SAUDI ARABIA

Saudi Arabia’s economy is a net beneficiary from the overall surge in global commodity prices in the wake of the war in Ukraine. With disruptions throughout energy-related supply chains moderating and the easing of activities at Chinese ports, logistics volatility and costs have reduced, ultimately neutralizing inflation across net energy exporters. Saudi Arabia is heavily reliant on grain imports and has managed to find alternatives, given ample purchasing power.

On the other hand, the current environment has offered sizeable economic opportunities. Saudi Arabia increased fuel shipments to crisis-hit European countries as the continent attempted to wean itself off Russian oil and refined products like diesel. Similarly, while Russia has surpassed Saudi Arabia as China's main crude oil supplier, Japan has purchased record volumes of oil and blue ammonia from Riyadh. Real GDP grew by +8.7% in 2022 and is likely to increase by another +4% in 2024, about 1pp above what we consider Saudi Arabia’s long-term potential and more than all other countries belonging to the Gulf Cooperation Council (GCC). The strong rise in global oil prices provided substantial fiscal buffers, tampered the current account deficit of non-oil sectors and freed additional liquidity at relatively low rates for local companies, resulting in low insolvency rates.

Inflation in Saudi Arabia is likely to remain around 2%, thanks to large export revenues, ample reserves that allow the local currency to maintain the currency peg with the US dollar and a timely monetary tightening cycle initiated in March 2022 in parallel with that of the US Federal Reserve.

In early 2023, Saudi Arabia made a few steps towards normalizing relationships with peers and playing a broader role in the region, which contributed to easing trade and investment conditions. In March, the Kingdom reached a historic accord with Iran negotiated by China. A restoration of ties between Riyadh and Syria would be the most significant development so far in Arab states' efforts to normalize relations with Damascus. Relations between Saudi Arabia and Turkey have also come to a truce after years of hostility. In March, Saudi Arabia agreed with Ankara to deposit a USD5bn swap line in the Turkish central bank to mitigate the lira exchange-rate volatility.

Competition with the United Arab Emirates for business and investment opportunities is likely to exacerbate policy divergences and enhance the possibility of confrontation between UAE and Saudi leadership, although the competitive dynamic increases the chance of domestic reforms aimed at improving regulatory and operational conditions in an effort to make each country more appealing to global investors. In March, three foreign law firms were granted the first licenses to practice in Saudi Arabia to encourage business expansion, and incentivize legal work written in the country and local work on high-profile agreements.

However, bilateral relations, ties to the government and limited exposure to global financing practices have conditioned the business environment in the country and could lead to new shocks abroad in the country's main sectors of investment in case of capital flight. In 2017, the suspension of diplomatic relations with Qatar triggered a number of commercial disputes and international arbitration cases, while the Credit Suisse crisis in March 2023 was preceded by public comments made by the Saudi investor in the Swiss bank. Similar episodes could happen again until governance mechanisms improve and institutional capabilities strengthen. Short-term growth and long-term projects may go hand-in-hand, but the path towards sustainability and actual diversification is still to be revealed.