The Importance of Economic Diversification for Saudi Arabia
Saudi Arabia’s economic performance has been strong and its outlook remains positive. Nevertheless, the country’s growth is expected to slow from 7.1 percent in 2011 to 6 percent in 2012. And while the oil sector will remain a fundamental aspect of the country’s economy and its important geopolitical position, Saudi Arabia’s high reliance on the oil sector also puts the country at risk from future shocks in the oil market.“That the country’s refined products have been the fastest growing category of exports bodes well for Saudi Arabia’s future growth.”
Already the European debt crisis has had an impact on Saudi Arabia’s economy. Oil prices have slumped as a result, with Brent crude falling around 20 percent due to a weakened global stock market, the reduction of a political risk premium resulting from improved relations with Iran, and increases in the global stock of oil. These events have been followed by the abrupt fall of TASI, the Saudi stock market, significant decreases in consumer spending, and rising inflation.
Yet, in spite of the weakening state of the global economy and the inevitable impact that it has had on Saudi Arabia’s economy, the country shows promise in a number of sectors, which if exploited further could provide an alternative lifeline to the country.
In a clear break from past trends, Saudi Arabia’s private sector is growing. This trend can be in part explained by the increase in bank lending to private sector. In year-on-year terms, lending growth was at its highest since March 2009. More specifically, bank lending to private sector rose by 1.1 percent in April to reach 13.5 percent in year-on-year terms, according to a recent report by Jadwa Investment. Increased lending opportunities are crucial for the growth of the private sector, as they provide entrepreneurs and SMEs with the possibility to pursue new ventures. In advancing the opportunities available in the private sector, increased lending also creates important positive spill-over effects in the rest of the economy, such as the creation of more jobs.
Further demonstrating the potential areas of growth in Saudi Arabia’s economy, non-oil exports and imports grew significantly in March of this year. Petrochemicals and refined products led non-oil exports. That the country’s refined products have been the fastest growing category of exports bodes well for Saudi Arabia’s future growth.
Countries that focus on exporting a wide variety of products, especially products of higher levels of sophistication that have a higher added value, boast higher levels of growth. If Saudi Arabia continues on this trend, it could see a similar positive trajectory to other countries that have pursued this approach to growth, such as South Korea.
According to the IMF’s study, many of the positive trends currently being observed in Saudi Arabia result from the government’s positive and prudent management of the economy. The Saudi government is well placed to continue to build on these advances and it is most likely to achieve success if it further reforms the economy, rendering its business environment more favorable. In addition to sustaining its reform agenda, the IMF has called on Saudi Arabia to support the growth of its financial sector, primarily by implementing Basel III, strengthening risk management, and promoting capital market development.