Saudi Arabia’s Vision 2030 faces its biggest test


Saudi Arabia has announced SAR120 billion ($32 billion) of stimulus to support its economy as it looks to fight Covid-19, but the impact of lower oil prices means it is also having to announce emergency spending cuts and increase its deficits to pay for them.

Minister of finance Mohammed Al-Jadaan unveiled on Friday SAR70 billion of new initiatives to help the private sector, in particularly SMEs, taking the official response stimulus up to SAR120 billion.

However, Saudi Arabia has also been hurt by the fall in oil prices to below $30 a barrel, squeezing the financial resources available and forcing the Kingdom to announce a SAR50 billion reduction in expenditure, as well as a reorientation of spending to fight the virus.

Already running a fiscal deficit, Al-Jadaan said Saudi would increase borrowing to fund the plan, raising the question of how much it will put aside to continue supporting Vision 2030.

Al-Jadaan announced a “partial reduction on spending in some items with the least social and economic impact”, while the government re-focuses its financial firepower to implement measures to fight the consequences and spread of the virus.

Healthcare and social spending are key priorities, Al-Jadaan said.

Even if oil prices were to fall to $25pb, Saudi Arabia might be able to finance a current-account deficit for up to a decade 

 – William Jackson, Capital Economics

This is not Saudi’s first oil crisis.

Vision 2030 was Saudi Arabia’s 2016 response to the last oil crisis, which saw revenues from the country’s most valuable asset almost halve. Broad in scope, it aims to transform Saudi into an investment powerhouse by creating a more diverse and sustainable economy, all the while maintaining fiscal prudence.

However, the spending cuts, as well as Covid-19’s impact on global trade and travel, may well mean that Vision 2030’s ambitions to boost non-oil sector growth will be severely hampered.


Garbis Iradian,

“Lower oil prices mean lower private sector confidence in Saudi,” says Garbis Iradian, chief economist for MENA at the Institute of International Finance (IIF).

Tourism and recreation will suffer, as will Saudi’s non-oil sector more broadly.

Diversification is a key driver of policy in the region, but non-oil sector growth is now projected to fall to 1.4% in 2020 from 3% in 2019, according to data by the IIF.

“It makes Vision 2030 more challenging,” says Iradian. “Lower oil prices and higher deficits make it less likely that authorities can increase spending on infrastructure. It will make it very difficult to achieve the objectives.

“They need higher oil prices to be able to spend on the non-oil economy.”

Under Vision 2030, Saudi Arabia wants to lower the unemployment rate to 7%, but Iradian warns that the slowdown could raise unemployment from 12.5% in 2019 to 13% in 2020.

“The national labour force is increasing rapidly, at around 3%, driven partly by an increase in female labour participation rate,” he says. “We need the non-oil sector to growth by at least 3% to avoid further decline in the unemployment rate.”

In addition, Iradian says it would be difficult for Saudi to reach its aim of foreign direct investment of 4% of GDP.

However, others say Vision 2030 has provided the structural framework to ensure that lower oil prices are better managed by all parts of the economy.

“The shift in oil policy shows how far the authorities went to in the shift to adjust to the lower oil prices: large shifts towards fiscal austerity, efforts to diversify and macro-adjustment,” says William Jackson, chief emerging markets economist at Capital Economics.

“A lot of these measures don’t need higher spending, but are structural in nature, and it’s more about whether policymakers will lift the barriers to diversify the economy.”


Ryan Lemand, ADS
Investment Solutions

Ryan Lemand, senior executive officer of ADS Investment Solutions, agrees that Saudi’s diversification model is working.

“They don’t have a problem, as they can always get a loan and have lots of flexibility when it comes to economic and fiscal policy,” he says.

Boost to banks

Vision 2030 has also helped bolster revenues for Saudi Arabia’s banks, which are now expected to suffer from a slowdown in lending activity, a rise in impaired loans and a fall in net interest margins on the back of falling interest rates.

All banks have benefited from growth in mortgages, which is directly linked to the government’s plan to increase home ownership to 70% by 2030. Home ownership has increased from 46% in 2016 to around 60% this year, according to analysis by Citi.

“The strong push for home ownership in the last year or so has benefited the bank sector – especially bank margins,” says Rahul Bajaj, vice-president, GCC banks sector analyst at Citi Research.

Banks have also been active participants in government bonds, issued in part to fund the transformation plan.

“It has been a low growth environment in the last three to four years, corporate loan growth has been quite weak, and the investment opportunity has given banks’ ability to park excess funds and also secure yield benefits,” he says.

The government wants to keep the lights on. Saudi is not a country where they make people redundant. They will just stop spending externally 

 – Saudi banker

The Saudi Arabian Monetary Authority (SAMA) has also moved quickly to contain the spread of the virus, announcing a SAR50 billion stimulus package and closing most banks earlier this week.

Banks are operating on skeleton staff with key branches left open to try to ensure access to all banking and finance services.

A chief strategy officer at one of Saudi’s banks tells Euromoney he was impressed with the response of the government and the regulator, adding that the stimulus package has been well received by banks.

The slowdown in spending had been expected, despite the fact that some analysts have actually revised up expectations for Saudi GDP growth on the back of higher oil production.

“The government wants to keep the lights on,” the strategy officer says. “Saudi is not a country where they make people redundant. They will just stop spending externally.

“They don’t see mass retrenchment of staff across the Kingdom. [We’ll see a] slowdown in spending, no new projects and reduced budgets.”

Oil prices

Analysts are still divided over the impact that oil prices being at a 17-year low will have on Saudi’s finances.

Capital Economics states that Saudi Arabia, and the rest of the Gulf, can live with low oil prices for several years. Saudi Arabia needs an oil price of about $85 per barrel (pb) to balance the government’s budget deficit, but only $50pb to balance the current account, it says.

“Even if oil prices were to fall to $25pb, Saudi Arabia might be able to finance a current-account deficit for up to a decade,” says the company’s Jackson.

However, Iradian at the IIF says that if oil prices remain low for several years “they will be in trouble”.

He adds, in context of the coronavirus and associated fall in global demand for oil: “I doubt that Saudi Arabia will sustain such a large increase in oil production for more than few months.”

Iradian estimates that the price of Brent crude oil will settle around $44pb, largely because higher production from the Gulf will offset lower production from the US, where the breakeven price for shale is between $45pb and $52pb.

With oil at $44bp, he expects Saudi’s fiscal deficit to widen to 10% of GDP for 2020, from 4.6% in 2019. Should oil remain at $30bp, Saudi’s fiscal deficit would be expected to widen to 18.6% of GDP for 2020.

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