Vision 2030 on track but oil remains the key

Two authoritative recent reports on the economy of Saudi Arabia reach broadly the same conclusion: that the Vision 2030 transformation strategy is on track, despite “recalibrations”.

The two assessments – from the International Monetary Fund last week after its annual Article IV consultation, and from the official Saudi government statistics authority on the second quarter of 2024 – also underline the central role that oil continues to play in the kingdom’s economy.

The IMF declared its verdict in its opening sentence: “Saudi Arabia’s unprecedented economic transformation is progressing well as it advanced in its modernisation and diversification efforts under Vision 2030.”

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In 2023 the kingdom went through a mild recession, with overall GDP contracting by 0.8 percent.

All of that downturn was due to the decline in oil revenues resulting from Saudi’s central role as a leader of the Opec+ alliance, which was committed to crude volume reductions.

The non-oil sector grew by a “robust” 3.8 percent, said the IMF, driven by private consumption and non-oil investment.

Part of that private consumption stemmed from the surge in tourism, with revenues up 38 percent, the Fund said. It is a mark of success for the Vision 2030 strategy that Saudi citizens and expatriates are now much more willing to spend on leisure and recreation within the country.

The official figures confirmed those trends in Q2. Total GDP grew by 0.3 percent compared with the same period in 2023, with non-oil up by a significant 4.9 percent year on year and accelerating compared to the first half of 2024.

In contrast, oil activities declined by 8.9 percent year on year, the government said.

The IMF is projecting a total GDP growth rate of 1.7 percent this year, with non-oil weighing in with a 3.5 percent increase, and a booming 4.7 percent total in 2025.

But here is the rub. The IMF forecasts were made before last weekend’s decision by Opec+ to delay the first tranche of a schedule to return 2.2 million barrels of oil per day to global crude markets.

The IMF figures assumed that Saudi and the rest of Opec+ would be enjoying increased revenue from oil sales throughout the period until next September.

The start of that restoration of crude supplies will now be delayed until December.

We can only assume they will go ahead in a similar monthly format from then. It’s too early for the IMF to recalibrate its own forecasts for Saudi oil GDP in light of the new Opec+ timetable.

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The IMF’s mission chief to Saudi Arabia advised the kingdom not to be too distracted by oil price volatility. “It’s important to continue [Saudi Arabia’s economic transformation] irrespective of what’s happening in fluctiations in oil prices,” he said.

That may be easier said than done. The reality is that the country’s economic progress still depends very much on global crude markets.

The official figures state that the oil and gas sectors were the biggest contributors to the economy at 23 percent of the total.

That may seem comparatively low, but it excludes other energy related activities like petroleum refining, electricity and other business, as well as government schemes, most of which are funded by oil revenue.

On top of these, the boost to government revenues from the Saudi Aramco special dividend, estimated at $40 billion this year, is also a factor obviously related to crude markets. 

That was underlined by the IMF, which repeated that Saudi Arabia needs a price of Brent crude at $96 per barrel to balance its budget, way off the current level around $71 per barrel.

This is not the fiscal disaster it might first appear. Saudi Arabia has huge capital reserves and enjoys solid credit-worthiness in international capital markets, as evidenced by multiple bond issuance already this year.

But the kingdom would much rather pay the substantial costs of Vision 2030 investment from current revenues. With revenue set to fall more steeply than expected after 2026, according to the IMF, this is becoming a strategic issue.

Paradoxically, oil revenue will assume a greater importance even as Saudi Arabia diversifies away from its traditional source of economic growth.

Frank Kane is Editor-at-Large of AGBI and an award-winning business journalist. He acts as a consultant to the Ministry of Energy of Saudi Arabia and is a media adviser to First Abu Dhabi Bank of the UAE