Global insights

Saudi Arabia: Transformation under way

Saudi Arabia stands at the crossroads of economic transformation. Unlike many developed economies, we think it benefits from low debt levels, ample energy resources, and a young, expanding workforce—a combination that supports long-term economic growth and creates opportunities in infrastructure and urban development. However, realizing these opportunities hinges on sustained investment. Historical data – see the chart – shows that Saudi Arabia is already an outlier in terms of population growth and has room to increase investment further.

The ambitious Vision 2030 plan seeks to unlock Saudi Arabia’s potential by fostering a more diversified economy, in our view. Meeting these aspirations and drawing in foreign capital will likely require substantial reforms across governance, regulatory frameworks, labor markets, and societal norms. Yet, the path is not without hurdles. Saudi Arabia’s economic trajectory remains heavily reliant on oil revenue, making it vulnerable to shifts in global energy markets. A decline in oil prices—potentially influenced by increased U.S. production or a slowdown in global demand—could challenge its reform agenda and economic resilience. Global investors will also need confidence in regional stability before committing significant capital. We are closely monitoring intensifying geopolitical risks that may weigh on investor sentiment.

Demographic dividend
G20 population vs. investment growth, 2000-2019

At the crossroads

Saudi Arabia's Vision 2030 aims to establish the country as a leading global hub for infrastructure investment. The plan seeks to attract U.S.$3.3 trillion over the next decade under the Saudi National Investment Strategy (NIS), spanning sectors from energy to healthcare to tourism. Among the highlights are ambitious "giga projects" like the new city of NEOM. This initiative represents an $800 billion increase compared to recent trends.

The investments are set to cover energy, water, transportation, logistics, digitalization, and services like waste recycling. The transformation involves three main shifts: transitioning to renewable energy, boosting private sector activity, and expanding non-oil sectors like household spending and tourism.

Saudi also aims to strengthen its position as a low-cost oil and gas producer. The BlackRock Investment Institute Transition Scenario sees rising global oil and gas demand over the next decade, with declines approaching 2050. Saudi Arabia's low-cost, low-emission production positions it to maintain or grow market share across various demand scenarios. Diversifying energy exports through natural gas/LNG could enhance its competitive edge, though an accelerated low-carbon transition could pressure oil prices.

To reduce energy carbon intensity, Saudi plans to shift power generation from 40% oil and 60% gas to an equal mix of gas and renewables by 2030. Its solar installation costs are 40% lower than the global average, boosting energy security, reducing emissions, and freeing up oil for export. Investments in carbon capture and hydrogen production could further support decarbonization.

Vision 2030 aims to increase the private sector's GDP contribution from 47% to 65% by 2030 through privatizing utilities, airports, and healthcare. Rising homeownership, now at 64%, boosts domestic spending and may reduce import reliance.

Broad reforms in governance, regulation, labor markets, and societal norms are crucial. Female labor force participation has risen to 36%, surpassing Vision 2030's 30% target, with further progress expected through improved childcare and shifting societal perceptions. Regulatory improvements include simplifying business licensing, reducing red tape, enhancing transparency, and introducing investor rights measures.

An investment boom

Saudi Arabia has ramped up capital investments, with about $780 billion invested over the past three years, fueled by a bank lending boom and significant public spending. Yet local banks now face lending constraints, making reforms to mobilize private capital essential. These reforms focus on diversifying the economy away from oil, transitioning to renewable energy, increasing private sector involvement, and boosting the non-oil tax base. Becoming a major investment destination requires broad economic and societal changes, stronger governance frameworks, and regional security assurances to attract capital.

Deepening its capital markets will be crucial, in our view. Historically, Saudi banks provided most corporate debt funding, but early Vision 2030 loans and a mortgage boom have pushed loan-to-deposit ratios above 100%, according to S&P Global. Public debt has risen to about 27% of GDP as of Q2 2024 from just under 6% in 2015. With solid sovereign credit ratings (A/A-1 by S&P and A+ by Fitch), Saudi can expand government borrowing, though oil prices will dictate how much additional room there is for future investment.

Saudi aims to leverage domestic and foreign private financing. Equity and fixed income markets are developing rapidly through IPOs, MSCI Emerging Markets index inclusion, and bond issuance, with an average annual issuance of $31 billion over the past three years, according to Bloomberg. Building a large, liquid local-currency corporate bond market is key to boosting non-bank financing across corporate bonds, infrastructure debt, and mortgage-backed securities.

The Shareek program, launched in 2021, aims to catalyze private investment, targeting $1.3 trillion in funding—40% of the Vision 2030 goal. Foreign direct investment, currently a small share of GDP, is also targeted to reach 15% of Vision 2030's total investment.

Bottom line

Saudi Arabia aims to harness its natural resources and youthful workforce to attract global investment and diversify its economy. We see substantial opportunities across public and private markets, though success will depend on progress in governance, regulatory improvements, and labor market reforms. Geopolitical risks and potential dips in oil prices could weigh on sentiment, but the kingdom’s demographic strengths and abundant resources underpin its long-term growth prospects, in our view.