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Growth in the

Kingdom of Saudi Arabia

June 2014


The Kingdom of Saudi Arabia (KSA or the Kingdom), traditionally a resource-driven economy, is evolving into an investment-driven broad-based economy. This transition would be supported by sound economic fundamentals. The International Monetary Fund’s (IMF) forecast of expansion in KSA’s GDP in 2014 stands at 4.1%, which exceeds that for the MENA region (3.2%), the European Union (1.6%), and the Advanced Economies (2.2%). Although KSA remains an oil-driven economy, the Kingdom’s diversification efforts are translating into sustainable growth. The latest move to open Tadawul, the country’s stock market, to full foreign participation is likely to support ongoing transformation in the domestic economy.


Robust Saudi economy, with strong economic and demographic fundamentals

KSA has been one of the fastest growing economies among G20 nations. The Kingdom’s economy expanded at a compounded rate of 5.5% during 2008–13. It remains the world’s largest oil producer, contributing nearly 11% to global output, despite growing domestic demand. As the country has an oil-based economy, hydrocarbons contribute 78% to total exports and 75% to government income. However, in recent years, the contribution of non-oil activities to GDP is increasing (51.8% in 2013 vis-à-vis 37.1% in 1980).

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KSA benefits from twin surpluses due to energy wealth

The Kingdom’s fiscal surplus, which increased from 5% of GDP during 2003 to 7.4% in 2013, and current account surplus have supported policymakers’ drive to undertake considerable infrastructure development. The Kingdom has placed strong impetus on developing economic sectors, such as petrochemicals, advanced materials, and information technology, as well as social sectors, including education and housing. Investments in the sectors have been aimed at initiating and sustaining momentum in the non-oil economy (53% of the total economy compared with 44% in 2008) and redistributing the nation’s wealth among its citizens. Debt levels in the Kingdom have been restrained, with government debt at 3.7% of GDP (2013), largely supported by oil revenues. In 2013, the budgetary surplus was 8.3% of GDP and the current account balance stood at 17.4% of GDP. 

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Favorable demographics to boost KSA’s economic growth agenda
Saudi has a population of around 29.5 million people (2013), with a median age of 26 and almost 65% of the population below 34 years. A large part of the population is scheduled to enter the work force in the coming years, as about 29% of KSA’s population is below the age of 15. The government has placed significant emphasis on developing this talent, allocating 25% of the budget for 2013 to the education sector, through labor reforms to boost employment in the private sector and by establishing research centers and educational institutes. The Kingdom’s favorable demographic dividend provides an advantage over other developing and advanced countries and establishes a platform for continual economic growth.

Focus on enhancing growth and employment in non-oil sector to transform into knowledge-based economy
Due to the need to protect the economy against the impact of volatile oil prices and export volumes, the Kingdom has developed diversification plans, including vertical integration into downstream petrochemical industries and horizontal integration into mining and solar energy resources. The government is also in the process to launch several reforms to boost foreign investment in the Kingdom. Owing to the accession of the Kingdom to the World Trade Organization in 2005, the investment climate has improved considerably, with KSA being the largest recipient of foreign direct inflows in 2013, according to the World Investment Report by UNCTAD.

The government is also investing substantially in national infrastructure projects aimed at developing the social and educational sectors. Saudi Arabia’s national budget for 2014 focuses on investment programs aimed at education and health, allocating 38% of total spending to these programs. The transport and infrastructure sector accounts for 7.9% of spending and includes new projects, such as finishing work on existing road projects, completing infrastructure projects at Jubail and Yanbu, and Ras Al-Khair. 

The Kingdom is at the forefront in developing economic cities to stimulate private sector activity and boost industrial manufacturing and production. The private sector is responsible for developing six smart cities, each centered on a globally competitive industry, such as logistics, heavy industry, and retail, thereby creating core and support service jobs as well as private investment opportunities in infrastructure, real estate, and industry. 

Jubail Industrial City, which is dominated by hydrocarbons and heavy industry, hosts petrochemicals and fertilizer plants, oil refineries and steel works, whereas Yanbu Industrial City facilitates large-scale oil refining and petrochemicals production. Ras al-Khair Minerals City, currently under construction, is expected to comprise a fertilizer complex, aluminum smelter, and conversion facilities as well as a sea port. The largest of the six new economic cities being built is King Abdullah Economic City, which will be linked by high-speed rail to the neighboring Jeddah, Medina, and Mecca. The city focuses on logistics and has been divided into an industrial zone, a sea port, residential areas, a sea resort, an educational zone, and a central business district. The economic cities are expected to create 1.3 million jobs, registering a direct contribution of USD150 billion to GDP by 2020.

Aggressive labor market reforms to bolster employment among Saudis
Following the Arab Spring in 2011 and as unemployment among nationals rose from 10.5% in 2009 to 12.1% in 2012, the Kingdom introduced wide ranging labor reforms to tackle unemployment. Since the Kingdom’s private sector is dominated by expatriates, the government has introduced policies, such as Saudization, which necessitates employment of Saudi nationals; job seeker allowance (Hafiz), which provides fixed financial assistance to job seekers; and unemployment insurance (Saned).


In the budget for 2014, almost USD56 billion (up 3% Y-o-Y) was allotted toward the development of educational facilities within the country to prepare new entrants to compete and support the developing private sector. Recent reforms have led the number of native employees in the private sector to increase by nearly 30% Y-o-Y in 2013 to ~1.5 million from 1.1 million in 2012. Given this mutually beneficial situation for employers and employees, these reforms are expected to further reduce unemployment among Saudis.

Easing capital accessibility to promote private sector contribution
The private sector’s contribution to the Kingdom’s economy increased at a compounded rate of almost 120% between 2008 and 2013. The sector currently contributes 37.2% to the Kingdom’s GDP. To further drive this expansion, the government has established specialized credit institutions, such as the Saudi Industrial Development Fund and the Saudi Arabian Agricultural Bank, which provide financial support to locals to develop projects in mining, industry, and construction.


To promote locally manufactured goods, the government has exempted Saudi industries from paying custom duties on imports required for domestic production. Bank lending to the private sector also expanded 12% Y-o-Y in 2013, with lending to manufacturing and construction increasing the most. The authorities have also taken steps toward improving the business climate by streamlining business registration procedures and extending credit through institutions and banks to promote development in the Small and Medium Enterprise sector. 

Liberalization of Tadawul expected to further aid economic diversification and growth
The Saudi stock market (Tadawul) is the largest equity market in the MENA region, with market capitalization of around USD560 billion, as of July 2014. The Kingdom’s decision to liberalize its capital market brings it at par with international standards; this move is expected to enhance KSA’s visibility among global investors, and thus, attract substantial foreign investments and improve liquidity.


The Tadawul is the most active IPO market (37 listings during 2009–13) in the MENA region, offering investors exposure to diverse sectors, such as petrochemicals, financials, food, and retail, among others. In addition, Tadawul has a negative to low correlation with peers in the emerging market, high credit rating, and relatively higher earnings, which are expected to support economic diversification and development in the Kingdom.

About the author(s)

Harold Alby is a managing director and chief operating officer at Inova Capital. Justin Inniss is a managing director at Inova Capital.For more details on our insights please get in touch with us at Inova Capital AG on +41 415616905. Inquire about our ideas and nowcasting capabilities.

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