Saudi Arabia: An ‘Emerging’ Frontier

“Think you could get me on ‘Amercan Idol’?”

Author: Tanya Rawat

Published in Global Risk Insights

Saudi Arabia opened its markets to international investors on June 15, 2015. It was the culmination of journey which started in July 2014 when the Saudi Cabinet took the decision to open the markets to Foreign Direct Investment (FDI). While this indeed is a watershed moment in GCC scripts, all eyes are on its 2018 inclusion to the MSCI Emerging Markets Index. Apropos not being included in MSCI’s Consultation List this year, the earliest it would be, is June 2016. In previous upgrades, MSCI has one year of consultation period followed by another year from when the announcement is made before the inclusion.

So, what makes it an ideal candidate for inclusion? While the size of its economy (Nominal GDP) equals that of  Turkey, its appeal comes from its fixed peg to the US Dollar that makes it less susceptible to currency fluctuations. With a market capitalization of half a trillion US Dollars and an average daily trading volume (three month average) amounting to USD 1.5 billion, it dwarfs most Emerging Market (EM) countries. The oil boom enabled it to accumulate the world’s third largest FX reserves at USD 700 bn, just behind China and Japan. Its Public Debt is non-existent at 1.8% of GDP compared to the EM 2015 expected average of 37.4%. Within the GCC universe, it is the lowest. Its young demographic is a favourable economic opportunity; a population of 31 million (2015 expected) with a median age of less than 25 years. Nominal GDP per capita stands at a highly competitive $24,847 and Real GDP expected growth rate in 2015 stands at 3% which is in line with 2.9% for the EM universe.

Yet with all its advantages, some sticky challenges remain. As oil  revenues account for 85%-90% of government revenue at a stable production level of 9.6 million barrels per day, its Achilles heel was exposed as oil prices plunged 59% in the last quarter of 2014. This has repercussions for Saudi Arabia which will face its worst fiscal deficit of circa 15% of GDP (assuming an average oil price of $50 per barrel)(see graph). Also the fairly young work-force of nationals are primarily employed in the public sector and female labour force participation rate remains dismal at 18% versus 65% for men.

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Addressing these labour market challenges, driving job growth and diversifying its revenue base remain key to the emergence of Saudi Arabia as global competitor economy which is more than an ideal candidate for Emerging Market status.

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