The visit to Saudi Arabia by Donald J. Trump, and the series of mega deals signed, brings to mind the adage of another American president, Calvin Coolidge: The business of America is business.
However, the result of the deals between Riyadh and Washington demonstrates that the business of America is Saudi Arabia and the business of Saudi Arabia is America.
The Public Investment Fund (PIF), the Kingdom’s sovereign wealth fund, agreed to commit $20 billion to an infrastructure investment fund with Blackstone Group, which will ultimately double in size with money raised from other investors. Saudi Aramco said it signed 16 accords with 11 companies valued at about $50 billion. One initial deal — worth $15 billion — was signed with General Electric. The US and Saudi Defense Ministry also negotiated a package worth about $110 billion.
As per President Trump’s speech, the total value of deals — some $400 billion, he said — amounted to more than the gross domestic product (GDP) of Austria. The deals signed should unleash multiple opportunities for American business in Saudi Arabia, Saudi jobs, localization and give a boost to SMEs, over time.
Saudi Arabia is on the cusp of change and reform and the country has embarked on a fundamental policy shift to respond to low oil prices. Doing business in Saudi Arabia is evolving toward becoming far more business-friendly. Transparency of the government is at the center of the evolutionary change. The bureaucracy is becoming more responsive and nimble to intra-institutional demands and the private sector. Diversifying the economy, creating jobs for nationals in the private sector, and implementing a gradual, but sizable and sustained fiscal consolidation are key policy priorities. The government is undertaking substantial reforms to reduce spending, adjust energy prices and introduce for the first time key performance indicators for ministries.
The IMF’s end-of-mission Article IV findings on Saudi Arabia’s economy provides a very positive assessment of the current state of economic reforms. Saudi Arabia is the largest economy in the Middle East. In purchasing power terms, Saudi Arabia in 2017 is estimated to be the 14th largest in the world, a notch below South Korea. In 2016, the Kingdom’s economy performed better than many other oil-based economies such as Nigeria and Russia and compared to others like Brazil and Japan.
The deals signed should unleash multiple opportunities for American business in the Kingdom, and give a boost to Saudi jobs, localization and SMEs.
Saudi Arabia is implementing a sea-change of policies that allows for a total reset of the way the economy is structured. The Kingdom is open for business. Reducing the role of the state in the economy is an essential target. Officials have highlighted a potential $200 billion privatization program that will span utilities, sports clubs, airports, education and health care. There are 16 entities earmarked as “prime for privatization”, along with more than 100 public-private partnership opportunities. Among the many examples are the plans to implement metro projects in Makkah, Jeddah, Dammam and Madinah in partnership with the private sector, according to recent remarks by the Saudi Railways Organization.
Economic developments in Saudi Arabia have an important impact on the other Gulf Cooperation Council countries and the wider MENA region. As non-oil growth picks up in Saudi Arabia in the ensuing years, it is expected to have an impact on countries in the immediate vicinity, including Bahrain, the UAE, Oman, Kuwait and Qatar as well as Egypt and Jordan. Assisting Saudi Arabia in its post-oil aspirations can act as a blueprint for other countries in the region to transition successfully away from oil. An economically solid Saudi Arabia has a vast multiplier effect for all in the region.
Saudi Arabia has long invested in the US as a sovereign, with private investors from the Kingdom also having been active in the market. Glancing at the latest major foreign holders of US Treasury Securities, Saudi Arabia’s stake increased since November 2016 to $114 billion. The Public Investment Fund (PIF), which is being transformed into a $2 trillion sovereign wealth fund giant, has also set up a defense company to help reduce the Kingdom’s reliance on foreign purchases and to diversify the economy away from oil. The newly-created Saudi Arabian Military Industries (SAMI) will manufacture products and provide maintenance services across units, including air and land systems, weapons and missiles, and defense electronics. Reduced dependence on imports will not be achieved overnight but will be due to the significant investment in a strong manufacturing base, engineering manpower and investment in research and development.
Saudi Arabia’s balance sheet is among the strongest in the G-20 with one of the lowest debt-to-GDP ratios in the world. Even in this climate of lower oil prices, Saudi Arabia’s financial standing is solid and supported by a strong and very well-regulated banking system. Saudi Arabia is building an economy that will require little dependence on oil beyond 2030, and help it become a true post-oil economic powerhouse of the G-20.
• John Sfakianakis is the director of economic research at the Gulf Research Center (GRC) in Riyadh.