Error Correction Model (VECM) reflected Saudi Arabia’s economy and exchange rate. VECM
consequently helps to show the country’s economic competitiveness. The country’s domestic
production is low; therefore, its success and competitiveness depend on external factors.
Domestic productivity has faced many ups and downs in recent years.
For instance, it increased by around 5.41 percent in December 2021. This was followed
by a fall of 3.62 percent in 2020 (CIEC Data, 2021). Labour productivity has been recorded to
reach its peak in 1990. Therefore, the curve has never stayed stable. The country’s economy is
more dependent on trade and external factors. Like any other country, there are many internal
and external threats to Saudi’s economy.
Like any other market, oil production and trade underwent many hurdles. Saudi Arabia
leads the organization of petroleum exporting countries (OPEC). Policies of OPEC were made to
begin a low-priced oil production to get a higher outcome. This strategy was presented and used
between April 2015 and May 2016. Every producer that manufactured oil at a higher price was
removed from the industry. The shale producers still maintained their position because of
advanced technology and better productivity performance (Razek & McQuinn, 2021). The
process of driving the high-cost producers again came to play after the COVID-19 outbreak.
Import trends influence the external performance and thus affect the trade and
competitiveness of a country. one of the ways it can happen is that when the pricing of import
fall, it becomes easy to produce more goods to be exported. It occurs through outsourcing and
intra-sector trade. The advantage of using this strategy also improves the product quality.
Achievements
Saudi Arabia has been flourishing in the West because of its exceptional oil trading and
export qualities. Studies evaluated that the misalignments in oil export REERS were hardly any
with continuous monitoring. The low standard deviation values predicted that the growth rates
were stable. Between 1986 and 2014, Saudi Arabia experienced stagnant growth (Alkhareif et
al., 2017).
 3

(Razek & McQuinn, 2021).

Analyzing the correlation between economic growth rates and exchange rates has become
evident that both are interconnected. Oil prices affect the exchange rates, which eventually peg
the Saudi Arab Riyal to the United States Dollar. The autoregressive model manifested that the
natural shocks are more profound than the nominal shocks. The increase in the money supply
causes an increase in variability in the real exchange rate. Therefore, another oil production is
dominant in controlling the exchange rates rather than the oil pricing. Because of relatively
stable growth and exchange rates, Saudi Arabia has a well-monitored and stable capital account
(Razek & McQuinn, 2021).
In the 1990s, the actual interest rates increased exceptionally. During the crisis, Saudi
Arabia employed fiscal policy to absorb the shocks in the oil export. Their oil export revenues
played a significant role in preventing the pricing shocks. It was another achievement that
enhanced the real exchange rate. The exchange rate was pegged to the U.S dollar. It has now
 4

been clarified that in Saudi Arabia, oil productivity is more important than the traditional
determinants of the international reserves.
The figure shows the stats of Saudi Arabia’s International Investment Position. These
figures are the representation that both the inward and outward FDI values are small. Depending
on the circumstances, Saudi Arabia has boosted its success and competitiveness through two
approaches. When the oil export revenue is growing, fiscal policy is employed. On the contrary,
deficit spending is employed when the foreign exchange assets are low.
The government of Saudi Arabia has implemented many strategies to balance the trade.
According to the CIEC report, the country’s total export was 28.9 USD (CIEC, 2021). As
already mentioned, any country’s export is dependent on its import. So, the import recorded in
February 2022 was around 12.9 USD. The figure below shows the country’s trade balance
between 2010 and 2021.

During the COVID-19 outbreak, oil export faced a crisis. To cope with the continuously
rising prices, OPEC drove the high-cost producers out of the market. It caused the fall of prices
within a month, by the end of March 2020. The growth rate is now expected to increase in 2022
to 7%. The values will then balance between 3.0 and 3.8% in the upcoming years. The major
contributor to fighting the economic crisis faced by the country during the pandemic, oil
products are still on the top of the list. On the other hand, non-oil goods are expected to rise by
4% by 2022. The following figure shows the downgrade of worldwide trade during the COVID
 5

outbreak.

(OECD, 2022).
The daily covid cases and activity normalizing are depicted in the following figure,

Outlook
Energy
Ukraine and Russia have not played a crucial role in the trade industry but have been
among the primary producer of food, energy, and fertilizers. After the invasion of Russia into
Ukraine, this transport of energy and food would be negatively impacted. One of the visible
impacts of this aggression is the rise in commodity prices. Saudi Arabia leads OPEC in
partnership with Russia. The conflict thus may harm the peaceful relationship between Saudi
Arabia and Russia or the US. Even in the conflict, Saudi production quotas may elevate further
to reach its utmost capacity north of 13mbd. The price, however, may increase because of
unforeseen Russian aggression (DW, 2022).
The covid outbreak reduced the energy demands and prices of oil and metals. During
January and April, the decline was recorded to be more than two-thirds. The economies of the oil
exporters sank in 2020. However, the rapid economic recovery during the second wave showed
 6

that in 2022, the prices will be balanced with better profit in export.

(Net Exports to Take Over as Main Driver of Saudi Growth in H221, 2022).
Ukraine war has caused major supply disruptions, especially the crude oil and its export
from Saudi Arabia. It is expected that the price of crude oil will be increased by $100/bbl. In
contrast with 2021, this value shows an increase of 40% (World Bank Groups, 2022).
Foreign Exchange Strengthening
The statistics below clearly depict the real effective exchange rate of the United States
and Saudi Arabia. The country’s exchange rate has been stable since 1986. One primary reason
being the SAMA is providing dollar bills to the domestic banks. It is to fulfill the commercial
and financial demands of the private sector. Moreover, the Saudi Riyal and USD ratio have
remained constant since 1986. During 2007 and 2008, a rise in Saudi riyal was observed in the
USD and domestic inflation (Al-Hamidy & Banafe, nd).
 7

Moreover, non-oil exports to imports rose from 45.7% in 2021 to around 50.7%. Not only
that, in February 2022, China became Saudi Arabia’s biggest exporting country. Statistics
revealed that China exported goods from Saudi Arabia worth SAR 18.5 billion. It makes a total
of 17% of Saudi’s export. Exports from Saudi Arabia to China, India, Japan, the U.S.A, UAE,
South Korea, Egypt, Singapore, Bahrain, and the Netherlands equal 73.1%.

Conclusion: Risks and Opportunities

Food Security
Ukraine and Russia are among those countries responsible for exporting wheat worldwide.
This could spill into the Kingdom's aspired food security efforts and elongate or eliminate the
 8

ultimate goal (IMF, 2022). The crisis may lead to decreased export or increased prices, which
can harm the food security in the Middle East, including Saudi Arabia. The OECD-FAO (2018)
presented that the Middle East may reach a self-sufficiency ratio of 0.1% (Araujo‐Enciso &
Fellmann, (2020)
The figure given below shows the production and export of Russia, Ukraine, and Kazakhstan
between 1995 and 2027.

(Araujo‐Enciso & Fellmann, (2020)

Status Quo
Though the kingdom is among the most significant energy exporters, the ongoing crisis
may harmfully affect the country’s economy. The significant events expected to affect the
general status include the COVID-19 pandemic and the Russian-Ukraine conflict. This nation,
however, exceptionally fought against the pandemic as stated above.
Neoteric Industry
Russia is an exporter of metals, including palladium, nonmonetary gold, etc. Therefore,
the crisis can influence the trade of these materials across borders and harm nations'
manufacturing and industry, including Saudi Arabia. It is an opportunity for the mining industry
to override Russia since Russia is the leading exporter of precious metals. The nation’s economy
is significantly impacted by commodity pricing across the country. Because the Russian
aggression has imposed restrictions on the Black Sea, the gas and oil price are expected to rise
further. It is estimated that the GDP will rise at least around +7% in 2022 and +3% in 2023. Not
only that, but the rends of inflation will also rise between +2 to +4% between 2022 and 2023
(DW, 2022).
 9

References
Al-Hamidy, A., & Banafe, A., (nd). Foreign Exchange Intervention in Saudi Arabia.
https://www.bis.org/publ/bppdf/bispap73v.pdf
Alkhareif, R. M., Barnett, W. A., & Qualls, J. H. (2017). Has the dollar peg served the Saudi
economy well?. http://hdl.handle.net/1808/26778
CEIC Data. (2022). Saudi Arabia Trade Balance. CEIC Data, Retrieved from
https://www.ceicdata.com/en/indicator/saudi-arabia/trade-balance
CEIC Data. (2022). Saudi Arabia Labour Productivity Growth. CEIC Data, Retrieved from
https://www.ceicdata.com/en/indicator/saudi-arabia/labour-productivity-growth
DW. (2022, February 16). How could the Ukraine war affect the Middle East? DW, Retrieved
from https://www.dw.com/en/how-could-the-ukraine-crisis-affect-the-middle-east/a-
60802745
IMF. (2022). World Economic Outlook: War sets back the global recovery. IMF.
OECD. (2022). International trade during the COVID-19 pandemic: Big shifts and uncertainty.
OECD, Retrieved from https://www.oecd.org/coronavirus/policy-responses/international-
trade-during-the-covid-19-pandemic-big-shifts-and-uncertainty-d1131663/
Net Exports to Take Over as Main Driver of Saudi Growth in H221, 2022. (2022, August 10).
Fitch Solutions/ https://www.fitchsolutions.com/country-risk/net-exports-take-over-main-
driver-saudi-growth-h221-2022-08-10-2021
Trading Economics. (2022) Saudi Arabia Balance of Trade. Trading Economics, Retrieved from
https://tradingeconomics.com/saudi-arabia/balance-of-trade
World Trade Organization. (2022). The Russia-Ukraine conflict puts fragile global trade
recovery at risk. World Trade Organization,
World Bank Group. (2022). Commodity Markets Outlook, April 2022: The Impact of War in
Ukraine on Commodity Markets. World Bank Group,
https://openknowledge.worldbank.org/handle/10986/37223
Araujo‐Enciso, S. R., & Fellmann, T. (2020). Yield variability and harvest failures in Russia,
Ukraine, and Kazakhstan and their possible impact on food security in the Middle East
and North Africa. Journal of agricultural economics,,, 71(2), 493-
516.https://www.wto.org/english/news_e/pres22_e/pr902_e.htm
https://doi.org/10.1111/1477-9552.12367
https://www.stats.gov.sa/en/325