The crisis meeting came three weeks after Riyadh upset the global economic order when it said it would increase oil production to record levels following the collapse of the agreement between the Opec+ group of oil producers to cap output to prop up oil prices.
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Saudi Arabia is, without question, the most important market in the Middle East. As the region’s biggest economy and home of Islam’s most important sites, the kingdom dominates the regional landscape. The events in March provided a reminder that Riyadh is also a key actor on the global stage, and that it is no longer content to operate quietly in the back room of global politics.
Despite decades of diversification initiatives, the Saudi economy remains dependent on government spending, and on oil. That is changing. The launch in April 2016 of the kingdom’s Vision 2030 reform agenda set a new path for a more diversified, private sector-led economy.
In October 2017, Riyadh unveiled a series of ‘gigaprojects’, including the $500bn Neom future city, to drive investment and business opportunities. In late 2019, a new round of reforms opened up the tourism market.
Critical to the vision are the country’s $1.4tn of major projects planned or under construction. Saudi Arabia is by far the biggest projects market in the region, nearly double the size of the next largest market, the UAE. The kingdom is home to almost half of all projects planned in the GCC.
But the collapse in global economic activity caused by the Covid-19 crisis, and the subsequent crash in oil prices, has raised questions about the prospects for Vision 2030 and the Saudi projects sector. In the short- to medium-term, Riyadh’s diversification drive will be severely disrupted. The crisis has introduced urgent economic and health challenges at home and abroad that must take priority.
The fall in oil revenues coupled with massive stimulus spending and monetary easing initiatives aimed at mitigating the economic disruption will rewrite the kingdom’s fiscal and business landscape for years to come.
Social infrastructure and oil and gas projects now have the highest priority
Riyadh will continue to invest, but its priorities have shifted. Social infrastructure and oil and gas projects now have the highest priority. Investment will continue, but the pace of spending will slow. Rising budget deficits will force Riyadh to increase borrowing and tap new sources of finance. Budgets will be rewritten to minimise deficit and debt growth.
In terms of project spending, the downturn caused by the crash in oil prices in Mach 2020 and the shift in political priorities caused by the Covid-19 crisis will change Saudi Arabia’s projects market substantially in 2020 and 2021.
Exactly how things will change depends on the duration and depth of the economic lockdown measures introduced to stop the spread of the virus.
Over the long term, Saudi Arabia’s strategic goals are unchanged. The kingdom’s growing population of more than 32 million people is driving demand for all kinds of goods and services, ranging from consumer products, to electricity, healthcare services and infrastructure. It is also driving the need for new jobs for the kingdom’s young people. Riyadh must get Vision 2030 back on track as quickly as possible.
Tying these themes together, MEED’s latest report on the kingdom – entitled Saudi Arabia 2020: Long-term opportunities in the Middle East’s biggest market – has been updated to consider the economic impact of coronavirus. It provides a comprehensive guide for companies seeking to work in Saudi Arabia. Covering oil and gas, petrochemicals, power, construction, water, manufacturing and transport, the report is a powerful resource for anyone seeking to find opportunities, understand risks and set strategy in the kingdom.
This article is an excerpt from MEED’s Saudi Arabia 2020 report with coronavirus update. Find out more about the report here
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