Saudi Arabia’s non-oil gross domestic product (GDP) is set for strong growth in the medium term as household consumption and investments rise due to Vision 2030-related initiatives. Saudi Arabia has witnessed significant social, economic and political reforms that seek to diversify its economy away from hydrocarbons.
In its latest report, S&P Global says that these reforms will continue to raise domestic demand indicators, further supporting the growth of non-oil activities. However, the agency notes that further success of diversification efforts will depend on improved labor productivity.
Household consumption to raise non-oil sector’s share of the economy
Saudi Arabia’s non-oil GDP has witnessed significant growth in the past 10 years, overtaking the oil sector’s increase. Retail trade, government and finance have led the way. “Despite some setbacks from recent oil production cuts, indicators point to strong overall non-oil performance later this year,” stated S&P.
The report notes that current numbers imply that there is significant potential to increase household consumption and, by extension, the non-oil sector’s share of the Saudi economy. Domestic consumption’s low share of the overall GDP reflects the oil activities sector’s crucial economic role, still directly accounting for more than 30 percent of the GDP in early 2024.
Through the Vision 2030 framework, Saudi Arabia has launched initiatives to boost domestic consumption, tourism, and economic diversification. This includes the development of mega projects such as NEOM, Qiddiya, Al Ula, Jeddah Historic District, and the Red Sea Project, which the government expects will generate spending in tourism and entertainment.
To further stimulate consumer spending, the Saudi government launched the Quality of Life Program, which focuses on developing the entertainment, cultural and sports sectors. In addition, the government has announced its goal to boost the share of household spending on entertainment to 6 percent by 2030 from about 2.9 percent currently.
Construction efforts to lift domestic demand
Tourist arrivals in Saudi Arabia have increased over the past several years, with the government planning to boost the total number of visitors to 150 million by 2030. The introduction of e-visas and the completion of mega-projects will increase international arrivals, which in general account for a higher share of total tourist spending.
Giga- and mega-project-related construction efforts will also lift domestic demand, added the report. The total costs of Vision 2030 mega-projects exceed $1 trillion and account for almost 90 percent of Saudi Arabia’s GDP. Even if NEOM downscales, the construction of mega-projects will be a key factor behind Saudi Arabia’s non-oil GDP growth for the next five years.
NEOM’s completion to decrease oil GDP to 24 percent of total
Up to 2030, growth in Saudi Arabia’s domestic demand will primarily come from mega-projects and their construction costs and investments. However, S&P also expects a significant pick-up in household spending due to potential growth in disposable income among Saudi nationals and government initiatives to lift entertainment and tourism spending.
Assuming the timely completion of Vision 2030 mega-projects, the gradual recovery of oil production by 2028, and modest increases in direct government expense of about 1 percent annually, S&P expects Saudi Arabia’s oil GDP to decrease to 24-26 of total GDP by the end of 2030.
“We expect that with NEOM’s completion, oil GDP will decrease to 24 percent of the total from 35 percent in 2017 when Vision 2030 reforms started,” added the report. According to S&P estimates, even the downscaling of NEOM to 50 percent of its original budget will lead to the oil activities sector share representing about 26 percent of GDP.
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Labor productivity remains key factor for growth
Although Saudi Arabia’s non-oil GDP growth is expected to rise in the next couple of years from the increased domestic demand, labor productivity will remain a key factor in growth. This concern will emerge when most mega-projects wrap up and the initial momentum in domestic consumption dissipates.
In Saudi Arabia, labor productivity growth has been lagging both developed and emerging economies for the past 20 years. “We expect Saudi Arabia’s ability to generate labor productivity growth via Vision 2030 will remain a key factor in economic diversification efforts over the long term,” concluded the report.
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