Saudi Arabia embraces a life beyond oil

In 2013, Time magazine’s then-Middle East Bureau Chief, Aryn Baker, wrote an article entitled Saudi Arabia to Tourists: We Are Just That Not Into You, in which she discussed the country’s disinterest in a regional tourism boom. In the article, she remarked on the kingdom’s reluctance to introduce a tourism visa and an unwillingness to welcome visitors on grounds other than religion or business. “With $288bn in oil revenues”, Baker wrote, “it’s not like Saudi Arabia is desperate for foreign currency.”

More than three years later, and the country is only now reconsidering its closed-door policy on tourism. Estimated to have contributed approximately $12.7bn to the economy – or 1.7 percent of GDP – in 2013, tourism’s slice of the pie grew to around $13.3bn and five percent of GDP by the end of the following year. Nonetheless, the market for non-religious tourism continues to be virtually non-existent, and while efforts to boost the sector have so far come up short, the kingdom would do well to consider embracing tourism in the wake of the oil price collapse.

Business confidence has fallen sharply, banking liquidity is tightening while interest rates are rising, and government spending is declining, according to Olivier Najar, Country Risk Analyst – MENA at BMI Research. As a result, Saudi Arabia will enter a protracted period of subdued growth from 2016, with Najar forecasting annual real GDP growth of 2.3 percent on average between 2016 and 2020, compared to five percent between 2011 and 2015.

The Saudi economy is at a crossroads, and with its stake in the world economy shrinking, it must diversify or suffer severe, long-lasting and irreversible consequences

“Given that the current economic slowdown is a direct consequence of low oil prices, the objective to diversify the Saudi economy away from its overreliance on oil (and the public sector) is a positive”, Najar told Business Destinations. “The reforms have the potential to stabilise the country’s growth outlook, and budget balance, over the longer term.” The Saudi economy is at a crossroads, and with its stake in the world economy shrinking, it must diversify or suffer severe, long-lasting and irreversible consequences.

“Saudi Arabia is in a unique position in its history, in which it has the economic incentive, the financial resources, and the political will to enact true reform”, Oliver Cornock, Managing Editor of the Oxford Business Group, told Business Destinations. “Now Saudis increasingly recognise the need to right the fiscal ship, precisely because the oil price is where it is, and many I’ve spoken to are eager for a reinvigorated, dynamic economy which will offer jobs, and better quality ones at that.”

Inflection point
Today, more than ever, there is the opportunity for policymakers to inject a dose of dynamism into the economy and, in doing so, free the Saudi population from the shackles of oil dependence. According to Cornock: “Even with an eventual recovery in oil prices, population growth, internal oil consumption and rising government expenditures, particularly in the form of long-term liabilities such as healthcare and pensions, the kingdom’s economic future is contingent on the development of a non-oil economy and especially an autonomous private sector growth.”

Saudi Arabia houses 18 percent of the world’s proven petroleum reserves and tops the global pile in terms of exporters. As a result, the collapse in global oil prices has exerted a heavy toll on its economic wellbeing. Occupying around a half of its gross domestic product and 85 percent of its exports, its dependence on oil – while responsible for a surge in prosperity in recent times – threatens to spark a collapse of elephantine proportions.

Over the last century and a quarter, the global economy has burned through roughly half of its proven oil reserves and, according to Peak Oil, consumes 85 million barrels of the black stuff a day. Of this total, Saudi Arabia churns out around 10.5 million barrels a day and shows no sign of letting up, despite encouragement from its fellow OPEC members and the rest of the world to curtail production. Failing that, the kingdom must begin to at least consider its options aside from oil.

It’s not a wholly novel situation, with Saudi Arabia having already struggled with low oil prices in the 1990s and early 2000s, when prices at one point reached single digits, according to Cornock. “Indeed, it was during these periods that the notion of diversification of revenue streams began to come to the fore.”

Soaring oil prices throughout the mid-2000s, however, meant these plans were put on the back burner, leaving Saudi Arabia to play catch up by investing in areas that had been neglected in the past.

As dismal as it is predictable, Saudi Arabia’s worsening financial circumstances and failing consumer confidence demand the ruling royal family pay heed to sectors aside from oil. Here is an economy that hinges on the inherent volatility of oil prices, and while the going is good when oil sells high, when it sells low – which it looks like it will for the foreseeable future – times are tough.

Vision 2030
The country can mitigate the gathering storm through aggressive reform measures if it so chooses. Gone are the days when Saudi Arabia could rely on oil revenue and public spending alone for prosperity – the nature of the challenge demands policymakers look further afield in stemming the decline.

Aside from investment in non-oil sectors, Saudi Arabia must lead the transition away from its government-led economic model and pursue a much more market-orientated approach. “With a large population and significant financial outgoings, not least on welfare and subsidies, the importance of diversification and economic reform has never been so clearly understood”, according to Cornock. “Economic growth has been too reliant on public sector spending at the expense of the private sector.”

According to researchers at McKinsey: “In the labour market, greater workforce participation by Saudi men and women is essential to achieve higher household income. Faster productivity growth requires better business regulation and more openness to competition, trade and investment. Improved efficiency of spending and new revenue sources, possibly including taxes and higher domestic energy prices, can help ensure fiscal sustainability.”

More than a quick departure, the reforms require that Saudi Arabia embraces a more inclusive environment and, crucially, a more competitive one, where sectors aside from oil are actively supported and allowed to flourish.

Surprising as it may sound, this recommendation appears not to have fallen on deaf ears: in April, Saudi Arabia’s Deputy Crown Prince Mohammed bin Salman announced a raft of economic and social reforms aimed at freeing the kingdom from its dependence on the black stuff. “Our vision is built around three themes: a vibrant society, a thriving economy and an ambitious nation”, according to the official announcement. “Our precious country deserves the best. Therefore, we will expand and further develop our talents and capacity… We are determined to reinforce and diversify the capabilities of our economy, turning our key strengths into enabling tools for a fully diversified future.”

This ambitious plan goes by the name of Vision 2030 and, if successful, will lift millions of individuals out of the doldrums and bolster the country’s non-oil sectors no end. Few – if any – of the policies are completely new, but they reflect the country’s determination (and that of the Gulf countries generally) to shake its reliance on oil exports and expand the role of the private sector.

The country’s tourism infrastructure is relatively weak, and attempts to reach a wider spectrum of visitors have had only limited success

With around two thirds of its population under the age of 30, the kingdom’s human capital potential is – for the time being, at least – terribly underutilised. An estimated 29 percent of under-30s are unemployed, and an emphasis on privatisation – much like that laid out in Vision 2030 – should in theory create the kind of jobs these potential workers need. To date, two thirds of the national workforce is employed by the public sector, and – to compound the issues facing an already underdeveloped private sector – 80 percent of it is made up of expatriate workers. The decision to slash the number of government positions and cut back on spending, therefore, should go some way towards shaking the public sector’s grip on the jobs market. The privatisation of select state assets and services, meanwhile, should attract more talent and investment, and therefore help to right the imbalance between the public and private sectors.

Not merely contained to matters of an economic persuasion, Vision 2030 encompasses a much broader shift in priorities. Social values, according to the announcement, “will be based on moderation, tolerance, perfection, discipline, justice and transparency, and our focus will be on achieving growth of these values and areas”. These principles, while seemingly unrelated, feed into the kingdom’s vision to create a more inclusive and productive society.

Tourism drive
Equally ambitious is the country’s revised commitment to tourism – namely, its determination to raise visitor numbers fivefold by the year 2030, which again chimes with the country’s ambitions to expand on the role of the private sector.

The focus on tourism is in some senses surprising, especially considering the country’s strict interpretation of Islamic law and reputation as being an inhospitable locale for Westerners. Still, the kingdom plans to inject a healthy $46bn into the sector by 2020 and give attractive coastal areas and key historical sites a going over, in the hopes that doing so will cause international tourists to put aside their reservations and pay a visit. “It is a promising area and one in which the current government has placed a great deal of hope”, according to Cornock.

One of Saudi Arabia’s advantages, Cornock continued, is that it is home to the two holiest sites in Islam: Mecca and Medina. As a result, Saudi Arabia is by no means an unpopular tourist destination, though certainly more could be done to broaden the spectrum of inbound tourists. The Saudi Government has therefore made it a priority to grow Umrah visitors from eight million to 30 million by 2030, by expanding the infrastructure in both locations to support more pilgrims.

In addition, it will begin the roll-out of the Post-Umrah programme, unveiled by Prince Sultan bin Salman, Head of the Saudi Commission for Tourism and National Heritage (SCTH), which will allow pilgrims to stay up to 30 days in Saudi Arabia and travel to other parts of the kingdom, either for additional religious travel or general tourism, shopping and business.

“These two initiatives alone have the power to generate billions for the economy”, said Cornock. “Saudi Arabia has historical sites, such as the UNESCO-designated Madain Saleh, which I have had the pleasure of visiting and can attest is a magnificent place. It also has majestic desert, mountains with forests and beaches that boast world-class diving and snorkelling. Further expansion of the tourism industry could include opening up these areas to a greater number of visitors. The key, as ever, is to balance this with cultural considerations.”

Slow progress
With the SCTH preoccupied with plans to develop a string of museums and heritage sites, plans to push the tourism agenda will exert a heavy burden on developers. A lot of sites require little in the way of development, although there’s no doubt billions of dollars in added investment will do a great deal to bolster the kingdom’s appeal. Mecca and Medina aside, the country’s tourism infrastructure is relatively weak, and attempts – however muted – to reach a wider spectrum of visitors have had only limited success.

According to Najar: “Tourism is a key area of Vision 2030, as the Saudi Government aims to make economic, as well as political and reputational, gains from opening some parts of the country… We believe that projects focused on developing religious tourism will be developed fast, but this will not impact the Saudi state and society. Sea resorts and other more secular-oriented tourism projects will face more hurdles, particularly from the conservative religious establishment. We believe that the Vision 2030 reforms have the potential for a major evolution of the Saudi society – and state – but this will take many years, and will be gradual.”

Certainly one area that shows great promise is business tourism, which, judging by rising investment in Saudi Arabia and the Gulf region generally, the country would do well to capitalise on. Seeing the opportunity to build better hotels and conference facilities, it makes sense the hundreds of thousands of people already doing business of some form or another in Saudi Arabia would see it as a fitting location.

Reports compiled in 2014 suggested Saudi Arabia was missing out on as many as two million airline seats a year due to a lack of capacity. Furthermore, what few tour operators did exist catered mostly to religious tourism – and this was but the tip of the iceberg for Saudi Arabia’s underdeveloped tourism sector. Speaking to The Washington Post, Senior Research Fellow at the University of Oxford, Toby Matthiesen, noted: “The realities of Saudi Arabia are, however, such that it is inconceivable that the kingdom can really become a tourist destination without fundamentally altering the religious and social policies in place.”

Saudi Arabia’s willingness to open the door to a broader spectrum of arrivals is, in a sense, a milestone for a nation that has in the past too readily shut out visitors. Should the country follow through with its reform programme, it would herald a new dawn not just for tourism, but for Saudi Arabia’s economy in general.