Cutting costs, drawing FDI and encouraging an entrepreneurial culture are all part of the transformation Riyadh is determined to bring about.

Author: Chloe Domat

For many years, Saudi Arabia’s economy was defined by a pretty simple equation: the quantity of oil it produced, multiplied by the price per barrel. Since the fall of energy prices, however, the math has become trickier.

To prevent the oil market from collapsing further, the OPEC+ countries, led by Saudi Arabia, last year renewed their decision to cap production, essentially deciding to sell less for a better price. But for the world’s second-largest oil producer, this quota policy, combined with unexpected attacks on oil facilities and tankers, slowed GDP growth to less than 1%.

“Recent overall Saudi growth was considerably lower than what had been hoped for by Riyadh,” says Harry Broadman, managing director and chair of the emerging markets practice at Berkeley Research Group.

That, in and of itself, is no emergency. “Given the relatively low oil-price environment, as well as production outages due to attacks on oil facilities, the Saudi economy actually weathered the year quite well,” says Ravi Bhatia, director of sovereign ratings at S&P Global Ratings. “Its biggest strength is its spare capacity, which gives it the ability to quickly react to changes in oil prices.”

The IMF, in the October 2019 World Economic Outlook, predicts Saudi Arabia’s growth will “pick up in 2020 as oil GDP stabilizes and solid momentum in the non-oil sector continues.”

The kingdom’s de facto ruler, Crown Prince Mohammed bin Salman, nevertheless wants to shake off oil dependency and write a new chapter for the royal family and his subjects. Vision 2030, the prince’s master plan, encompasses a national strategy of economic diversification, fiscal adjustment and foreign investment. Four years after the reforms began, change is taking root.

While oil and oil products still account for 79% of exports, non-oil sector growth has increased year-on-year from 0.2% in 2016 to 2.9% in 2019. Much of this growth, however, relies on state resources.

“The kingdom’s non-oil economy is still highly dependent on public sector spending, which in turn is sourced by petroleum revenues,” says Broadman. “While the kingdom has been making admirable progress, it remains caught in a multidimensional trap of heavy reliance on petroleum for national income, fiscal revenues and exports.”

Fiscal Consolidation

By its conservative estimate, the Finance Ministry expects the budget deficit to widen this year to almost $50 billion, or 6.4% of GDP, compared to 4.7% in 2019. Analysts note that Riyadh would need oil prices above $70 a barrel to balance its budget.

Almulaik, Fintech Saudi: Developing a pool of talent with the key skills required by fintech companies, and a culture that supports risktaking, is a challenge.

Meanwhile, the kingdom continues efforts to reduce public spending and boost state revenues. Saudi Arabia’s 2020 budget, at $272 billion, amounts to a 2.5% drop from 2019’s estimated actual spending of $279 billion.

In July 2019, Riyadh announced a new public procurement law, in an effort to streamline government spending, reduce corruption, expand opportunities for small business and inspire confidence. “The law seeks to allocate and manage financial resources effectively [and] provides more transparency in all tenders and procurement procedures,” Finance Minister Mohammed Al-Jadaan said in a July 16 ministry press release.

Other reforms include new taxes, subsidy cuts, a restructuring of public sector wages and frequent adjustments to gasoline, water and electricity prices. While it is too soon to judge the overall impact of these policies, the first results are starting to show. The introduction of a 5% value-added tax in 2018, for example, generated more revenue than expected, and the IMF is urging the government to raise it to 10%.

With economic transformation ahead, Saudi Arabia’s biggest companies are increasingly motivated to cut costs and improve efficiency. In key sectors of the economy, stakeholders are reorganizing their assets to better compete internationally and fund the national transition effort.

The kingdom’s crown jewel, Saudi Aramco, is a prime example of this strategy. Last March, it bought a 70% stake in Sabic from the Public Investment Fund (PIF). The $69.1 billion megadeal was part of Aramco’s diversification strategy; but it also injected new liquidity into the PIF, allowing it to fuel further development projects and create jobs.

“This is a win-win-win transaction and a transformational deal for three of Saudi Arabia’s most important economic entities,” said Yasir Al-Rumayyan, managing director of the PIF, in a press release.

“Saudi has done a lot to remove red tape and create opportunities for stronger Saudi companies to expand and consolidate their respective sectors,” says Indranil Ghosh, CEO of Tiger Hill Capital, a London-based investment management and advisory firm. “There has been a lot of activity in sectors like banking, health care/pharmacy, chemicals, food, water management and education.”


Three Of Saudi Arabia's Most Promising Fintechs

Geidea PayTabs Unifonic
Founded in 2008, Geidea is one of the pioneers of fintech in the kingdom. The company provides cashless solutions, including software and hardware such as payment terminals. In 2018, Abu Dhabi-based asset management firm Gulf Capital acquired 51% of Geidea for more than $267 million. This digital payment solution targets mainly SMEs. It offers a customizable payment gateway and dashboard to businesses looking to develop their presence online. Founded in 2014 and headquartered in neighboring Bahrain, the company has offices in seven countries and processes over 160 currencies. It raised $20 million dollars in 2017—the biggest funding round for a MENA fintech at the time. What started out as a mass service management system provider is now Saudi Arabia’s biggest cloud communications company providing voice and messaging services to a wide range of customers. The startup boasts over 5,000 corporate clients including Uber, Aramex, Toyota, Samsung, Carrefour and HSBC. In 2018, Unifonic closed a $21 million funding round in Series A, led by Saudi venture capital STV.

Foreign Investment Wanted

A population of 34.6 million with high consumer-purchasing power makes Saudi Arabia a naturally attractive destination for global investors. Thus far, the Saudi market has been difficult to penetrate; but with foreign investment now a new priority, the kingdom is gradually opening up.

Foreign direct investment (FDI) flows “had already picked up in 2019, and there will be more foreign investment and foreign acquirers as the Saudi market opens in an increasing number of sectors,” says Ghosh.

Between 2018 and 2019, five foreign banks,  including Citigroup, Goldman Sachs and Sumitomo Mitsui, were allowed to enter Saudi Arabia. Several international lenders are on the waiting list. To encourage FDI, the authorities are introducing new competition, franchise and bankruptcy laws. Last June, the Capital Market Authority (CMA) relaxed restrictions on foreign ownership of listed Saudi companies. For the first time in decades, international investors are permitted to acquire majority shares in key sectors of the economy such as telecommunications, insurance and banking, although a range of restrictions remain in place.  Last year, FTSE and MSCI added the Saudi Stock Exchange (Tadawul) to their emerging-market indexes. The Tadawul first opened to foreigners just five years ago.

Last year’s $25.6 billion IPO of Saudi Aramco also marked a milestone. “Albeit with a lot of the investment flowing from neighboring countries, it will do a lot for Saudi’s credibility as a home for transparent, investable companies,” Ghosh says.

Promoting Entrepreneurship

Saudi Arabia is looking for entrepreneurs as well as investors. Today, small and medium-sized enterprises (SMEs) account for 97% of the kingdom’s businesses. The authorities want to increase SMEs’ contribution to GDP from their current 22% to 35% by 2030.

To encourage business creation, Riyadh last April licensed more than 20 international venture capital firms to enter the market. It has also set up two large funds of funds: the $747 million Saudi Venture Capital Company and the $1.1 billion Jada Fund of Funds. The kingdom now provides all startups with a license allowing 100% ownership of their Saudi entity at a cost of approximately $500 a year for five years

“To develop an ecosystem, you need components such as capital, talent and private and public sector support,” says Ahmed Aljabreen, venture partner, MENA, at 500 Startups, a Silicon Valley tech fund that entered the Saudi market in 2017 and has made 20 investments thus far. “These components are all available in Saudi Arabia, which is quite rare to find,” he adds. “I firmly believe that in a few years, we will be seeing this ecosystem thriving. Honestly, opportunities in such an early ecosystem are abundant. You can practically look at every industry and see opportunities there.”

Sectors with the best growth prospects include fintech—especially payments, wealth management and transfer—e-commerce and transport. The government is particularly keen on supporting innovation in financial services and has set a goal of increasing cashless transactions to 70% by 2030. To make this a reality, the Saudi Arabian Monetary Authority (SAMA), the kingdom’s central bank, is adapting regulations to fit the fast pace of change induced by online banking and has created a Regulatory Sandbox for entrepreneurs to try out their ideas. Similarly, the CMA now operates a dedicated Fintech Lab.

With 12 % unemployment among Saudi nationals—its lowest rate in more than three years—Saudi Arabia hopes the new startup ecosystem can provide jobs for its fast-growing and often restive youth population. However, fostering entrepreneurship in a country that has long lived off rents from its oil bounty is a tall order. “Developing a pool of talent with the key skills required by fintech companies, and a culture that supports risk-taking and where failure is acceptable, is a challenge,” says Nejoud Almulaik, director of Fintech Saudi, a body launched in 2018 by the SAMA and the CMA to support the fintech industry and its entrepreneurs.

Oil remains the backbone of the Saudi economy. But the regime is pushing reform and starting to see results. The pace—and success—of transformation will depend on stakeholders’ dedication and on the geopolitical context. Regional turmoil could slow Riyadh’s progress toward realizing its ambitions, with important spillover to other Gulf countries. Alternatively, a successful transformation in Saudi Arabia could send benefits rippling outward.

High Hopes For Saudi-Born Fintech

Startup funding in the MENA region had another record year in 2019, with 564 disclosed investments, up 31% from 2018, and $704 million in total funding. Saudi Arabia was the fastest-growing market, with 12% of the deals, an increase of 4% compared to 2018. In line with Vision 2030, the government is pushing for the development of a startup ecosystem.