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SAUDI ARABIA: THE PAST, THE PRESENT AND THE WAY AHEAD S E L E C T E - - PowerPoint PPT Presentation
SAUDI ARABIA: THE PAST, THE PRESENT AND THE WAY AHEAD S E L E C T E - - PowerPoint PPT Presentation
ECONOMIC DIVERSIFICATION IN SAUDI ARABIA: THE PAST, THE PRESENT AND THE WAY AHEAD S E L E C T E D E C O N O M I C I S S U E S I N S A U D I A R A B I A I M F D e l e g a t e s M A Y 1 4 , 2 0 1 4 S A M A Q u a r t e r l y W o r k s h
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Motivation … so why diversify?
Reliance on oil revenues makes the economy vulnerable to swings in oil prices Competitive tradeables sector will help boost productivity and growth More jobs need to be created for the young and growing population Put in place an economic model that will support the country as oil reserves
eventually dwindle.
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Diversification in Saudi Arabia’s Economy over the Past Decade
- A. Economic production, sources of growth
Historically, and contrary to expectations,
non-oil GDP in Saudi Arabia has been dominant
- a huge pickup—in level—over the past
decade
Real growth in the non-hydrocarbons sector
has outpaced growth of oil, yet has decelerated as of late.
- 200
400 600 800 1,000 1,200 1,400 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
GDP non-oil private (non-oil)
- il
Real GDP: 2004-2013 (constant prices, 1999=100, Billion Riyals)
Deceleration in Non-hydrocarbons growth across the board, several sectors. Strong correlation between hydrocarbon and non-hydrocarbon activity in
nominal terms, relatively weaker in real terms
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Diversification in Saudi Arabia’s Economy over the Past Decade
- B. Labor market structure: employment and wages
Since 2008 through 2013, Saudi Arabia added over
2.7 million new jobs to the economy, of which 1 million for Saudi citizens … but most in the public sector.
Cross-sectoral distribution of jobs lacked diversity. Differentials in relative wage structures and number
- f hours worked between the public and private job
markets are a cause of potential labor market imbalance.
5% 2% 3% 2% 3% 6% 5% 3% 71%
Employment of Saudi Nationals by Sector (2013) Agriculture Mining and refining Manufacturing Utilities Construction Trade and tourism Transport and Communication Finance, business and real estate Community, social services
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- 1,000
2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 2008 2011 2012 Average Monthly Wage in the Public and Private Sector (Riyals)
1/
Public sector Private sector Private sector, Saudi nationals 1/ Average wage in the public sector is computed as total wages and compensation from the government budget divided by number of civil service employees (includes public administration and defense, education and health employees). Average wage in the private sector is sourced from GOSI.
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Diversification in Saudi Arabia’s Economy over the Past Decade
- C. Trade: Exports
Diversification into non-hydrocarbon exports
has progressed somewhat; the share of non- hydrocarbon trade to non-oil output has picked up and non-oil commodity exports have been impressively strong, albeit starting from a narrow base.
Yet, exports are driven primarily by
hydrocarbons (hydrocarbon-related products).
The level and growth in services exports still
weak, and restrictions on services trade exist.
Also, the degree of sophistication in non-oil
exports is low (food, base metals, etc).
1.3% 84.3% 12.7% 0.6% 1.1%
Saudi Arabia Export Structure (sophistication) 1/ 2012
Agriculture, foodstuff, animal products Minerals and fuel Chemical products, plastics Base metals Other 1/
1/ Including re-exports.
50 100 150 200 250 300 350 400 450
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Exports of Goods and Services (USD billion)
Total Exports, Services Total exports, G&S Non-oil exports, G&S
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Diversification in Saudi Arabia’s Economy over the Past Decade
- C. Trade: Exports (cont’d)
Export concentration has increased since 2000,
in opposite direction to improvements in diversity witnessed in real sector activity.
Export quality remains low, has fallen in recent
years, and is highly correlated to oil price developments.
Trade diversification (regional penetration)
remains weak:
- over half of exported products geared
towards Asia.
- exports to GCC comprise only 7 percent of
total exports.
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0.5 0.5 0.5 0.6 0.6 0.6 0.6 0.6 0.7 0.7 4.4 4.6 4.8 5.0 5.2 5.4 5.6
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Export Product and Real Sector Diversification (Theil index, 1990-2009)
Real sector diversification (RHS) Export product diversification
10 20 30 40 50 60 70 80 90 100 0.5 0.5 0.5 0.6 0.6 0.6 0.6 0.6 0.7
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Export Quality (1990-2010)
Oil price (avg., US$ per barrel, RHS)
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Diversification in Saudi Arabia’s Economy over the Past Decade
- D. Financial Assets
Financial diversification improved: SAMA has
managed to accumulate sizeable reserves over the years—as large as the size of the economy— investing most reserve assets abroad.
Local banks, however, diversify less of their
assets abroad.
… reflected positively on the Net International
Investment Position (NIIP), which has improved over time, and remains strong, yet still a function of hydrocarbon export performance.
20 40 60 80 100 120 0.0 20.0 40.0 60.0 80.0 100.0 120.0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
SAMA: Breakdown of Total Assets (Percent of GDP) Investment in foreign securities Deposits with banks abroad T
- tal assets
- Avg. Oil Price (US$ per Brl, Right scale)
Source: Saudi Arabian Monetary Agency (SAMA).
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- 20
20 40 60 80 100 120 140 2007 2008 2009 2010 2011 2012
Net International Investment Position: Breakdown (Percent of GDP) Other investment, net Direct Investment, net Reserve assets Portfolio investment, net NIIP
Source: Saudi Arabian Monetary Agency (SAMA).
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Experiences with Economic Diversification in Commodity (Oil) Exporting Countries
Only a handful success stories: Experience from 4 commodity exporting
countries: Mexico & Chile (Latin America); and Malaysia & Indonesia (Asia).
In general, diversification attempts have been difficult, and prolonged. Historic experiences of these countries sheds some light on a number of key
- bstacles on the path towards diversification:
- problem of the state and hydrocarbons sector being (remaining) driving
forces in the economy,
- natural resource-based industries and import substitution were not always
sustainable as growth drivers,
- heavy industrialization policy has not always been successful.
Successful diversification seems to have come as oil production horizon shortens.
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Source: Cherif and Hasanov (2014).
Malaysia Indonesia Mexico Chile State intervention to spur growth in targeted sectors
P P
Technological transfers to improve competition
P P
Import substitution
P P
Export promotion:
P P P P
- Attracting FDI / foreign capital
P P
- Human and capital development / training and skills
upgrading / encouraging innovation
P P P
- Establish free zones
P P
- Provide tax incentives
P P
- Reduce trade barriers
P
- Export subsidies
P
- Exchange rate devaluation
P
- Attractive wages (conducive business environment)
P
- Join FTAs
P
SME development / focus
P P
Tapping non-traditional sectors (utilizing oil windfall to diversify other sectors)
P P P
PPPs to develop new firms
P
Experiences with Economic Diversification in Commodity (Oil) Exporting Countries
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Dutch disease: a common problem in oil exporting countries. Appreciating real
exchange rates crowd-out the tradable sector.
This traditional Dutch-disease doesn’t seem a problem in Saudi Arabia. Flexible
labor markets have kept wage pressures in the non-tradable sector under control. Real exchange rate not overvalued.
However, oil revenues may crowd-out tradable production in other ways. Specifically, the transfer of oil revenues to the population through public
employment and spending on goods and services may skew incentives away from private sector employment (for individuals) and exports (for firms).
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Experiences with Economic Diversification in Commodity (Oil) Exporting Countries
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Business Environment: How Does Saudi Arabia Compare to other Countries?
Business Environment
Pros Cons
- 18th most competitive economy globally out
- f 144 countries 1/
- Weak on contract enforcement (ranks 127
globally)
- Short time span to start a business (25
days, down from 70)
- Weak on resolving insolvencies (ranks 106
globally).
- Low startup costs (55 of GNI per capita,
down from 60 %)
- Relatively high services trade restrictions
index (GCC economies highest worldwide)
- Strength of investor protection
- Trade and transport-related infrastructure
(“logistics performance index”) fares better
1/ According to the Arab Global Competitiveness Index (2013).
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Incentives for Export Promotion
Pros Cons
- Export costs have increased in many
countries , at slower pace in the Kingdom
- Trade integration dimension seems to lag
behind (integration within GCC minimal)
- Number of documents required to export is
low (5 documents)
Labor Market Regulation
Area Current Stance Limits on duration of fixed term contracts No maximum requirement (no limit) Degree of rigidity in working hours Workweek can be extended beyond 50 hours, similar to policies adopted in most other emerging market and developing countries or even advanced economies Redundancy rules Applies similar legalities like most other countries 13
Business Environment: How Does Saudi Arabia Compare to other Countries?
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Education
Pros Cons
- High literacy rates, both for adults and
for youth
- Nevertheless, a large part (half) of
unemployed Saudi citizens hold graduate and postgraduate degrees.
- A good share of national income and
budget spending is directed to the education sector (larger in comparison to
- ther countries)
- Trends in international mathematics and
science study (TIMSS) data: (a) number of years of schooling is low compared to other countries; (b) enrollment rates in early/childhood education compare relatively poorly, (c) education quality suboptimal (lower average math and science score).
- The overseas scholarships program has
been expanded (185 thousand students, at present) 14
Business Environment: How Does Saudi Arabia Compare to other Countries?
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Policies to Support Further Economic Diversification in Saudi Arabia
Business Climate
Address remaining areas of weaknesses: strengthen ability to
- enforce contracts
- resolve insolvencies
- improve labor regulation, and education
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Continue steps to improve business environment, develop domestic infrastructure,
and invest in education and skills:
Education
Greater focus on quality, attainment
- ensure development of skills needed by private sector
- ensure systems in place to realize improved outcomes from
spending on education (efficiency) Labor market reform
Active labor market policies:
- control public sector wages and jobs
- increase competitiveness of nationals (ease hiring regulations)
- greater mobility for foreign workers (narrow the wages differential)
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Policies to Support Further Economic Diversification in Saudi Arabia
Infrastructure
Prioritize, sequencing of mega projects
Ensure public investment spending efficiency 16 Develop SMEs
Continue facilitating access to finance Other: specific measures for export promotion and trade integration
Experience of commodity exporters highlights benefits from
- export insurance guarantees, export credit, other financing
- role of FDI in non-oil activity (strengthen manufacturing base to
act as springboard for export growth)
Strengthen Arab-Arab integration, accession to FTAs, Customs Union.
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Conclusions and Key Takeaways
Further reduced reliance on hydrocarbons—a prime aim of diversification—will have many benefits for:
- macro stability: reduce economic volatility and uncertainty associated with global oil
market swings,
- labor market development: create jobs in private sector to absorb a young and
growing labor force (especially, to attract nationals),
- Increased productivity, sustainable, broad-based growth,
- A strong non-oil economy, to withstand oil revenue downturn.
Progress has been made in enhancing the business environment, improving infrastructure, and social dimensions of education and health care… Yet how far can further efforts encourage diversity without additional incentives.
Biggest challenge: creating appropriate incentives to strengthen economic diversification… also, re-align incentives in order to:
- scale up work opportunities for Saudi nationals in the private sector, and
- ensure firms continue supplying the domestic economy while putting greater