Saudi Arabia's Economy Flourishes Amid Regional Tensions

Resilient Economy Despite Regional Conflicts

The economy of Saudi Arabia has shown remarkable resilience amid Israel's war in Gaza and Houthi attacks in the Red Sea. This indicates that the kingdom's strategy to distance itself from regional tensions is yielding positive results. The International Monetary Fund (IMF) noted in its recent report on the Saudi economy that Middle Eastern geopolitical events have not significantly affected the kingdom's economy.

Strong Oil Exports and Tourism

The IMF report highlighted that Saudi oil exports are not reliant on the Red Sea, which has been a target for commercial ships by Iran-backed Houthis, claiming solidarity with Palestinians in Gaza. Saudi Arabia's tourism sector also continues to thrive. Overall, the IMF portrayed a positive image of the Saudi economy, marked by a robust banking system, increasing home ownership, and significant non-oil economic growth.

Contrasting Gulf and Poorer State Economies

The report highlighted the economic disparity between Gulf countries and poorer states like Egypt, Lebanon, and Jordan. These latter nations have seen their already fragile economies further weakened by Israel's war.

Saudi Arabia's Diplomatic Maneuvers

Saudi Arabia has managed to avoid getting embroiled in the Gaza war, a fact that the IMF report will likely affirm. The kingdom has been vocal in urging Israel to work towards a Palestinian state and has paused discussions to normalize ties with Israel. However, it has refrained from taking further steps in support of the Palestinians.

Avoiding Military Involvement

Saudi Arabia has also steered clear of joining the US's military campaign against the Iran-backed Houthis in Yemen. Despite the group's attacks on commercial shipping, Saudi Arabia has eased banking restrictions on them and resumed flights to Yemen.

Focus on Economic Growth

Despite the heightened tensions over Gaza, Saudi Arabia has prioritized economic growth as part of Crown Prince Mohammed bin Salman’s Vision 2030 program. This initiative aims to lessen the Saudi economy's dependence on oil.

Positive Results from Vision 2030

The Vision 2030 program is yielding positive results. By the end of 2023, Saudi Arabia's unemployment rate hit a historic low, primarily due to growth in private sector jobs, as per the IMF.

Non-Oil GDP and Mega-Projects

Saudi Arabia's non-oil GDP reached 3.8 percent in 2023, a decrease from 2022's 5.3 percent but still considered robust due to strong investment and private consumption. However, the IMF also noted that Saudi Arabia has had to adjust some of its more ambitious mega-projects.

Neom Project Scaled Back

The kingdom has had to reduce the scale of Neom, a $1.5 trillion megacity project. Instead of housing 1.5 million people by 2030, Saudi officials now expect fewer than 300,000 residents. Also, only 2.4km of the city is expected to be completed by 2030.

Dependence on Oil Revenue

The crown prince's program heavily relies on oil revenue. The IMF estimates that Saudi Arabia needs oil prices at $96 per barrel to balance its budget, about $20 less than the current prices. The kingdom has tried to balance its efforts to support oil prices by cutting output and pumping crude before global energy demand peaks.

Concerns Over Declining Oil Revenue

The IMF’s prediction that Saudi Arabia's oil revenue is likely to decline faster than previously estimated will likely cause concern among Saudi officials. Revenue is expected to rise to $209bn in 2026, roughly 26 percent of GDP, before declining faster in 2029 to 4.1 percent less than expected earlier.

Bottom Line

Saudi Arabia's economy has shown resilience amid regional conflicts, demonstrating the effectiveness of its strategic distancing from these tensions. However, the kingdom's heavy reliance on oil revenue and the scaling back of ambitious projects like Neom raise questions about the sustainability of this economic growth. What are your thoughts on this matter? Feel free to share this article with your friends. Don't forget to sign up for the Daily Briefing, which is available every day at 6pm.