The Saudi Arabian Economy and Vision 2030: Rising to the challenges Dr. Mohamed A Ramady, Senior Advisor Partner Energy, and Former Visiting Associate Professor King Fahd University of Petroleum & Minerals (KFUPM) Aramco Sourcing & Localization Forum 2016
Municipal Services Transport & Comms. Health & Social Affairs Education & Manpower Defense & Security (SR Billion) (SR Billion) KSA: key macro indicators Government actual expenditure still exceeds budgeted: key spending sectors maintained. 1,200 1,000 800 600 400 Budgeted versus actual spending 350 300 250 200 150 100 50 0 Spending by sector 200 0 2006 2008 2010 2012 2014 2016F Government oil still predominates, capital expenditure still healthy. 1200 1000 800 600 400 200 0 129 913 Saudi Arabia: Government Revenue (SR bn) Oil 164 445 Non-oil 182 384 183 547 224 229 618 663 244 757 2014 2015 2016 2017 2018 2019 2020 1200 1000 800 600 400 200 Sources: Min. of Finance, SAMA 0 Saudi Arabia: Central Govt. Capital & Current Spending (SR bn) 670 471 Capial Speding 640 Current Spending 583 606 654 648 684 357 328 338 345 383 409 2014 2015 2016f 2017f 2018f 2019f 2020f
Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Aug-16 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016f 2017f ($ per barrel) ($ per barrel) Fluctuating fortunes of oil prices affecting Govt. international reserves. 120 100 Oil prices SAMA FX reserves and Brent oil prices 80 60 40 20 0 and inducing increased rise in domestic public debt and local bank borrowing Government debt 180,000 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 Saudi Arabia: Bank s Holding of Government Bonds (SRm) Aug-16 0 2016 (F) Sources: OPEC, SAMBA, Min. of Fin.
KSA: key macro indicators- continued. Non-oil GDP growth still positive, with crude oil refined products exports expanding Non-oil GDP Growth, Contribution Manufacturing Construction Transport & Communication Other Sectors Electricity & Water Trade Hotels, and Restaurants Financial, Insurance, and Real Estate Services 2011 2012 2013 2014 2015P 2016F Source: SAMA and NCB Saudi production towards basic chemicals and polymers Saudi crude oil refined products exports at record highs Aug-16 Sources: SAMBA,NCB, Jadwa
TRANSFORMATION KSA: a PEST analysis Reform Minded Council of Economic and Development Affairs Talent recognition and placement Transparency, accountability and consistency Generational power transfer Succession issues clarified Determination to implement changes. POLITICAL CHANGES DUE SOCIAL ECONOMIC Wider Societal Stake Gender Participation Local Employment and Targeted Saudization Change tempered with realism Vision 2030 Roadmap Weaning away from oil Better management of expenditures Openness to both West and East Centrality of Private Sector Economic Participation and Growth
Deficit as % of GDP Vision 2030 and National Transformation Plan (NTP) 2020: the reasons Why? (A) Unsustainable dependence on oil price vagaries: fiscal break even oil prices Saudi Arabia: Fiscal Break-even oil prices or, Mind the gap.... 10% $44 5% 0-5% -10% -15% -20% ($112) ($86) ($60) ($34) ($8) (B) High Central Government Wage Bill and Public Sector Job Preference Central Govt. Wage Bill as a % of Total Expenditure Saudi Arabia $18 $30 $40 $50 $60 $70 $80 $90 49% MENA 36% LATM 31% East Asia South Asia Eastern Europe OECD 23% 22% 18% 16% Sources: World Bank, IMF
National Transformation Program (NTP) 2020 and Vision 2030: Aims and Objectives Operating model of NTP 2020 Saudi Arabia s Vision 2030 Identifying the Challenges and Establishing 2020 Interim Targets Leading to A vibrant society - With strong foundations - With fulfilling lives - With strong roots An ambitious nation... - Effectively governed - Responsible enabled A thriving economy... - Open for business - Investing in the long-term - Rewarding opportunities - Leveraging its unique position Sources: NTP 2020
Vision 2030: an overarching, inter-linked agenda
Government s key commitments of the Saudi Vision 2030 Objectives Goals (1) A Thriving Economy (2) A Vibrant Society (3) An Ambitious Nation Open for business A developed digital infrastructure A flourishing retail sector A restructured King Abdullah Financial District Investing in the longterm Rewarding opportunities Leveraging its unique position A renewable energy market A mining sector with full potential Localized defense industries, emphasis on local content A bigger role for SME s An education that contributes to economic growth Building a unique regional logistical hub Integrating regionally and internationally Supporting national companies With strong foundations Corporatization: efficient and high quality healthcare (PPP) With fulfilling lives Intiqaa : A more prominent role for families in the education of children Dream : meaningful entertainment for citizens Effectively governed Qawaem : Increasing spending efficiency Effective E-government Share services to government agencies Responsibly enabled A more impactful non-profit sector Sources: NTP 2020
Quantifying Vision 2030 outcomes (Total committed cost of SR270 bn) Key Goals of the Saudi Vision 2030 Theme Goals Today 2030 (1) A Thriving Economy Private sector contribution (% of GDP) Logistics Performance Index (Rank) Non-oil exports (% of non-oil GDP) Public Investment Fund assets (SR billion) Global Competitiveness Index (Rank) Annual FDI inflows (% of GDP) Domestic output of the oil & gas sector (% of total) The Kingdom s GDP size (Rank) Saudi unemployment rate (% of Saudi labor force) Female labor force participation rate (% of working age females) SME output (% of total GDP) 40.0 49 16.0 600 25 3.8 40.0 19 th 11.6 22.0 20.0 65.0 25 50.0 7000 10 5.7 75.0 Top15 7.0 30.0 35.0 (2) A Vibrant Society Social Capital Index (Rank) Average life expectancy (years) Household spending on culture & entertainment (% of total) 26 74 2.9 10 80 6.0 (3) An Ambitious Nation Household savings (% of household income) Non-profit output (% of total GDP) Non-oi government revenues (SR billion) Government effectiveness Index (Rank) 6.0 <1.0 163 80 10.0 5.0 1000 20 Sources: NTP, 2020 (Total 543 Initiatives)
Vision 2030: rewarding investment opportunities For foreign investors, a rich and varied investment opportunity. Target Sector Key Factors Human Capital Development Most vital enabler of a robust and innovative private sector Vocational training, centers of excellence SME s Promotion SME contribution to grow to 35% from 20% of GDP growth Easier access to funding, to rise to 20% from 5% of total bank credit. Localized defense and local comfort industries KSA is a major military spender but only 2% of this spending is in-kingdom. Aim to localize over 50% of military spending by 2030. Aramco s IKTVA Program 70% local content by 2021. Mining Sector Potential Sector output to reach SR97 bn by 2020, adding 90,000 jobs. Intensified exploration mineral resources. Renewable energy market development Target of 9.5 gigawatt/hour of renewable energy from 75gw/h by 2020, but target evolving. Privatization of health care Corporatization of the health care sector by transforming responsibility to network of public companies who would compete against each other and the private sector. Govt. to maintain regulatory/supervisory role. 11
Overcoming Vision 2030 implementation challenges: or Vision without execution is hallucination (Thomas Edison) (A) Administrative Structure Update approval mechanism for funding programs FINANCE COMMITTEE COMMUNICATION TEAM Verify publicly communicated messages ADAA NATIONAL CENTRE FOR PERFORMANCE MEASUREMENT THE DELIVERY UNIT Designing, implementing & achieving initiatives Promoting transparency Follow up on progress towards implementing programs, Measure progress regulatory STRATEGIC COMMITTEE PROJECT MANAGEMENT OFFICE Monitoring and follow up Adherence to project management methodologies MINISTRY OF ECONOMY AND PLANNING Provides all necessary information to stakeholders. Harmonize the sector and regional plans 12
(B) RESOLUTION MECHANISM: A bottoms up approach LEVEL FOUR Issues are referred to the Council of Economic and Development Affairs for resolution LEVEL THREE Strategic Committee shall at its own discretion decide on the matter that falls under its jurisdiction or refer to the Council of Economic and Development Affairs for resolution. LEVEL TWO LEVEL ONE Strategic Management Office shall be asked to examine the matter and obtain all necessary information. If impossible to address concern then raised to Strategic Committee for resolution. Issues addressed within each executive body in charge of implementing the programs under direct supervision of relevant minister. If issue does not fall under jurisdiction of a specific body, referred to a higher level.
THE HEART OF THE MATTER: WEANING AWAY FROM OIL DEPENDENCY AND EMPOWERING PRIVATE-PUBLIC PARTNERSHIP KSA can no longer rely on oil revenue and public spending for growth. Changing global energy market (renewables, environmental concerns fossil fuel), and demographic transition adding to employment pressure. Productivity led economic transformation could enable KSA to increase GDP and create new jobs from key sectors. All stakeholders private sector, foreign investors, households will need to be involved. Requires fundamental changes to current business as usual model: State needs to embrace a new delivery philosophy Businesses need to adapt to a more competitive, cost conscious environment, Individual Saudi citizens will have to take more personal accountability.
Vision 2030: doing business with both East and West Visits by Deputy Crown Prince and key Ministers have resulted in tangible cooperation roadmaps. COUNTRY KEY AGREEMENTS USA Dow Chemical Company became first company to receive a trading license allowing 100% ownership in trading sector. 3M and Pfizer granted licenses Talks with Apple to enter KSA Microsoft International to assist with technology transfer Six Flags entertainment amusement part agreement China Huawei first Chinese company licensed to invest in ITC. Chem China agreement with Saudi National Program for promotion of industrial clusters, and renewable energy. Yanchuan Yoching Investment Co. and Gwanzu Industrial Development Group MOU s with Aramco and RCJY for investment in Jazan Economic City. SABIC and SNCG to build a coal-to-chemicals complex PIF discussion to invest in Ali Baba Group. Japan MOU signed to assist with SME development. Agreement to supply oil for Okinawa strategic oil reserves. 15
SAUDI ARABIA: RISKS AND OPPORTUNITIES Saudi Arabia is at a crossroads and the current leadership fully understands the need for change as the status quo is unsustainable; ie oil revenue expenditures = surplus (or deficits) Hard look at current projects to reduce costs and implement best practices ( $ 20bn rumored of project savings to assess meeting national employment and localization content ) Vision 2030 I committed to three basic principles: transparency, accountability and consistency for it to succeed A NEW MINDSET IS NOW PALPABLE To this end, the building blocs have been set up: Substantial government reshuffle and ministerial amalgamation has taken place (Min. of Energy, Industry and Mineral Resources) No changes expected to currency peg policies, with monetary stability and sufficient liquidity in the banking sector Raising international borrowing on favorable terms ($17.5 Bn 5,10 and 30 year bonds -largest sovereign emerging market offering ) Attracting foreign capital by amending participation rules for foreign qualified investors by the Capital Market Authority to buy shares directly in Saudi IPO s ; considering dual listing for Saudi companies; preparing for inclusion in the MSCI Emerging Market Index.
CONCLUSION KSA well placed to service the domestic economy and broader GCC and provides unrivalled comparative advantages and investment opportunities as it refocuses on becoming a manufacturing and trading hub for global markets. Saudi Arabia will continue to provide access to infra-structure funding (SIDF), abundant supply of energy, and remains committed to maintaining its position as the world s top oil exporter with focus across the whole hydrocarbon value chain. Vision 2030 will provide opportunities to leverage on local supply chain capabilities across many industries. Hard decisions are being made, subsidies rationalized, VAT and fees introduced Irrespective whether oil prices are high or low, a strategic decison has been made to pursue the necessary difficult transformation. THE CHALLENGE HAS BEEN TAKEN UP
Thank You Author Email Mohamed.Ramady @partner-energy.com Author Website www.saudi-economy.org 18