In a new Citi Research Macro-to-Micro report, a team of economists and analysts led by Ilker Domac examines the progress Saudi Arabia has made on Vision 2030, an ambitious agenda aimed at diversifying its economy and boosting growth through structural reforms. The authors find the macroeconomic rationale behind the kingdom’s reform program compelling: Diversified economies perform better over the long term and Saudi Arabia must contend with highly volatile commodity prices and the low employment potential of its extractive sector.
In the authors’ view, the kingdom’s need to step up efforts at economic diversification has become even greater as the world has accelerated toward economies that are less carbon-intensive. Declining demand for fossil fuels might permanently lower the value of Saudi Arabia’s non-renewable natural capital; as a consequence, the future performance of its economy will largely depend on how policymakers diversify their portfolio—with potential diversification steps including investing in human capital, building Saudi Arabia’s stock of productive assets and boosting the value of renewable natural capital.
The vehicle for addressing these challenges is Vision 2030, launched in 2016 and so at its halfway point. As the authors note, Vision 2030’s core mission is to reduce oil dependence, diversify income sources and bolster competitiveness. A key driver of the agenda is the Public Investment Fund (PIF), Saudi Arabia’s sovereign wealth fund, with total estimated assets of $777 billion. This fund is also the main entity for implementing the National Investment Strategy (NIS), launched in 2021. The NIS’s three strategic objectives for Saudi Arabia are to build national industrial resilience, become an integrated regional manufacturing hub, and expand global leadership in selected segments.
Under the NIS umbrella, Saudi Arabia hopes to inject SAR 12.4 trillion ($3.3 trillion) into the national economy between 2021 and 2030. One of the PIF’s main drivers is funding giga projects, large-scale and complex developments focused on diverse sectors such as tourism, entertainment, culture, sports, technology and innovation. Such projects are seen playing a pivotal role in boosting non-oil revenues, diversifying the economy and creating new opportunities.
The authors note that Vision 2030 has attracted substantial attention from global investors. Given this level of interest, the authors offer an assessment of Vision 2030’s progress and challenges, an analysis of gaps in structural reform, and an assessment of the macro effects of such reforms to provide guidance for how to prioritize, bundle and sequence the measures seen as part of the agenda.
Progress and challenges
The authors write that Saudi Arabia has made important strides on multiple fronts in implementing Vision 2030, despite the setback of the pandemic and the economic slowdown that followed it.
In looking at 18 goals, the authors conclude that Saudi Arabia has made significant progress or exceeded its target in five, made satisfactory progress in nine, and needs “enhanced momentum” to achieve four.
Areas of significant progress identified by the Citi Research team include female labor-force participation, which has surpassed its 2030 target of 30%; a significant expansion of home ownership from 47% to 67% in 2022; non-oil fiscal revenue reaching 2.5 times its baseline by 2022; and the transformation of the PIF from a relatively low-profile sovereign wealth fund into an assertive international dealmaker and manager of megaprojects.
Turning to areas of satisfactory progress, the authors note Saudi Arabia’s GDP surpassing the $1 trillion mark for the first time in 2022; the growth of GDP contributions from small and medium-sized enterprises (SMEs) and the private sector in general; progress in measures of logistics performance and government effectiveness; and Saudi Arabia’s rise up the ranks in global competitiveness.
Other parts of Vision 2030 have progressed more slowly than desired. The authors note that non-oil exports face a challenge in reaching the agenda’s target percentage; foreign direct investment has considerable scope for improvement; and religious tourism has faced hurdles.
To sum up, the authors note that “sowing the oil” to diversify the economy has been a goal of Saudi authorities since the 1970s, but Vision 2030 has given those efforts significant traction—and momentum for reform is expected to remain strong.
Reform gaps and the path forward
In considering the structural-reform gaps that remain, the authors assess Saudi Arabia’s performance in eight key areas—governance, business regulation, external sector, labor market, credit market, education, health and environment—in comparison with the average OECD country.
The authors also asked what the impact on growth would be if structural gaps were narrowed. Structural reforms, they noted, can bolster economic growth through various channels. The authors’ estimates suggest raising Saudi Arabia’s governance score to the OECD average could lead to a cumulative increase of 19% in real GDP after six years, while comparable external-sector reforms could increase growth by 5%. Improving the business and credit environment could raise output by about 3%, with a 1.5% gain from labor-market reforms.
In surveying Saudi Arabia’s path, the authors note the difficulty resource-rich nations face in diversifying their economies and exports, and the importance of good macroeconomic management for building such economies. A stable macro environment, they write, is a prerequisite for Vision 2030’s success.
With Saudi Arabia at the halfway point of its agenda, the authors write that major governance reforms would be a sizeable multiplier in maximizing growth payoffs. All in all, the authors write, their analysis makes a strong case for building other types of capital to complement Saudi Arabia’s wealth in natural resources.
In the authors’ view, strong institutions bolster stability, predictability and investor confidence, which promotes investment and supports sustainable economic development. Strengthening governance, they argue, will be pivotal for a sustainable economic diversification driven by the private sector, enabling new investments and jobs and also magnifying the payoff from reforms elsewhere.
Existing Citi Research clients can access the full report, which also includes commodities, credit and equity views and investment ideas, here.