Bracing for a Storm: Saudi Businesses Navigate Boom-Bust Cycles
After a decrease in oil prices, Saudi businesses initiate layoffs
In the heart of Arabia, businesses are gearing up for a potential economic downturn, spurred by a dip in oil prices and geopolitical turbulence. For decades, Saudi Arabia's economic engine has been fueled by energy exports and government spending, leaving it susceptible to the whims of crude prices.
Recently, oil prices plummeted from over $80 per barrel in January to roughly $60 - the lowest since 2021 and far below the kingdom's break-even point. This slump has sent ripples through the private sector, prompting a renewed focus on diversification, a familiar battle cry in the reign of Crown Prince Mohammed bin Salman.
A tech entrepreneur exemplifies this predicament. He vividly recalls the lessons learned during the 2016 oil price collapse, when his first business crumpled after the government slashed public-sector worker incentives. Now, he's taking a more strategic approach. One of his ventures provides customer loyalty programs for other businesses and has reduced its dependence on government clients to protect itself from potential spending cuts. It has also ventured into more resilient sectors such as food and beverages, buoyed by rising tourism.
"We've diversified our revenue streams to mitigate that risk," he said, with government clients now accounting for less than 10% of the company's business. However, his second company, offering enterprise software services, remains heavily reliant on government contracts and could grapple with the brunt of the slowdown if oil prices continue to sink.
The Kingdom's Vision 2030, unveiled in 2016, aims to transform Saudi Arabia's economy by investing in various sectors, including tourism, infrastructure, and private-sector development. The government hopes to increase the private sector's contribution to GDP from 40% in 2016 to 65% by 2030.
However, government spending and state-linked entities such as the Public Investment Fund continue to dominate the economic landscape. Despite decade-long efforts at diversification, these powerhouses remain the primary drivers of economic activity. The $940 billion sovereign wealth fund is steering a multitude of projects aimed at unlocking new sectors and generating employment.
Yet, despite these ambitions, the kingdom has been directed to tighten its purse strings. Some of its mega-projects, like the flagship Neom scheme, are experiencing delays or revisions, signaling a recalibration of spending priorities. The Saudi government has started increasing oil production in a bid to increase market share, hinting at a willingness to endure lower prices for the longer term.
The slower growth in oil and non-oil sectors threatens businesses across the board. Karen Young, a senior researcher at Columbia University's Center on Global Energy Policy, cautions that the immediate concern will be a contracting award cycle and shifts in bank lending or cost of capital. During the last slump, between 2014 and 2016, austerity measures led to delays in payments to contractors, causing lasting damage to many businesses. Authorities claim that subsequent reforms now ensure that contractors are paid on time.
However, the ripple effects of global trade tensions could compound the challenges. A seasoned foreign executive, working for a company operating a franchise restaurant chain in the kingdom, notes that while the impact has yet to be felt, he's watching closely for potential disruptions in global supply chains, particularly accessories like beef imports. "The hospitality industry operates on a thin margin," he warns, "any fluctuations in the supply chain can impact our bottom line."
- To navigate the economic downturn, Saudi businesses are recalibrating their strategies, focusing on diversification to mitigate risks and protect profitability.
- The tech entrepreneur, who had experienced the 2016 oil price collapse, now offers customer loyalty programs and has ventured into sectors like food and beverages to increase resilience.
- Despite the government's vision to invest in various sectors, state-linked entities continue to dominate the economic landscape, with the Public Investment Fund driving numerous projects for sector expansion.
- The slump in oil prices has forced the Saudi government to tighten its spending, leading to potential delays or revisions in mega-projects like Neom, signaling a shift in spending priorities.
- The ripple effects of global trade tensions could exacerbate challenges for businesses in Saudi Arabia, particularly in sectors like hospitality that operate on thin margins and rely heavily on global supply chains for accessories like beef imports.
