Indrani De
Mark Barnes
- Saudi Arabia tells a story of change, as the leading energy exporter continues to pursue plans to diversify its economy away from oil. Also important to investors to note that while Saudi Arabia’s economy is largely dependent on oil, energy stocks have comparatively little representation in Saudi Arabia’s equity market.
- GCC's Sustainability Shift: Traditionally oil dependent GCC nations are embracing diversification and modernization, with Saudi Arabia's Vision 2030 as a prime example.
- Vision 2030 Goals: Saudi Arabia's comprehensive plan targets economic diversification, foreign investment, privatization, and social progress, including greater female workforce participation.
- Economic and ESG Impact: Successful execution of Vision 2030 could enhance fiscal sustainability, financial stability, and ESG scores, while increased female workforce participation could boost economic growth.
After defeating the 2022 global growth slowdown, investors are eyeing what might lie ahead for the Gulf Cooperation Council (GCC) area—particularly Saudi Arabia, its largest economy. As emerging markets have seen a widespread rebound in 2023, Saudi Arabia has continued to hold its own among both peer GCC countries and the broader emerging markets index. And looking ahead, Saudi Arabia tells a story of change, as the leading energy exporter continues to pursue plans to diversify its economy away from oil.
Saudi Arabia: The largest GCC economy and leading oil exporter
The GCC is an economic and political alliance of six member countries: Bahrain, Kuwait, Oman, Qatar, the Kingdom of Saudi Arabia, and the United Arab Emirates (UAE). Saudi Arabia’s economy is by far the largest of the GCC countries, with 2022 GDP more than double that of the UAE, the second largest economy.
GCC country 2022 GDP
Source: IMF 2022. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
Like all GCC countries, Saudi Arabia’s currency, the riyal, is pegged to the US dollar—ensuring a buffer against large currency movements. And given the riyal’s peg to the USD, Saudi Arabia interest rate policy moves generally track the US Fed.
As the world’s top oil exporter, petroleum exports comprise a large share of Saudi Arabia’s economy. In 2022, crude petroleum, natural gas, and petroleum refining contributed 39% of Saudi Arabia’s GDP,[1] and 68% of the country’s revenues were oil based.[2]
The Saudi Arabia equity market: A snapshot
While Saudi Arabia’s economy is largely dependent on oil, the country’s oil companies tend to be majority owned by the government. As such, energy stocks have comparatively little representation in Saudi Arabia’s equity market. As shown, the most heavily weighted industry in the FTSE Saudi Arabia Index is Financials, with banks comprising half of the top ten index constituents.
FTSE Saudi Arabia Index composition - ICB industry weights
Source: FTSE Russell as of July 31, 2023. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
Top ten constituents
| Constituent | Index Weight | ICB Industry |
|---|---|---|
| Al Rajhi Banking & Investment Corp | 12.7% | Financials |
| The Saudi National Bank | 9.8% | Financials |
| Saudi Aramco | 8.7% | Energy |
| Saudi Basic Industries Corp | 6.7% | Basic Materials |
| Saudi Telecom Co | 6.6% | Telecommunications |
| Saudi Arabian Mining | 4.7% | Basic Materials |
| Riyad Bank | 4.1% | Financials |
| Alinma Bank | 3.2% | Financials |
| Saudi British Bank | 3.1% | Financials |
| SABIC Agri-Nutrients Co | 2.9% | Basic Materials |
This high exposure to Financials—and low exposure to Technology and Consumer Discretionary—helped Saudi Arabia equities largely shrug off the 2022 market downturn. As Technology stocks saw a sharp selloff and Financials proved relatively resilient in the 2022 rising rate environment, the FTSE Saudi Arabia Index fell a relatively modest -3.1% for the year, while the broader FTSE Emerging Index plummeted -16.9%. The Saudi market was relatively insulated from the Technology selloff and the weakness in China, which continued to experience economic fallout from its zero-Covid policy.
Global equities have made a sweeping comeback in 2023, and while some 2022 industry performance trends have reversed year-to-date, Saudi Arabia has performed in-line with the broader emerging markets index and Bahrain—and has significantly outperformed the rest of its peer GCC countries.
2023 year-to-date cumulative returns (rebased USD)
Source: FTSE Russell as of July 31, 2023. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
Whether the Saudi Arabia equity market rally continues to gather steam in 2023 remains unseen. But many view its performance trajectory as closely tied to its “Vision 2030” plan for economic transformation-and the potential for the plan’s “story of change” to unfold.
Exposure to this market for large investors has been facilitated by the launch and subsequent expansion of Saudi Arabia’s Qualified Foreign Investor (QFI) program, which initially eased registration requirements, then expanded the range of eligible institutional participants.
Saudi Arabia’s story of change: Diversifying away from oil
When it comes to sustainability, the oil rich GCC region has traditionally been a laggard. However, in recent years, some GCC countries have set their sights on diversifying their economies away from oil and investing in non-oil industries such as services and manufacturing.
Notably, in 2016 Saudi Arabia announced Vision 2030, a comprehensive plan for national transformation. The plan outlines several commitments and key targets, most of which focus on modernizing and diversifying the economy away from oil revenue, attracting foreign investors, and privatizing government services. The plan also sets goals for social progress, such as increasing the participation of women in the labour market.
Successful execution of Vision 2030 goals has the potential to benefit the Saudi Arabia financial markets in many ways. Increased buffers from oil revenues can be used to ensure fiscal sustainability, financial sector stability, private sector led growth, and access to good education. And the push for improved ESG practices, both with respect to large scale renewables development and a more diverse workforce, could boost the country’s historically weak ESG scores.
Increased participation of women in Saudi Arabia’s workforce not only has the potential to improve the country’s ESG scores but could also spur the country’s economy to faster growth. As GDP growth is a function of change in labour force and change in productivity, all else being equal the addition of women in the labour force could give a structural boost to Saudi Arabia’s GDP growth.
Measurable progress toward Vision 2030 goals
Recent data indicates Saudi Arabia has made significant strides toward its Vision 2030 goals. In 2022, Saudi Arabia’s non-oil GDP grew 4.8%, driven by robust private consumption and non-oil private investment.[3] And the World Bank projects the country’s non-oil sector will grow 4.7% in 2023[4] as Saudi Arabia makes further progress on its plans to transform its economy.
Please see our FTSE Saudi Arabia Inclusion Index Series for more information on indexes that represent the performance of the Saudi Arabia equity market.
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