Analysis Economy Saudi tourism revenue grows as budget surplus shrinks By Andy Sambidge August 16, 2023 Unsplash/Haidan Saudi Arabia is expanding its visitor appeal beyond holy sites such as the Mosque of the Prophet in Medina as part of Vision 2030 Tourism brought in $9.8bn in Q1 Surplus halved year on year Vision 2030 targets 100m visits a year Tourism revenue is beginning to emerge as a serious component on Saudi Arabia’s balance of payments, tripling in a year, and experts see the sector as a “very important” offset to any decline in oil earnings. While the kingdom’s current account returned another surplus in the first quarter of 2023 of $17.7 billion, this was less than half the size of the year-earlier surplus. A 15 percent year-on-year downturn in oil earnings combined with a 24 percent surge in import spending led the surplus to decline from almost $40 billion. Saudi 2023 growth forecast cut to 1.9% by IMF Saudi tourism appeal growing ‘at the speed of light’ Oil cuts take $11bn bite out of Saudi exports The current account records the value of exports and imports of both goods and services and international transfers of capital. Tourism revenue surged to $9.8 billion in Q1, more than three times the 2022 level. With more Saudis spending their vacations at home, the tourism balance was firmly in the black at $6 billion. Historically, the balance on travel tended to be in deficit. Outflows from Saudi nationals spending their holidays abroad would more than offset earnings from foreign religious pilgrims. However, that has all changed over the past year. Saudi’s Vision 2030 targets 100 million visits by 2030 as well as international air connectivity to more than 250 cities by the end of the decade. In the context of the overall current account tourism earnings are still small, but they are growing rapidly and promise to deliver meaningful current account diversification, said analysts at Jadwa Investment. They said rising hospitality capacity for religious pilgrims with an ever-increasing number of hotels catering to a wide range of budgets is partly driving the tourism surplus. Administrative procedures have also been streamlined and visas have become more flexible, while there has been a notable increase in tourists from the GCC and Western countries, many of whom are curious to see the social changes underway in the kingdom. Saudi Arabia's services balance remains in the red despite growing tourism “Western tourist inflows are coming off a very low base, but curiosity about a country that for a long time appeared to be ‘closed’ is evidently growing,” said Jadwa chief economist James Reeve. Saudi nationals are also spending more of their holidays and money on the growing number of entertainment and sporting options within the kingdom, rather than travelling to Dubai or further afield. Tourism debits have eased to $4 billion in the past year, from roughly $5-6 billion in the pre-Vision 2030 era as a result. Reeve described tourism revenue as having “the potential to alter fundamentally the structure” of the Saudi current account. “It is unlikely to surpass oil exports earnings, at least not for many years, but it could become a very important offset to any decline in oil earnings. Moreover, it has the potential to create a lot of jobs,” he said in the research note. Outside expertise Despite the sharp rise in tourism revenue, Saudi’s services balance remained in the red as the country increasingly calls on foreign firms to advise on mega-projects integral to Vision 2030. Last month, the Public Investment Fund (PIF) launched the Saudi Tourism Investment Company (Asfar) to invest in new tourism projects and develop destinations with hospitality and retail attractions in cities across the kingdom. “By streamlining visa processes, increasing air connectivity, developing multiple tourist attractions and hosting several local and global events, the Saudi government has made significant efforts to attract investment into the country," Saud Alsulaimani, country head for Saudi Arabia at real estate advisor JLL said. "Today, the kingdom is being recognised as one of the world’s biggest investors in tourism.” Analysts at Fitch Solutions also observed that strong government support will be the main driver behind the “fast development” of the tourism sector in the coming years. The Saudi current account was also boosted by a decline in remittance outflows. These fell from over $10 billion a year ago to $8.1 billion in Q1, suggesting that higher-earning expats are saving more of their income – given the high deposit rates on offer – rather than remitting them. Saudi Arabia has recorded current account surpluses averaging of 4.5 percent of GDP for the past decade. It slipped into deficit following the slump in oil prices in 2014 and more recently during the Covid-19 pandemic, but improved to 13.6 percent of GDP last year, the highest ratio since 2013. While Saudi’s current account remained in surplus in Q1, the financial account – the part of the balance of payments that records the net flow of investment transaction – was firmly in deficit. This was driven by substantial investments in foreign equity and investment funds, mostly by sovereign wealth fund PIF and other state-owned entities. Foreign direct investment (FDI) outflows reached $9.4 billion in Q1, up from just $2.3 billion a year earlier, while inflows totalled $2.2 billion, a 10 percent year-on-year gain. According to Jadwa, there is “cautious optimism” that intensive efforts to court foreign investors are “beginning to bear fruit”.