Saudi Arabia

Saudi Arabia’s economy contracted in the first half of 2024, despite improving momentum, and growth for the full year is likely to be much lower than previously expected at +1.4%. Inflation decelerated to 1.5% y/y in July (from 1.55% the previous month) and is expected to remain at 1.6% on average for 2024. The slowdown is the result of oil prices dropping below 80 USD/ barrel (76 USD/barrel as of Q3) and the self-imposed oil production cap of 9-9.5mn barrels per month. The production ceiling agreed with all OPEC+ members aimed to stabilize global oil output at an elevated oil price. As a result, all Gulf Cooperation Council members experienced weak or negative growth in 2023 and are expected to reaccelerate during 2024 compared to previous years, given the reduced oil output. In Saudi Arabia, oil production is expected to gradually increase to 10mn monthly barrels by the end of 2024, bringing more revenue to the government’s coffers. While global oil markets continue to trend downwards, geopolitical risks and regional conflict could suddenly shift markets.

The non-oil economy continued to grow over the first half of the year, albeit with a decelerating trend, reflecting the country’s continued heavy dependence on commodities. Non-oil industrial and manufacturing sectors grew at a weaker pace, while services such as tourism continued with robust acceleration.  The Kingdom’s leadership remains committed to their Vision 2030 program, channeling oil funds for economic diversification, and stimulating domestic demand. Tourism and construction are expected to grow by +10% y/y and +5% y/y, respectively, in 2024 and will remain drivers of the non-oil sector throughout the next decade as the Kingdom will host several sport events (including the 2034 FIFA World Cup) and the 2030 Riyadh Expo. Saudi Arabia also plans to tap into the growing LNG global market as it is expanding domestic gas output. In the face of lower-than-expected oil revenues, authorities have scaled back some projects of the 2030 Vision program and redistributed and reprioritized funds. While this will result in lower shorter-term growth, it should provide longer-term sustainability.

Saudi Arabia is following the footsteps of the United Arab Emirates in positioning itself as a hub for tourism, technology and financial services through the adoption of new laws aimed at providing safer regulatory stability and attracting FDI (eg. in civil and commercial transactions) and an investment code. Higher female labor force participation is also supporting growth and attracting more talent from across the region. In addition, the active role of the Kingdom’s sovereign wealth fund to invest in strategically important technologies could channel productive investment towards Saudi Arabia and support the diversification effort. Notably, the main investments have been directed towards AI and electric vehicles.

The Middle Eastern Kingdom has been establishing new global partnerships, diversifying away from the US, its main historical partner. In the framework of the G20, Saudi Arabia joined forces with European and other Middle Eastern nations, as well as India, in the development of a new Economic Corridor that would position Saudi Arabia in the center of transportation between Europe and South Asia, even though this plan is now under scrutiny due to the conflict in the Levant. In addition, China is now not only a relevant economic partner but has also become an important political ally to Saudi Arabia. The two countries built a solid economic relationship over the last decade under the framework of the Belt and Road Initiative, with major infrastructure projects built and financed together with Chinese corporations. Now, Beijing has become an important partner and mediator in the region, brokering a deal to re-establish relations between Saudi Arabia and Iran in 2023, as well as a mediator between Palestinian factions, which are highly connected to the Kingdom's political elites.

Amid, this relationship diversification, the outcome of the US Presidential election in November could also have a significant impact on the role of Saudi Arabia in the region as well as on the outcome of the ongoing conflict and the future of the Middle East.