The Saudi Crown Prince Mohammed bin Salman is on a diplomatic mission in London to promote Saudi Arabia abroad and to attract more investments into the country. The Crown Price first visited Egypt, were he announced a new mega city that is planned to be developed on the border between Saudi Arabia and Egypt. Next he will travel to the United States. His trip comes a number of months after he implemented a strong anti-corruption purge in the country.

Impact on country risk

Mohammed bin Salman is currently implementing a bold reform programme in Saudi Arabia (Vision 2030) in order to reduce the country’s dependence on oil. The aim is to increase the size of the private sector in the economy from 51% in 2014 to 65% by 2030. Furthermore, he wants to reduce the country’s high unemployment and increase female labour participation, among other planned measures.

The main purpose of his current visit to the UK is to attract more investments into Saudi Arabia. These investments are needed in order to successfully implement the planned diversification effort, given that the country currently lacks the know-how and capacity to develop alternative industries on a large scale.  However, the way in which the anticorruption purge was implemented in November has rattled investors. Therefore, bin Salman’s visit abroad also serves as a way to reassure investors.

Nevertheless the challenge of diversifying the Saudi economy in the coming years remains enormous. This can be better understood when Saudi Arabia’s public revenue and exports are assessed more closely.

First of all, public revenues remain dominated by oil revenues, as shown in graph 2. While the drop in oil prices led to a decrease in the share obtained from commodity-related income, it still represented almost 70% in 2017. In the coming years, tax income is expected to increase but it remains to be seen whether the government will be able to implement the reforms needed in order to increase the tax base and tax revenues.

Secondly, the share of oil and gas in Saudi Arabia’s total export receipts remains very large. Over the period 2007-2017, hydrocarbons represented around 76% of total current account receipts (in 2017, it was 65%). Manufacturing exports represented less than 20% of total current account receipts in 2016 and around 40% of these exports consist of chemicals which result from the large petrochemical sector in Saudi Arabia. This is shown in graph 3. Nevertheless, the share of chemicals in total manufacturing exports has been decreasing since 2000 when it represented almost 90%.

Therefore, while the diversification plan currently remains on track, it will still take a number of years before the diversification will have a visible impact on the country’s public revenue and export composition.

Analyst: Jan-Pieter Laleman – jp.laleman@credendo.com