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Saudi Arabia: Greater Efforts to Reduce Oil Dependence

Highlights
CapitalRiyadh
Population31.8 million
CurrencySaudi Riyal (pegged to the US dollar at 1 USD = 3.75 SAR)
Official languageArabic
Form of governmentMonarchy

 

Major Exports (% of total, 2015*)Major Imports (% of total, 2015*)
Mineral products (75.4%)Machinery & transport equipment (45.7%)
Chemicals (7.6%)Foodstuffs (14.0%)
Plastics (7.5%)Chemical & metal products (8.4%)
Top Three Export Markets (% of total, 2016)Top Three Import Markets (% of total, 2016)
China (13.6%)China (16.2%)
Japan (11.3%)USA (15.0%)
India (10.7%)Germany (6.3%)

* Most recent year for which data are available
Source: Economist Intelligence Unit

Political Highlights

As a leading oil producer in the world, and also the birthplace of Islam, Saudi Arabia is a major power in the Middle East and the Arab world. Islam is the sole official religion, with Sunnis making up 90% of the population. The Al-Saud family has been ruling Saudi Arabia since the kingdom’s foundation in 1932. Modest political reforms, such as granting women more rights, have been introduced, but bold political reform is unlikely due to strong objections from conservatives. King Salman bin Abdul-Aziz al-Saud, aged 81, ascended the throne in 2015.

Amid the persistently weak oil prices which have depressed the government’s primary source of income, the government has increased domestic prices for fuel and other utilities, which have the risk to provoke a social backlash. The government will need to boost the private sector and step up its drive to diversify the economy away from its dependence on oil.

Meanwhile, the country is facing threats from Islamic extremism, as well as with regards to regional insecurity. In June, Saudi Arabia, along with the UAE, Egypt and Bahrain, cut off diplomatic ties with Qatar, accusing it of supporting terrorism.

Economic Trend

Economic Indicators2014
2015
2016
2017^
2018^
Nominal GDP (US$ bn)756.4654.3646.4688.1700.6
Real GDP growth (%)3.74.11.7-0.51.1
GDP per capita (US$)25,21021,18020,34021,04020,820
Inflation (%)2.72.23.51.13.1
Budget balance (% of GDP)-2.3-14.8-12.8-7.5-6.8
Current account balance (% of GDP)9.8-8.7-4.30.5-1.5
Public debt (% of GDP)9.2*14.8*22.3*29.435.2
External debt (% of GDP)22.026.229.330.932.0

* Estimates ^ Forecasts
Source: Economist Intelligence Unit (www.eiu.com)

Saudi Arabia is an oil-based economy with strong government controls over major economic activities. According to the Organisation of the Petroleum Exporting Countries (OPEC), Saudi Arabia possesses 22% of the world’s proven petroleum reserves and ranks as the world’s largest exporter of petroleum. The oil and gas sector accounts for roughly 50% of its GDP and 85% of its export earnings. As oil prices have sunk from their recent peak of above US$110 per barrel in mid-2014 to the current level of around US$50 per barrel, Saudi economy is facing a sharp economic adjustment.

As oil revenues account for over 80% of government revenues, Saudi Arabia’s public finances have deteriorated, due to low oil prices and after years of spending its massive oil wealth to support the local economy and provide subsidised energy and other utilities. The OPEC has agreed to cut production from January 2017 until March 2018, in an effort to prop up prices. However, relatively low oil prices are likely to persist for some time and the extent of any oil price rebound will be limited by the US shale gas production.

That said, Saudi Arabia should be able to tolerate lower oil prices more readily compared to some other oil-producers because of its substantial fiscal buffer. Saudi Arabia also acknowledged that it should reduce oil dependency. Last year, the government unveiled a major economic reform plan, Saudi Vision 2030. The plan, which seeks to attract foreign investment and enhance the overall competitiveness of the Saudi Arabian economy, includes the sale of up to 5% of the state-owned oil company, ARAMCO, and economic diversification through development of the private sector.

Chart: Hong Kong total exports to Saudi Arabia
Chart: Hong Kong total exports to Saudi Arabia

Hong Kong-Saudi Arabia Trade

Total exports from Hong Kong to Saudi Arabia increased by 15.6% from HK$7,243 million in 2015 to HK$8,371million in 2016. The top three export categories to Saudi Arabia were: (1) telecommunications, audio & video equipment (+31.6%), (2) office machines & computers (+58.8%), and (3) power generating machinery and equipment (+61.7%), which represented 75.0% of total exports to Saudi Arabia.

HKECIC Underwriting Experience

HKECIC imposes no restrictions on covering Saudi Arabian buyers. The Corporation’s underwriting experience on Saudi Arabia has been satisfactory, with no payment difficulty or claim payment case reported from October 2016 to September 2017.

Content provided by Picture: Hong Kong Export Credit Insurance Corporation
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