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Saudi Arabia is at the early stages of a reform programme designed to reduce its dependence on oil exports and public sector jobs, and grow the size of the non-oil economy.
The economic reforms are set out in the governments Vision 2030, which was published in April 2016. The fall in crude prices led to a radical change in the governments financial position, with revenues plunging by 46 per cent in 2015 and by a further 14 per cent in 2016, along with budget deficits for the past three years.
The first phase of reforms is being implemented via the National Transformation Programme (NTP), which comprises a series of targets to achieve by 2020. During 2016, Riyadh reviewed its capital expenditure programme, resulting in a sharp drop in main contract awards. Just $26bn of deals were let last year, compared with an annual average of $52bn since 2010 and a peak of $73bn in 2013.
One of the main objectives of the NTP is to grow the role of the private sector in the economy, both through the sale of state-owned assets and public-private partnerships (PPPs). Saudi Post Corporation and Saline Water Conversion Corporation are expected to be among the first organisations to be privatised this year. The power sector will also be privatised, with 100 per cent of generation coming through private partners by 2020.
Four PPPs have already been awarded this year to develop airport projects; Saudi Arabia also wants to privatise the operations of all existing airports by 2020.
The Health Ministry is currently seeking advisers to help it draft a framework to build about 3,000 medical centres with the participation of the private sector.
Total contract awards in 2016
Average annual contract awards since 2010
Contracts under execution
Projects in tender or design phase
Value of transport projects planned
Another priority area cited in the NTP is developing a renewables sector, with a target of 3.45GW of installed capacity by 2020. Major progress has been made in 2017, with new bodies set up to execute the programme and firms invited to prequalify for solar schemes.
Riyadh says it remains committed to plans to part-privatise Saudi Aramco in 2018. For its part, Aramco says it plans to invest $334bn over the next 10 years in oil and gas. The oil and petrochemicals sectors were the only areas of the Saudi projects market to see spending rise in 2016 from the previous year.
Overall, Saudi Arabia has awarded more than $370bn of contracts across all sectors since 2010. Some $227.2bn of deals are still under execution. There is currently almost $250bn of projects in the tender phase or under design. In terms of future schemes, the power and transport sectors are the biggest.
After contracting by 14 per cent in 2015 and 4 per cent in 2016, Saudi Arabias nominal GDP is forecast to grow by 10 per cent in 2017 and by 4-7 per cent a year over the subsequent four years. The economys fortunes should be boosted by an expected recovery in oil prices to $63-$64 a barrel in 2020. Saudi oil production is also expected to rise to 10.7 million barrels a day (b/d) by 2020, from about 9.8 million b/d expected in 2017.
The government is forecast to record substantial but declining budget deficits in 2017-19 as it benefits from higher oil revenues and significant increases in non-oil income, alongside tight restraint on public spending, which is forecast to grow by no more than 3 per cent annually between 2017 and 2020.
The government will finance budget deficits, forecast to total about $130bn in 2017-20, through drawdowns on its reserves, a sovereign debt issuance programme and asset sales.
Higher oil prices in 2017 and beyond, coupled with rising crude production in 2018-20, will lead to a recovery in the kingdoms export earnings over the next four years, the return of a trade surplus of more than $100bn by 2020 and a steady decline in the current account deficit from the record $74bn recorded in 2016. This report forecasts the deficit will drop to about 2 per cent of GDP in 2020, a level that is acceptable and financeable.
Riyadhs strategy to cut the state payroll and boost the productivity of nationals will require a big increase in the employment of Saudis by the private sector. Major changes in the employment of expatriates are on the way, and from 2018, hiring large numbers of foreign workers will be far costlier.
Saudi insight report 2017
This article is an excerpt from MEEDs Saudi Arabia 2017 report. Buy it here