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Chart 5: More sustained private non-oil sector growth needed in Saudi
25
20
15
10
5
0
-5
-10
-15
Oil Sector
Private Non-Oil Sector
Government Non-Oil Sector
Real GDP growth (%yoy)
1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
Source: Haver, BofA Merrill Lynch Global Research. Series uses contributions to growth from real GDP data with 1999 base year prior to 2010.

Chart 6: Oil sector large; government controls 60% of real economy
16.9%
43.0%
39.3%
Oil Sector
Private Non-Oil Sector
Government Non-Oil Sector
Source: Haver, BofA Merrill Lynch Global Research. Data as of 2015.

Human capital is critical and takes time to build
In our view, improvements to human capital, rather than business climate supply-side reforms, are the critical barriers to overcome. While building the appropriately qualified workforce takes time, Saudi Arabia has been making progress in this area. c25% of Saudi tertiary graduates complete humanities and arts programs, but this is down from 39.4% in 1999. Graduates from social sciences, business and law represented the largest share of graduates at 27.2% of total in 2014, up from 15.5% in 1999. Still, as we discuss in later sections, diversification prospects are mixed across sectors and will likely depend in part on providing the appropriate incentives to the private sector.

Chart 7: Distribution of Saudi tertiary graduates by field of study (%)
40
35
30
25
20
15
10
5
0
1999
2014
Humanities and arts
Education
Social sciences, business, law
Science
Engineering, manufacturing
Health and welfare
Agriculture
Others
Services
Source: UNESCO, BofA Merrill Lynch Global Research

Mobilizing domestic resources is key
The NTP makes clear that part of the NTP costs (40%) will need to be shouldered by the private sector. Out of a total estimated NTP cost of SAR447bn (US$119bn; 18.4% of GDP), the NTP implies that the private sector will need to contribute about SAR179bn over the coming five years (US$47.6bn; 7.4% of GDP). Implementation of growth-boosting initiatives will require a challenging crowding in of private sector investment. The NTP expects only a SAR40bn increase in the level of Foreign Direct Investment (FDI), meaning that the bulk of private sector investment could have to come from domestic sources. While the government investment is generally in retrenchment mode, the NTP may be suggesting that selective and strategic projects are likely to go ahead. Authorities have also suggested a number of projects could be structured as Public-Private Partnerships (PPP).

Merrill Lynch
GEMs Paper #26 | 30 June 2016
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