Saudi Arabia’s story of change – milestones in its long-run transformation 

Since their inclusion in the FTSE Emerging index in March 2019 at 0.3%, Saudi equities have come to represent 4.2% as the fifth largest country constituent of the EM benchmark as of September 2024 (Exhibit 1).

The increase in Saudi equities’ index weight has come on the back of steady performance since it was added to the FTSE Emerging index in March 2019. Exhibit 2 shows that the Saudi index outpaced the benchmark, particularly in the period after the Covid shock.

From an industry standpoint, FTSE Saudi Arabia has a heavy weight in Financials, at nearly 40% of the index. However, there are also important differences in industry composition relative to its EM peers and EM equities broadly. Exhibit 3 shows the industry composition of FTSE Saudi Arabia and FTSE Emerging.

Primary among these differences is FTSE Saudi Arabia’s lower exposure to Technology and Consumer Discretionary, and much higher exposure to Energy and Basic Materials than the EM benchmark. By comparison, nearly three-quarters of FTSE Taiwan and almost 28% of FTSE China are made up of Technology stocks. As FTSE Saudi Arabia’s representation within the FTSE Emerging index grows, it may bring more industry diversification to the EM equity universe.

It is worth noting that although Saudi Arabia is heavily dependent on its petrochemical sector, with oil activities accounting for approximately 30% of the economy, Energy constitutes only about 11.6% of its equity index given that much of the industry is still state-owned. About 9%-pts of Energy’s weight is Saudi Aramco, which recently announced a record increase in dividends in 2024 for shareholders. Despite its smaller weight in public equities, the Energy industry remains significant for the broader economy and its evolution is likely to be key for the kingdom’s growth prospects.

Chief among Saudi Arabia’s Vision 2030 goals is the diversification of its economy away from reliance on oil revenues. Between 2021 and 2023, non-oil activities, which include domestic consumption and investment, have steadily accounted for about half of Saudi’s real GDP. Oil activities and government activities amounted to about 30% and 18%, respectively, of real output during that period. In 2023, Saudi Arabia reached about half its goal of securing 1 trillion Saudi Riyals in non-oil government revenue by 2030.^[1]  Despite this progress, the volatility of oil’s contribution to the economy continues to be a problem. 

In the recent macro environment, oil prices have remained anaemic and far below the Saudi government’s soft target of USD 100/barrel, despite OPEC+ oil cuts and threats of supply disruption from Middle East geopolitical tensions. In September 2024, the government announced plans to abandon its USD 100/barrel price target in order to increase output volume and take back market share that it has lost from production cuts. Coupled with its efforts to increase revenues from non-oil activities, and a vast program of domestic investment channelled via the kingdom’s Public Investment Fund, Saudi output growth over the last three years has been bolstered by growth in non-oil activities.

Exhibit 4 shows the growth in Saudi Arabia’s real GDP by main economic activities. It illustrates how growth in non-oil activities and government activities helped to offset a sharp 9.0% decline in oil activities in 2023. It also shows the recent volatility in Saudi’s oil output, underscoring the importance of its economic diversification goals.

In terms of the non-oil sector, the government considers several sectors strategic, including tourism and financial services.

One of its early successes has come in tourism. Annual tourism visitors topped 109 million in 2023, surpassing the Vision 2030 target of 100 million, and prompting authorities to revise that target up to 150 million. Non-religious visits are gathering pace, and the kingdom plans to host major international events such as Formula One, the 2027 AFC Asian Cup in football and the 2030 World Expo. This has spurred jobs growth in related sectors such as construction and hospitality.

Saudi’s Vision 2030 also set ambitious targets to increase and improve financial intermediation, by growing the market value of listed equities in the domestic Tadawul exchange, increasing the share of small/mid-sized enterprise (SME) loans from banks, and fostering Fintech companies and digital payments. In 2023, the percent of SME loans increased to 8.4% of total bank loans from just 2% in 2016 and closer to the 2030 target of 20%.

Saudi Arabia is also attempting to improve its economic growth rate through more efficient use of its available labor resources. Toward this end, government efforts helped improve Saudi female labor force participation from the 2016 baseline of 22.8% to 35.2% in 2023, higher than the 2030 target of 30%.

The FTSE Saudi Arabia index represents a growing segment of the investable EM equity space. It has above average exposure to Financials even among EM peers. However, with its relatively lower exposure to Technology stocks and higher exposure to Energy and Basic Materials than the EM benchmark, it could bring more industry diversification to an EM equity allocation. Saudi equities’ growth is underpinned by a vast program of economic reforms in a country with a young population and consumer base.

Saudi Arabia’s success thus far in progressing toward its Vision 2030 goals do not diminish the challenges it faces in implementing the rest of its economic transformation agenda. The large-scale investments it is making in areas like renewable energy and energy efficiency are yet to bear fruit. And progress toward training and employing a young population in an economy that has been highly reliant on elastic immigrant labor, is a long-term proposition. 

However, the government’s sustained focus on the Vision 2030 agenda and progress to date, combined with Saudi Arabia’s strong macro position, provide a solid foundation for Saudi equities’ prospects in the years to come.

1. Progress toward Saudi Arabia’s Vision 2030 goals in this section are sourced from the IMF’s Staff Report for the 2024 Article IV Consultation with Saudi Arabia (September 2024), unless otherwise noted.

This FTSE Russell Insight uses the following indices for informational purposes: FTSE Saudi Arabia, FTSE Emerging, FTSE China, FTSE India, FTSE Taiwan, and FTSE Brazil.