Saudi Vision 2030: the impact of COVID-19
By Claudia Baldelli
Image source: Shutterstock
Over the past year, COVID-19 has wreaked havoc on the Global Economy, an event which has inevitably posed significant issues to Saudi Arabia as it continues to work towards its Vision 2030. The largest impact has been on Oil and the Travel Industry, in particular. As a result the two key points of the Saudi 2030 vision, transforming Saudi Arabia into a “global hub” of transportation and diversifying the economy have been hit hard. As oil accounts for 45% of Saudi GDP and tourism is set to bring in 5% of GDP by next year, these are critical components in financing the 2030 vision. With its key revenue-producing sectors in jeopardy, the question remains whether Saudi Arabia’s hopes to build and diversify new industries are still possible. COVID-19 has put a significant strain on these efforts, at a time when they are most needed.
Diversifying the economy
The cornerstone of the 2030 Saudi Vision is diversifying the economy and assuring the kingdom becomes less reliant on oil. To do this, major investment is required into new areas such as travel, infrastructure, and tourism. However, state revenue is still heavily dependent on crude oil sales and the fall in prices has “affected Saudi’s financial budgeting” and thus limited investment into these new ventures. Oil output has been slashed due to the COVID19 pandemic with cuts by OPEC at 7.7 million bpd and JP Morgan saying any alteration to this may need to be delayed “until the end of March”. Furthermore, Russia and Saudi Arabia have added they are reevaluating “easing production cuts in January”. The crash in oil revenue and the pandemic have forced Saudi Arabia to take austerity measures, with VAT “raised from 5 percent to 15 percent from July 1”. Additionally, government borrowing has increased, with the kingdom borrowing 26.6 billion in light of the pandemic and also announcing from 2022 a raise in the debt ceiling from 30% to 50% from 2022. This is undermining what OBG CEO Andrew Jeffreys calls the “cushion against external shocks” and while Sandeep Srivastava (partner at PricewaterhouseCoopers (PwC)) has said that “the Saudi economy in 2020 is expected to contract less than other major G20 economies” there is no doubt that “weak oil prices and tripling of VAT will hinder diversification of Saudi economy”. This has ultimately forced the kingdom to announce an $8 billion cut in its 2030 vision and the kingdom is being forced to focus on economic recovery.
However, a key element of the diversification of the economy is the Public Investment Fund (PIF), which is the “engine behind economic diversity”and has taken the opportunity to focus investments in both the domestic sphere and in global markets. During the pandemic, it took the opportunity to buy up shares in Facebook Inc, Citigroup Inc and Walt Disney Coduring the “height of pandemic-driven sell-off” in March, which it then exited from as markets rebounded. Furthermore, in May the government invested an additional $40 billion into the PIF which has also taken the opportunity to invest in Big Oil as a safe investment as shares collapsed. Fitch Ratings has said as a result that “the PIF’s domestic investment will partly help offset the effect of government austerity” as it is set to invest the equivalent to more than 10% of government expenditure in 2021 into the domestic economy. As a result PIF remains the lifeline of the kingdom for economic recovery and to get Vision 2030 “back on track”.
“Global Hub” vision
Travel and the creation of the “global hub connecting three continents, Asia, Europe and Africa” has been heavily impacted by COVID-19. The global tourism industry is set to lose $1 trillion and reduce global GDP up to 2.8% . Specifically, Middle Eastern air traffic in June was down 96.1% in comparison to June 2019 and passenger confidence has been severely hit. The Vision 2030, with its aim of 100 million plus visitors by 2030, now appears increasingly impossible. Coupled with the Hajj pilgrims limited to 1000 domestic visitors and the Umrah pilgrimages cancelled since March, Saudi Arabia Minister of tourism said “the tourism sector is expecting to see a 35-45% decline by the year end”. This is a huge loss for the Vision 2030, not only in terms of meeting their goal of 100 million visitors a year, but also in terms of economic loss. With the hope of investment in Saudi Arabia’s tourism at $810 billion by 2030, not achieving this will deal a large blow to Vision 2030, making other elements of the vision impossible. However some hope has emerged from the SGP (Saudi Global ports company) unveiling plans to turn KAPD (King Abdulaziz Port Dammam) into a mage-container hub. This investment of $1.8 billion has come at an important time for Saudi Arabia, indicating confidence in the transformation of Saudi Arabia into the global hub that the optimistic Vision 2030 lays out. It is clear that the recovery of the travel industry will play a large role in determining the extent to which the 2030 vision will succeed.
As outlined above, it is clear that COVID-19 has had an immense impact on the Saudi VIsion 2030. With oil demand set to peak in 2028, instead of 2030 as previously expected by Rystad energy, this will increase the urgency for Saudi Arabia to diversify its economy and accelerate the need for Vision 2030 despite their denial of this as “unrealistic”. The impact of COVID-19 has set the Vision 2030 plans back, however there are still indications that vision 2030 remains possible, particularly with the PIF.
The views expressed in this article are the author’s own and may not reflect the opinions of the St Andrews Economist.