Investment Adventures in Emerging Markets


Spotlight on Saudi Arabia

Saudi Arabia’s economic rebound is drawing attention with an obvious boon from rising oil prices. Outside of hydrocarbons, the country is continuing to diversify and reform in a number of sectors as part of its ambitious Vision 2030. Dina Ting, Head of Global Index Portfolio Management, Franklin Templeton ETFs, highlights developments on the kingdom’s horizon.

Spotlight on Saudi Arabia

  • S&P revised Saudi Arabia’s debt outlook to positive, citing an economic rebound from improved oil sector prospects, an accelerated COVID-19 vaccination program and notable government reform policies to attract further investment.1
  • Estimates suggest the kingdom’s current-account surplus should grow to 12% of gross domestic product (GDP) this year, up sharply from a previous forecast of 6.3% of GDP by the Economist Intelligence Unit—bolstered by the expansion of both non-oil and oil export revenue anticipated for 2022.2
  • Beyond energy, Saudi Arabia has made a big push to diversify its exports and investment potential with major sporting events, tourism, infrastructure and entertainment. The kingdom also leads other Gulf nations in a recent initial public offering (IPO) boom.

Saudi Arabia, the Arab world’s largest economy, is experiencing positive momentum even amid a challenging investment climate and geopolitical tensions that are dampening growth elsewhere. Reflecting expectations of improving GDP growth and medium-term fiscal dynamics, S&P Global Ratings revised its outlook on Saudi Arabia’s debt from stable to positive at the end of March 2022.

“The positive outlook reflects our expectation of improving GDP growth and fiscal dynamics over the medium term, tied to the country’s emergence from the COVID-19 pandemic, improved oil sector prospects, and the government’s reform programs,” S&P said.3

The kingdom’s budget surplus expectations were evident late last year when it raised its revenue forecast even before Russia’s war in Ukraine propelled oil prices higher. Energy revenue still dominates the Saudi economy and those of its Gulf neighbors. Government data shows that break-even levels for Saudi Arabia are far lower than current crude prices, and possible hikes to official selling prices signal the potential for a significant budget boon.

Beyond energy, Saudi Arabia continues to diversify its economy. Seven years ago, the kingdom launched its Vision 2030 program to broaden its exports and investment potential with major sporting events, tourism, infrastructure and entertainment. This included the introduction of tourist visas in late 2019, with government aspirations to create one million additional leisure and tourism-related jobs and attract 100 million annual visits. It recently unveiled futuristic plans for Trojena, an ultra-luxury, year-round ski destination that can double as a venue for sports, art, music and cultural festivals.4

Like any country, there are risks associated with investing in Saudi Arabia. Last month, Yemen’s Houthi rebels attacked an oil depot near the Saudi Arabian Grand Prix Formula One racetrack, an event that was hosted for the second time ever in Jeddah. Additionally, while the kingdom has made substantial progress to diversify away from oil, any significant downturn in oil prices could negatively impact its economy. Saudi Arabia also continues to face scrutiny on human rights issues.

One area of positive development is Saudi Arabia’s ongoing social reforms. Since Mohammed bin Salman became Crown Prince in 2017, the kingdom has reintroduced concerts and movie theatres and lifted a ban on women driving. Saudi women are also being encouraged to enter the workforce with participation rates increasing as roles in various sectors have opened up in recent years, including construction, manufacturing, accommodation and food. Most recently, Saudi’s defense ministry opened military recruitment to women.5

Middle Eastern markets have also stepped up efforts to sell shares in private companies and boost liquidity on their stock markets, and Saudi Arabia is a leader in this IPO boom. China is its largest trading partner and Saudi businesses were recently reported to be in talks to build major foundry projects as well as potentially pricing some oil sales in yuan. The kingdom tends to adjust monetary policy in lockstep with the US Federal Reserve as it pegs its currency, the riyal, to the US dollar. The benefit of this relative stability is important given that foreign exchange in emerging markets can be a source of detraction.

What Are the Risks?

All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Investments in emerging markets, of which frontier markets are a subset, involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size, lesser liquidity and lack of established legal, political, business and social frameworks to support securities markets. Because these frameworks are typically even less developed in frontier markets, as well as various factors including the increased potential for extreme price volatility, illiquidity, trade barriers and exchange controls, the risks associated with emerging markets are magnified in frontier markets. To the extent a strategy focuses on particular countries, regions, industries, sectors or types of investment from time to time, it may be subject to greater risks of adverse developments in such areas of focus than a strategy that invests in a wider variety of countries, regions, industries, sectors or investments.

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1. Source: S&P Global Ratings, “Outlook on Saudi Arabia Revised to Positive on Improving Fiscal and Economic Growth Dynamics,” March 2022.

2. Source: Economist Intelligence Unit, Saudi Arabia Country Report, March 2022. There is no assurance any estimate, forecast or projection will be realized.

3. Source: S&P Global Ratings, “Outlook on Saudi Arabia Revised to Positive on Improving Fiscal and Economic Growth Dynamics,” March 2022.

4. Source: Gulf Business, “Trojena: All you need to know about Saudi’s new mega tourism project,” March 8, 2022.

5. Source: “Vision 2030: The changing roles of women in the Saudi workforce,” July 19, 2021

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