Analysis - Economic Trends

NEOM Project

How will Vision 2030 Contribute to Modernizing the Saudi Economy?
Sunday، December 03، 2017
NEOM Project

The announcement of NEOM project by the Saudi Crown Prince Mohammed bin Salman in October 2017 revealed the growing trends of modernizing and reshaping the Saudi Economy in post-oil era. The project is an indication of the Kingdom’s persistent approach to adopt large-scale development projects that capitalize on the advantages of the Saudi location and opportunities for cooperation with neighboring countries to transform towards a diversified, modern and more open economy.

Underpinnings of the Saudi Economy

The Saudi Vision 2030 features broad plans, including economic, social and development programs, aimed at preparing the Saudi for post-oil economy. It consists of three main axes: a thriving economy, a vibrant society, and an ambitious nation.

The vision focuses on the investment of Saudi Arabia’s main resources, as it possesses the largest oil reserves in the region and the second largest reserves in the world, estimated at 267 billion barrels of oil, about 8.5 trillion cubic meters of natural gas, plus considerable reserves of gold, Phosphate, uranium, as well as renewable energy sources and others.

As for the human component, Saudi Arabia has 33.2 million people, mostly youth, with a relatively high growth rate. More than 78 percent of the population live in urban areas, which is a positive factor with regard to market size and domestic demand.

Moreover, Saudi Arabia enjoys a large area and a distinct geographical location, as it comes first in terms of space in the Middle East and North Africa region and 13th globally, with up to 2.250.000 square kilometers. It is situated in the far West Asia, near Africa and Europe, with a long coastline on the Arabian Gulf in the east and on the Red Sea and the Gulf of Aqaba in the west, with a total coastline of 2640 km. The huge area and geographical location provide it with comparative advantages that enable it to be a business and trade hub at the regional and global levels.

Post-oil Era

In order to prepare the Saudi economy for the post-oil era, the Kingdom’s vision focused on the optimal investment of these resources and set relevant goals, on top of them spurring real growth to increase the size of the Kingdom’s economy to advance to the 15th rank, instead of the 19th in global rankings, raising the proportion of non-oil exports from 16 percent to 50 percent of the GDP.

In addition, the vision aims to increase the proportion of local content in the oil and gas sectors from 40 percent to 75 percent, and raise the contribution of small and medium enterprises from 20 percent to 35 percent of the GDP. Furthermore, the vision aims to enhance the contribution of tourism in the GDP by doubling the numbers of Umrah and Haj pilgrims.

The vision also seeks to take advantage of the geographical location of the Kingdom by turning it into a hub for logistics services, to advance on the service performance Index logistics from the 49th to the 25th at the global level. It also aims to progress to the 25th in the Global Competitiveness Index, to become one of the first 10 countries in this ranking.

Furthermore, the Kingdom seeks to achieve a set of social-related development goals with, such as: raising the rate of Saudis’ ownership of houses, boosting women’s participation in the labour market, slashing the unemployment rate by half, promoting the practice of sports and family spending on culture and leisure, and improving life expectancy at birth, among other goals.

Surely, the implementation of this vision needs a huge funding, about USD 4 trillion according to McKinsey Institute estimates. To secure this funding, the Kingdom seeks additional sources along with the large cash reserves it possesses, namely USD 516 billion of reserves in the Saudi Arabian Monetary Authority (SAMA) and about USD 230 billion of assets managed by the Public Investment Fund (PIF).

The vision offers the private sector the opportunity to participate in the financing and management of facilities and services. It also aims to increase the value of the PIF assets to about USD 1.9 trillion. In this respect, the vision adopts several mechanisms, including to float around 5 percent of Aramco in an initial public offering (IPO). Besides, the kingdom’s vision is to increase non-oil government revenues from USD 43.5 billion to USD 267 billion a year, and attract more foreign direct investment to help raise the proportion of such investments in the GDP from 3.8 percent to the 5.7 percent, the global rate.

Pillars of NEOM Project

Saudi Arabia espouses a string of mega-development projects, several of which have been announced over the past period, the largest of which so far is NEOM. It is located on an area of about 26.5 thousand square kilometers, situated in an area that enables the Kingdom to cooperate with both Egypt and Jordan. The project overlooks 460 km of coastline of on the Gulf of Aqaba and the Red Sea, where 10 percent of world trade goes through. In addition, an average of 70 percent of the world’s population can reach the project in the span of 8 hours only.

This giant project includes several sub-projects distributed to various economic sectors, particularly renewable energy, technology, tourism, industry, food security, transport and logistics services.

With these advantages, NEOM epitomizes the Saudi Vision 2030 and the grand ambitions it seeks to realize, at a time full of geopolitical challenges at the regional level. This is in addition to the various economic challenges facing the world now, on top of them the unusual decline in oil prices, which reflects that a fundamental change is taking place in the world oil markets. This shift in the oil prices will radically alter the face of markets and heralds a new future for oil economies, including the Saudi economy.

The Saudi economy has relied on oil resources as a major source of income in the past years, with oil revenues accounting for more than four fifths of its public revenues.

In conclusion, the major development projects being pursued by Saudi Arabia, as part of its vision 2030, need substantial funding and may face some challenges. However, the expected challenges appear to be manageable considering the great economic potentials of the Kingdom. That is due to its strong drive to overhaul its economy beyond post-oil stage, desire to thrust the Saudi economy to a new position to be more balanced, enabling it to evade the negative repercussions of any future problems or crises, including those associated with oil and energy markets in general.

Keywords: Saudi ArabiaNEOMSaudi EconomyMohamed bin Salman