The agreements sealed between Saudi Arabia and the US during American President Donald Trump’s visit to Riyadh on May 20 and May 21 are significant to both, the Saudi and the American economies. These deals are worth more than USD 400 billion which is equal to 56 percent of the size of the Saudi economy and 2.1 percent of the size of the American economy.
What makes these agreements more important is the fact that they’re part of the “Joint Strategic Vision” between Riyadh and Washington. As a result of these agreements, bilateral relations are expected to witness a new and deeper dynamic phase that is distinguished for its bigger momentum and increased dependency on economic cooperation.
Interest in the Energy Sector
The agreements signed between Saudi Arabia and the US during Trump’s recent visit included 16 agreements in the energy sector. Aramco signed deals on behalf of Saudi Arabia with 11 American companies. The investments which will result from these agreements are worth around USD 50 billion and they aim to support growth and added value opportunities in joint investments in the energy sector.
Aramco signed a memorandum of understanding with General Electric. The MoU stipulates that the American company provides digital technology to Aramco’s operations to save USD 4 billion from the latter’s annual production. This is one of the major developments pursued by Aramco in terms of its operations.
Another memorandum of understanding was signed with the company Rowan to establish an offshore drilling company in Saudi Arabia. An additional MoU was signed with Nabors Industries to discuss developing and improving offshore drilling operations. Furthermore, an agreement was signed with Dow Chemical Company to build a polymer manufacturing facility for coatings and water-treatment applications in Saudi Arabia and another signed with National Oilwell Varco Corporation to establish a joint project to provide high-specification drilling rigs and advanced drilling equipment. All these agreements are a strong addition to the Saudi energy sector.
One can say that these agreements mark Saudi Arabia’s initial steps to enter the most important developmental phase in its history. This is of great significance particularly considering the timing of these deals. These agreements come at a time when the global energy sector, including Saudi Arabia, is in dire need to pump more investments especially after global oil investments decreased during the past years due to the decrease of oil prices, which in turn warn of the retreat of the sector’s production capacities during the upcoming years. Therefore, the massive investments being pumped in the Saudi energy sector, as a result of these agreements, may help avoid these risks.
Economies of Defense
The USD 110 billion US-Saudi arms deal was one of the most important agreements concluded between the two countries during Trump’s visit. Considering its military nature, the deal has several aspects linked to strengthening the security of borders and coasts, combating terrorism, modernizing air force troops and air and missile defense and developing cyber security and communications security.
The military deal carries other economic and developmental significances that help localize some military industries in the kingdom. This assists in achieving the aim of localizing 50 percent of governmental military expenditure in the kingdom as part of Saudi Vision 2030. Saudi Arabia also signed an agreement with Lockheed Martin to support the final assembly of 150 Black Hawk S-70 helicopters in Saudi Arabia. An agreement was signed with General Dynamics Corporation to localize design, engineering, manufacturing and support of armored combat vehicles in the kingdom. An agreement was also signed with Raytheon Company to implement programs to develop Saudi defense and aerospace and strengthen its security capabilities.
Reasons for Success
There are several factors that indicate the success of the agreements signed between the US and the Saudi Arabia during Trump’s visit to the latter, and they include:
1. The presence of a strong bilateral relations: The strength of economic relations between Saudi Arabia and the US are currently the solid base that ensures the success of the recently-sealed agreements. The features of these relations’ success are specified in commercial trade, which was worth USD 38 billion in 2016. The US ranks first among the largest countries that exports to Saudi Arabia and it ranks second among the largest countries which import from Saudi Arabia.
Saudi Arabia is considered one of the most important countries, which export oil and its derivatives to the US. It exports around 1.2 million barrels a day and this amounts to 13 percent of the US daily needs. What’s remarkable is that oil exports from the kingdom to Washington witnessed a continuous increase over the past three years.
In addition, Saudi Arabia owns what is worth USD 116 billion of US Treasury bonds. Thus the kingdom is America’s largest creditor in the Arab world and the largest creditor among the Gulf Cooperation Council countries, which altogether own USD 231 billion of these bonds.
The value of Saudi investments in the US is around USD 750 billion while, according to some estimates, the value of American investments in Saudi Arabia ranges between USD 100 and USD 380 billion.
Therefore, these economic relations are considered strong and effective mechanisms that can help implement the agreements signed between Washington and Riyadh, particularly that these deals mean both parties are aware of each other’s current economic situation and its future prospects and investment opportunities. They also show that both countries are aware of each other’s practical experience and knowledge in each other’s local markets. This means there is familiarity with the procedures relevant to establishing and operating companies and marketing their products as well as knowledge in the consumers’ tastes.
2. Trump’s economic orientations: There is an increased chance of these deals’ success due to their harmony with Trump’s economic orientations and policies. These agreements aim to achieve a 3.5 to 4 percent growth in the American economy, compared with 1.8 percent growth in 2016. The deals will pump billions of dollars as investments in the American infrastructure sector and encourage companies to pump more investments as the imposed taxes decrease.
A number of these bilateral agreements stipulated pumping huge investments in the American economy. An example is the agreement between Blackstone for direct investment and the Saudi Public Investment Fund to invest USD 40 billion in US infrastructure projects. Saudi Arabia pledged USD 20 billion to the American company. It is expected that this funding will eventually help attract investments worth more than USD 100 billion in the American infrastructure sector.
There’s also an agreement with the wholly-owned affiliate of Saudi Aramco Motiva Enterprises to invest USD 12 billion in the US with a possibility to increase this investment to USD 18 billion by 2030 to improve the work of the Port Arthur Refinery in Texas.
In addition, a memorandum of understanding was signed between ExxonMobil and SABIC, a chemical manufacturing company, to carry out a detailed study of the petrochemical plant project in Texas and establish a unit to produce ethylene at the annual production capacity of 1.8 million tons.
These deals will help the American economy increase its economic growth to the aspired rate and they will also help it create around 1 million direct job opportunities, other than indirect job opportunities. This is very essential in terms of Trump’s plan to prevent exporting jobs.
3. Coherent Saudi economy: Saudi Arabia is still one of the countries that has massive financial capabilities encouraging it to invest in other countries. Despite the unfavorable circumstances which its global economy witnessed during the past years and despite the drop in the global prices of oil, Saudi Arabia still has financial reserves that are more than USD 576 billion. This is in addition to a Public Investment Fund that owns assets, which are estimated at USD 183 billion. These financial assets protect the Saudi economy from any current or future financial disturbances. Saudi Arabia’s trade surplus is considered an important support to foreign cash and to the Saudi economy’s added value.
In general, the Saudi economy did not witness shrinkage during the past years despite the slow growth rates. According to the International Monetary Fund, it’s not expected that it will witness shrinkage in the next five years. Saudi Vision 2030 aims to privatize several of the state-owned assets, which were not available for private investments previously. This will help pump massive amounts of liquid assets in the Saudi economy. For example, the 5 percent of Aramco that will be listed for initial public offering as part of the Saudi Vision 2030 is estimated at USD 62 billion. This is a massive amount of liquid assets that will boost the entire country’s economic growth and not just on the oil sector or Aramco.
Moreover, the major investment opportunities in other sectors, as part of Vision 2030, such as: infrastructure, trade, logistical services, telecommunications, information technology, education, healthcare, tourism, culture, entertainment and others. This paves the way towards the flow of massive direct foreign investments in the Saudi economy.
Finally, there are some challenges which may confront implementing these Saudi-American agreements. The most prominent of which are: global economic difficulties and some obstacles on the American local front particularly during the phases of ratifying those deals in the Congress. However, in general, Washington’s and Riyadh’s great interest and keenness to activate the deals as well as the expected economic revenues represent a motivational factor to move forward in implementing them and basing work on them to reach a new phase of broader economic and strategic cooperation between the two countries.
