UK-Saudi Arabia Trade:
Boom Times Ahead?

Saudi Arabia’s economy is riding high with oil revenues. In 2022, it surpassed most countries in terms of economic growth with output gains of more than 7% with oil exports accounting for some 87% of government revenue.[1] Saudi Arabia boasts 16%  of the world’s proven oil reserves.[2] It is estimated that the wider Gulf’s oil and gas producers will generate an additional $1.3 trillion (USD) in revenues over the next four years, following Russia’s invasion of Ukraine, and, Saudi Arabia will be one of the main beneficiaries.[3]

 

Saudi Arabia’s state owned Aramco plays a dominant role in the national economy. On its own, it accounts for 10%  of total global oil production with a maximum capacity of 12 million barrels a day (MBD). This expected to increase to 13 million MBD by 2027. Furthermore, gas production is targeted to soar by more than 50% over the next seven years, which highlights a remarkable expansion that will provide a real competition to Qatar’s LNG industry.[4]

 

Saudi Arabia ranks as the 9th freest economy in the Middle East and North Africa, according to The Heritage Foundation’s 2022 Index of Economic Freedom.[5] Clearly, there is scope to improve on this ranking and it is encouraging to note the regulatory reforms that have been implemented in recent years.

 

Saudi Arabia has a population of 36 million people and the official unemployment rate hovers around 7%. One striking feature is the high proportion of young people because more than two thirds of the population is under the age of 35.[6] Companies are required to employ a certain quota of Saudi workers in pursuit of Sauidisation. In tandem, there is a high and growing proportion of women in the workforce. For several years now, more than half of all those graduating from universities in Saudi Arabia are women.[7] Furthermore, womens’ participation in the workforce surpassed 30 percent in 2020, far ahead of schedule.[8]

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Saudi Arabia’s oil wealth allows it to channel export earnings into the Public Investment Fund (PIF), which is one of the region’s major state investment vehicles. The PIF is now committed to spending $40 billion (USD) a year in the country, as well as investing in a wide range of overseas ventures.[9] In 2017, the PIF’s investments abroad amounted to 9%. By June 2022, this proportion had climbed to 25%.[10] In October 2022, for example, the PIF announced that it was planning to set up subsidiaries in Bahrain, Iraq, Jordan, Oman and Sudan, focusing infrastructure, healthcare, finance and food. This forms part of its strategic plan to invest in long term partnerships across the region.  The PIF also indicated that it is likely to borrow more from the world’s capital markets as opportunities for investment arise. Last November, for instance, the PIF raised $17 billion (USD) through a syndicated loan from the world’s major investment houses. The PIF has invested in more than 60 new companies based in Saudi Arabia over the past seven  years.

 

The UK and Saudi Arabia have enjoyed along a long history of mutually beneficial relations, reflected in the close ties between the countries’ respective Royal Families and their love of horse racing. There have been no less than four state visits to Britain by Saudi monarch since 1952. The discovery of oil transformed the Saudi economy beginning in 1933 with the creation of Aramco, taken into full state ownership in 1980. Aramco has proved to be the beating heart of the Saudi economy.

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Trade Relations between Saudi Arabia and the UK

 

As outlined above, Saudi Arabia ranks 25th out of all the UK’s trading partners. The total exports in the 12 months to 1 July 2022 amounted to $16.9 billion (USD), placing Saudi Arabia 16th in terms of UK export partners.[11] 33.6% of UK exports to Saudi Arabia are in the form of goods, whereas the majority, 66.4%, are in the form of services.[12] Indeed, the UK accounts for 11.8% of imported services in Saudi Arabia. Furthermore, the UK invested $6.8 billion (USD) in the form of foreign direct investment in Saudi Arabia in 2020—despite the damaging impact of the Covid-19 pandemic lockdown.

 

Mechanical power generators are a hugely important export item for the UK and rank at the top of the league table for goods exported to Saudi Arabia. Additionally jewellery is another important export, because it reflects Saudi citizens’ love of pearls, diamonds and other precious gems. Medical and, in particular, pharmaceutical products, also appear high on the list of UK exports to Saudi Arabia along with motor vehicles, including expensive luxury cars, such as Rolls Royce and Bentley. Saudi Arabia also imports a lot of trucks and construction vehicles from the UK.

 

Arms and armaments rank 4th in the 2021 export totals, reaffirming Saudi Arabia’s position as one of the UK’s most important export markets for defence equipment and military aircraft. According to a House of Commons library research brief (January 2021) the UK was the second largest defence exporter to Saudi Arabia (after the US) over the nine year period 2010 to 2019.[13] Furthermore, the UK and Saudi Arabia have established a Government-to-Government defence cooperation programme, spanning the export of advanced Typhoon, Tornado and Hawk military aircraft, along with minesweepers, logistics and manpower support packages. For UK defence contractors, Saudi Arabia is a key market: in fact, it is their largest national market internationally.
 

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It is also noteworthy that in 2017, the lobby group Campaign Against Arms Trade (CAAT), brought legal action against the UK government to prevent military equipment sales to Saudi Arabia. The case was rejected by the High Court in 2017, but a later ruling in July 2019 by the UK Court of Appeal placed a moratorium on the Government granting specific export licences for certain military equipment.[14] However, following an internal government review, this legal ruling was overturned and the UK government resumed the issuing of appropriate defence export licences for UK suppliers of military hardware and equipment. Official statistics published by the Department for International Trade indicate that the UK approved $1.9 billion (USD) of arms sales to Saudi Arabia over the three month period July to September 2020 following the removal of the previous temporary moratorium.[15]

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As noted, the UK derives two thirds of its export earnings to Saudi Arabia from services. In the 12 months to 1 July 2022, financial services accounted for 12.6% of these earnings while transport (airline) services accounted for 3.8%. Telecoms, computer and IT services contributed a further 3.7%.

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Saudi Arabia is an export market of growing significance for the UK. Britain’s commitment to security in the Gulf exemplified by the Royal Navy’s presence to protect shipping is testament to this strong bond. Furthermore, the Gulf Strategy Fund (GSF) is the vehicle by which the UK seeks to strengthen commercial and security ties. The GSF seeks to support Saudi Arabia’s Vision 2030 reforms, spanning economic development, boosting tourism, enhancing mutual security, and tackling the impact of climate change through, for example, by mobilising young Saudis to lead climate initiatives in their spheres of influence.[16]

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Saudi Arabia is the world’s largest exporter of petroleum and the sale of hydrocarbon products dominate the league table of Saudi Arabia’s exports to the UK. In 2021, mineral fuels, oil and distillation products accounted for over $900 million in export sales to the UK. Vehicles were the second largest export. Machinery ranked third while there was a growing demand for toys, games and sports items: this is evidence that demonstrates a rapidly developing market. Plastics, which are by-products of distilled oil, ranked 5th, while aircraft sales were also significant. Saudi Arabia has a strong presence in the aluminium sector as well, since it is able to take advantage of comparatively cheap power in the production process. As a matter of fact, growing demand for aluminium and aluminium refined products means that it will be a continued source of revenue for Saudi Arabia. Jewellery also features in the rankings of top UK imports, reflecting the importance of this luxury sector in today’s world.

 

Cork is an agricultural product that had real value with export sales of over $30 million in 2021, while edible fruits; such as dates and citrus fruits, also rank in the top dozen exports to the UK.  

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Trade links between Saudi Arabia and the UK remain dominated by oil and gas exports from Saudi and significant arms exports from the UK. However, Saudi Arabia is diversifying its economy and this is reflected in exports of aluminium, plastics and vehicles to the UK. Britain’s exports to Saudi are spearheaded by services of one type or another, with a strong presence in banking and financial services. But there is also a growing client base for IT, telecoms and digital software.

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Future Opportunities

 

In 2021, a new series of initiatives were announced to attract overseas investors, especially large corporations. Meaningful reforms have been made which enable foreign investors to own controlling stakes in companies in Saudi Arabia. Most recently, limits on the level of permitted foreign investment in firms operating in the financial sector have been relaxed. This has encouraged interest from some leading international players in the world’s capital markets and is one of the reasons why renowned figures, such as Jamie Dimon, the CEO of J P Morgan Chase, and Steve Schwarzman, the head of Blackstone private equity, were among more than one thousand global executives who attended the annual investor conference in Riyadh in October 2022, dubbed “Davos in the Desert.”[17]

 

The PIF is focusing investment on sectors of the economy where the country is heavily dependent on imports. Accordingly, it is seeking to develop the country’s capacity for  building materials, as well as investing in the nascent mining sector, where there are some promising prospects such as phosphates.[18] UK companies could offer considerable expertise in developing these industries. There are also exciting opportunities in other sectors ripe for expansion, notably retail and leisure. And, there is considerable scope for developing manufacturing capacity in the defence and motor vehicle sectors. In this context, the PIF’s decision to acquire 62% of the electric vehicle manufacturer Lucid is a pointer to the future.[19]

 

Hydrogen power, which is an enticing area for development, is rapidly evolving. As articulated in ‘Green Hydrogen: The Next Step Forward’ the past years have seen innovative strides towards lowering the price of the electrolysis process required to generate green hydrogen.[20] Saudi Arabia is determined to rank as the world’s largest hydrogen producer, which is a goal confirmed in October 2021 by Abdulaziz bin Salman Al-Saud, Saudi Arabia’s Minister of Energy.[21]  It was therefore significant that three years ago, Saudi Arabia was responsible for the 1st shipment of hydrogen to Japan which was transported in the form of ammonia. Planned export production of this new form of liquid hydrogen is set to increase to four million tonnes a year by 2030.[22]

 

Saudi Arabia currently has three preferential trade agreements in force and the average trade weighted tariff rate is 5.1%. However, it is also important to note there are a total of 143 non-tariff measures in effect, which hinder growth in trade.

 

The UK is actively negotiating a new free trade agreement (FTA) with the six members of the Gulf Cooperation Council (GCC) of which Saudi Arabia is a member. This is a particularly important opportunity for small and medium sized enterprises in the UK as they account for 85% of all goods exported to Qatar, Saudi Arabia and the UAE. The UK government estimates that a comprehensive FTA with the GCC could be worth an additional £1.65 billion annually to the UK economy; and, it would prove particularly  worthwhile for trade in respect to motor vehicles and machinery. The main goal for the UK would be to enhance and develop Saudi Arabia’s renewable energy sector, most notably in the wind power sector, where tariffs are currently levied on turbine part at 15%.[23] Clearly, there is a lot to play for in the next couple of years and boom times may be just around the corner.

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(27/02/2023)

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Notes

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[1] 2022 Index of Economic Freedom, Heritage Foundation, Washington DC.

[2] Ibid.

[3]‘The new sovereign wealth fund boom’, Financial Times, 5 January 2023.

[4] ‘Saudi Aramco bets on the long haul’, Financial Times, 13 January 2023.

[5]  Source: https://www.heritage.org/index/

[6] ‘Two thirds of Saudi Arabia’s population is under the age of 35’, Gulf Business, 10 August 2020. The original source is a report entitled Saudi Youth Report in Numbers, issued by the General Authority for Statistics (GASTAT).

[7] More women than men in Saudi universities, says ministry’ Saudi Gazette, Al Arabiya,https://english.alarabiya.net/perspective/features/2015/05/28/More-women-than-men-in-Saudi-universities-says-ministry.

[8] Source: ‘The Gulf in 2021’, House of Commons Library Brief, page 13, 9 August 2021.

[9] ‘The new sovereign wealth fund boom’, Financial Times, 5 January 2023.

[10] ‘The new sovereign wealth fund boom’, Financial Times, 5 January 2023.

[11] Trade & Investment Factsheet, Department for International Trade, 20 January 2023. https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1129435/saudi-arabia-trade-and-investment-factsheet-2023-01-20.pdf

[12] Ibid.

[13] The brief quotes as its source the Stockholm International Peace Research Institute (SIPRI) Arms Transfer Database.

[14]  Source: ‘UK arms exports to Saudi Arabia: Q & A’, House of Commons Library Briefing Paper, page 13,  29 January 2021.

[15]  Source: ‘UK approved $1.9bn of arms sales to Saudi Arabia since ban lifted’, https://www.aljazeera.com/news/2021/2/9/uk-approved-1-4bn-of-arms-sales-to-saudi-arabia-post-export-ban, 9 February 2021.

[16] Source: ‘Gulf Strategy Fund’, Foreign & Commonwealth Office update, 26 Augusts 2022, https://www.gov.uk/government/publications/official-development-assistance-oda-fcdo-international-programme-spend-objectives-2021-to-2022/gulf-strategy-fund

[17] ‘Davos in the Desert’ guests shrug off US tension, Financial Times, 25 October 2022.

[18] ‘Saudi Arabia looks to mining as way to diversify its economy’, by Joseph Hammond, Forbes , 3 January 2023.

[19] ‘The new sovereign wealth fund boom’, Financial Times, 5 January 2023.

[20] Green Hydrogen: The Next Step Forward by Keith Boyfield, Euro Gulf Information Centre, 23 September 2022. https://www.egic.info/green-hydrogen-the-next-step-forward

[21]  Green Hydrogen: The Next Step Forward by Keith Boyfield, Euro Gulf Information Centre, 23 September 2022. https://www.egic.info/green-hydrogen-the-next-step-forward

[22] Source: Upstream Energy Explored, 7 January 2022, https://www.upstreamonline.com/energy-transition/saudi-aramco-sets-out-plan-to-produce-hydrogen-powered-vehicles/2-1-1140811. See also ‘Saudi Arabia’s Hydrogen Industrial Strategy, Jane Nakano, Centre for Strategic & International Studies, 7 January 2022,  https://www.csis.org/analysis/saudi-arabias-hydrogen-industrial-strategy

[23]‘UK-GCC Trade Negotiations’, Deloitte, https://www2.deloitte.com/uk/en/pages/tax/articles/uk-gcc-trade-negotiations.html

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