Technology

The age of diversity

 By Benjamin Plackett

Saudi Arabia is facing what is likely to be the largest deficit in its economic history. The slump in oil prices has emphasized the importance of investing in alternative energies and opening the Saudi stock exchange to foreigners for the first time. This year Riyadh has made some significant reforms, which gives hope that the kingdom may eventually shirk its over-reliance on oil. The diversification is happening both within the energy markets and beyond it but it remains unclear whether the Saudi government’s aim is to export solar energy or to boost its consumption of renewable energy domestically…

Few have felt the impact of lower oil prices more than the Saudi Arabian treasury. The kingdom is facing what is likely to be the largest deficit in its economic history.

The last deficit was back in 2011, and while that’s an enviable track record for most Western governments, it spells bad news for a country with a reputation for running a surplus. The Saudi economy is heavily reliant on oil revenue, perhaps more so than any other country.

The recent economic difficulties in China have also compounded the problem. China is one of Saudi Arabia’s biggest consumers of the few non-oil products and services that the kingdom exports.

The need to diversity is a clear. It’s also a long-held aim of the government. Despite this, the country failed to make any headway on its economic diversification crusade when times were good and when the government was making a profit.

The Saudi economy actually became more reliant on oil revenues when the price per barrel was favorable, explains Bassam Abdullah Al-Bassam, a director at the Institute of Public Administration, an autonomous government agency in Riyadh. Al-Bassam wrote a paper published earlier this year in the journal Resources Policy where he questioned whether Saudi Arabia’s economic diversification is myth or reality.

“In 1970, oil revenue made up 88 percent of GDP,” says Al-Bassam. “But last year it was around 91 percent—it’s going in the wrong direction.”

Nevertheless, this year Saudi Arabia has made some significant reforms, which gives hope that the kingdom may eventually shirk its over-reliance on oil. The diversification is happening both within the energy markets and beyond it, says Nina Skero, an economist at the Centre for Economics and Business Research. She recently penned a forecast report on the Middle East’s economy.

She says the Saudi government has recognized its country’s solar potential. “They’re building solar panel factories and their geography also allows for vast areas of desert with high levels of sunlight energy,” says Skero. “I absolutely think their intention is to stay at the forefront of energy.”

However, it remains unclear whether the Saudi government’s aim is to export solar energy or to boost its consumption of renewable energy domestically. “Is their plan to invest in alternative energy so as to reduce oil consumption at home so they have more of it to export?” asks Skero.

Saudi Arabia is an oil-thirsty place and it’s only getting thirstier. “If the rise in energy consumption continues, some projections suggest Saudi Arabia could end up as a net importer,” explains Skero, “Their attempts to diversify could mean that the long term idea is to have oil left to sell.”

In June of this year, the Saudi stock exchange opened to foreigners for the first time - though admittedly there are still some restrictions in place. For example, only institutions that operate with $5 billion worth of assets are allowed to invest, and foreign ownership of any given company cannot exceed 49 per cent

Either way, Skero says that the slump in oil prices has emphasized the importance of investing in alternative energies and she thinks it will continue to do so. “There are very few elements in the market that will drive oil prices higher in the next five years,” she lamented. “Iranian oil is going to enter the market in a matter of months and U.S. shale producers are filling more domestic demands of the American market.”

Financial services is one of the most significant areas of investment outside of the energy sector that the Saudi government is pushing.

They’re right to do so, according to Al-Bassam.

“If we look at Dubai, Qatar and Bahrain, they’re using their geographical location to their advantage for this,” he says. Stocks in the Middle East can be traded during the work day in both Asia and Europe. “We also have this privilege,” he adds.

In June of this year, the Saudi stock exchange opened to foreigners for the first time—though admittedly there are still some restrictions in place. For example, only institutions that operate with $5 billion worth of assets are allowed to invest, and foreign ownership of any given company cannot exceed 49 percent.

Al-Bassam says this is encouraging, but thinks more could be done, “It’s a good step but it needs to be taken further.” He warns that forcing foreign investors to compete for a small slice of a company will lead to inflation.

However, the very fact that foreigners of any category can now buy and sell stocks on Saudi Arabia’s exchange is a sign that the government is taking economic diversification seriously, says Skero.

“I’m optimistic. I think they’ve made genuine efforts to diversify revenue,” she says.

 

MUST READ: More cautious steps in Saudi Arabia by Abo.net

The drop in crude oil prices forces Riyadh to revise its monetary investment plans
about the author
Benjamin Plackett
I’m a journalist based in London. I report on all things science, tech, and health for a number of different publications. My work has been published by The Daily Dot, Inside Science and CNN among others. I earned my M.A. in Journalism at New York University and my B.Sci in Biology from Imperial College, London.