Saudi Arabia – The ambition versus the reality of Vision 2030

T. Belman. Saudi Arabia: Woman Sentenced to 34 Years for Tweets

CONTROL RISKS

After a year marked by a massive oil windfall and major project announcements, the progress of Crown Prince Mohammed bin Salman (MbS)’s flagship development plan, Vision 2030, can be seen in the data and on the ground. Our analysts look at how Vision 2030 is – and is not – changing life and business in Saudi Arabia. 

• Halfway through the lifecycle of Vision 2030, both progress and underperformance in key indicators are becoming clearer, with gaps likely to persist through to the deadline.
• The government will continue to allocate budgetary funds to previously neglected spending areas to ensure core elements of the plan are implemented.
• As major economic and social changes are already being realised, new challenges will emerge that the government will need to answer before the end of the decade.

Going to plan?

When Vision 2030 was published in 2016 (and after it was revised in early 2017) it contained highly ambitious targets, including increasing the state’s non-oil revenue more than six times and almost doubling foreign investment. Many of the targets were considered highly ambitious by analysts at the time, but they have since set a clear direction for the state’s policy priorities.

Below is a scorecard of a selection of the Vision 2030 targets from the finalised 2017 plan:

Sources: Vision 2030, GASTAT, Ministry of Finance, CEIC Data

The scorecard demonstrates the scale of the task of restructuring one of the world’s most oil-dependent economies, especially on a relatively short timescale of 14 years. There have been a few notable successes, in particular the increased participation rate of women in the workforce, which has already exceeded the 2030 target.

This is most clearly visible in Riyadh, where women are engaged in various sectors such as hospitality and tourism, but most notably in sought-after public sector jobs. This has created competition with young Saudi men who feel they are being increasingly shut out of high-paid government jobs, as women are now being hired where they were previously excluded and in some cases benefiting from quotas for women in government bodies.

However, the government continues to fall short of several key macroeconomic goals, and halfway through the delivery period for the plan, it is becoming increasingly clear that some targets – such as the contribution of the private sector to GDP, or the overall unemployment rate for Saudi nationals – will not be met. As 2030 approaches, some targets are likely to be softened or have different methods of measurement introduced to manage underperformance, with successes in some areas used to excuse shortfalls in others.

A good year

Amid a gloomy 2022 for much of the world economy, Saudi Arabia has had a very good year. The rise in global oil prices prompted by the Ukraine-Russia crisis was a boon to revenue and is expected to yield a fiscal surplus of USD 27bn (2.6% of GDP) for the 2022 fiscal year – the first since 2013. Although the government has allocated much of the windfall towards replenishing depleted foreign exchange reserves, it has also facilitated increased off-budget spending on Vision 2030 projects through the country’s sovereign wealth fund, the Public Investment Fund (PIF). The 2023 budget forecasts spending of approximately USD 296bn and revenues of approximately USD 300bn, leading to a 0.4% fiscal surplus.

Saudi’s non-oil economy – the development of which is another key goal of the vision – continues to grow healthily. This is in part driven by 2022’s high oil prices creating more liquidity in the economy as a whole, helping to drive a 22% increase in manufacturing sector activity. Consistently high readings from the Riyadh Bank Purchasing Manager’s Index (PMI) and the Industrial Production Index have demonstrated enduring momentum heading into 2023. Growth in the non-oil economy in 2022 is also driving an increase in non-oil government revenue, with taxes linked to profits, income and capital gains forecast to reach SAR 22bn (USD 5.7bn) in 2022, an increase of 24.6% in 2021.

The government is counting that this growth will become self-sustaining, or at least less explicitly linked to the oil price’s fortunes. As the scorecard shows, the targets linked to the non-oil economy were among the boldest. However, it remains unclear whether there has been enough growth, development and support from the government’s shift to a counter-cyclical fiscal policy to keep non-oil activity going under its own steam.

Saudi social life

The Vision 2030 explicitly linked the development of vibrant leisure and hospitality sectors with improving the quality of life and providing services for Saudis. One of the goals was to increase household spending on entertainment from 2.9% to 6.0%. This has driven projects focused on creating theme parks and other entertainment venues and activities, including the developments of Qiddiya and Saudi Entertainment Ventures Company (SEVEN), annual events such as the Riyadh Festival (including its own version of London’s Winter Wonderland), Winter at Tantora in al-Ula and the MDL Beast festivals in Riyadh and Jeddah. These developments have established new spaces in public and norms of socialising for young Saudi nationals that did not previously exist, while also creating new opportunities and revenue streams for businesses and the government.

The government’s determination to deliver this primary focus was reflected in spending decisions in the 2023 budget. The government appears to be using tangentially related budget lines to funnel money into these areas. Spending on municipal services – which beyond the usual public services and maintenance also includes the development of entertainment and leisure sectors in major cities – has increased year-on-year by 25%. Health and social development, which includes cultural activities and sports programmes, has increased by 37%. Economic resources, which includes everything from power and desalination, but also notably supporting the tourism sector, SMEs and growing national exports, is up 33.3% for next year. This spending will build capacity in the leisure sector, albeit from a low base, in an attempt to meet growing demand for new activities, and to encourage Saudis to spend on entertainment at home rather than abroad.

Rapid social change

The direct and indirect consequences of Vision 2030 have begun to emerge. Whereas historically the national oil company has been an important source of jobs for ambitious young Saudis, many now seek employment elsewhere, such as in the PIF or the government ministries associated with delivering the key planks of the vision: namely tourism and heritage, and economic development.

Rents and property prices are creeping up in Riyadh as economic planning, policy decisions and other activity have been centralised in the capital like never before, while the established hubs of Jeddah and Dammam increasingly play second fiddle. The birth rate continues to fall as the rising cost of living is leading some young couples to wait longer to get married, starting to create cultural cleavages between the generations.

It is not clear the government has answers to these new problems, but it is not willing to facilitate open debate about solutions, particularly those that could clash with its own Vision 2030-dominated agenda. The economic and social change has not come cost-free politically: in exchange for new opportunities, already limited space for dissent has been reduced even more. The government will not accept criticism of the pace of the country’s transformation, the nature of change or the way it is being delivered and overseen by the crown prince.  This stance will sustain reputational risks for foreign businesses, even as the nascent changes on the ground create a perception in some spheres of ‘opening up’ or ‘liberalising’.

Outlook

Foreign investment will be key to successfully delivering the plan and boosting the non-oil economy, as there simply isn’t enough domestic capacity in Saudi Arabia to meet the economic targets. Key ministries are offering incentives to foreign firms in market entry and expansion negotiations, but internal bureaucracy and contradictory policies between ministries will create challenges for new and existing entrants. In particular, the rapid regulatory and legislative changes underway to update the business environment will create new stumbling blocks to navigate in the coming two to three years.

With major projects under construction and oil revenues providing tailwinds for now, the physical imprint of the Vision 2030 is already taking shape. By the end of 2029, in many places where once there was desert there will be concrete – but considerably more that is unseen will have changed in Saudi Arabia too.