Latest / The Emerging Markets Podcast with Fexingo: Developing Economies, Growth, and Investment / How Saudi Arabia Is Becoming the New EM Powerhouse
Transcript
- Lucas: So Saudi Arabia is up 18 percent year-to-date on its main stock index, the Tadawul All Share. That's not just oil bouncing — that's the biggest gain among major emerging markets so far in 2026. Luna: And this is the kingdom that everyone has been watching since Vision 2030 was announced. But 18 percent — that's a real number. What's driving it? Lucas: If today's episode makes something click about how emerging markets are shifting, the way we keep this ad-free is simple: listener support. If you find that useful, buy me a coffee dot com slash fexingo. Truly, it's what keeps us independent. Luna: Yeah, absolutely. And we appreciate that. So back to Saudi — non-oil GDP grew at 5.6 percent in the first quarter. That's the fastest pace in over a decade. Lucas: Right. And that's the headline number that tells you the story. The Public Investment Fund, the sovereign wealth fund, now has over 925 billion dollars in assets. They are deploying that capital into everything from a new airline — Riyadh Air — to gigaprojects like NEOM, the smart city in the desert. Luna: And these aren't just construction projects. They're building entire new economic sectors. Tourism, entertainment, tech startups. The number of venture capital deals in Saudi doubled last year. Lucas: Doubled. And the base was already growing. You've got a young population, 70 percent under 35, high smartphone penetration, and a government that is effectively forcing diversification through the PIF. The fund is the largest investor in Uber, it owns stakes in Live Nation, in Nintendo, in a whole portfolio of global companies. Luna: That's the classic sovereign wealth fund play — use the oil wealth to buy future growth. But the difference here is they're also trying to build domestic capacity. They want Saudi companies to emerge. Lucas: Exactly. And there's a concrete example from just last month. Aramex, the logistics company, was spun off from Saudi Aramco and listed on the Tadawul. It raised over a billion dollars. That is a direct result of the PIF pushing Aramco to unlock value and create a logistics hub for the region. Luna: So you've got the IPO pipeline opening up. That attracts foreign investors. And the data shows that foreign ownership of Saudi equities has risen to about 4 percent — still low by EM standards, but double what it was three years ago. Lucas: And that's partly because MSCI upgraded Saudi Arabia to emerging market status in 2019. Then FTSE Russell followed. So index funds have to buy. The weighting in the MSCI Emerging Markets Index is now around 4 percent — that's bigger than Thailand, bigger than Mexico. It's closing in on South Korea. Luna: But there's a tension here. The strong dollar is still a headwind for all emerging markets. The trade-weighted dollar index is at 119 — that's elevated. And Saudi riyal is pegged to the dollar. So when the dollar strengthens, Saudi exports become more expensive, but oil is priced in dollars anyway, so that's a mixed bag. Lucas: It's a mixed bag for sure. The oil revenue side is actually helped by a strong dollar because it's dollar-denominated. But the non-oil export story — petrochemicals, plastics, fertilizers — those get squeezed. And tourism, which they're betting big on, becomes more expensive for Europeans and Asians. Luna: And then there's the geopolitical risk. We just saw headlines this morning — oil jumped 3 percent after Iran said it targeted a US airbase. That kind of tension directly impacts investor sentiment toward the Gulf. Lucas: Right, and Saudi Arabia is right in the middle of that. The kingdom has been trying to de-escalate with Iran, but the broader regional instability is a risk that can't be ignored. Yet the market seems to be looking through it. The Tadawul barely reacted to those headlines — it was down maybe 0.3 percent. Luna: That suggests investors are pricing in a kind of normalisation. They believe the reforms are real enough that short-term shocks won't derail the trajectory. Lucas: And that's the key question for anyone thinking about allocating to Saudi. Is this a genuine structural transformation, or is it a sugar rush from oil wealth being deployed? I think the evidence leans toward structural. Luna: Give me your strongest piece of evidence. Lucas: Labor force participation. Women's participation has more than tripled since 2016 — from 17 percent to over 35 percent. That's not a short-term stimulus effect. That's a cultural and regulatory shift that changes the productive capacity of the economy for decades. Luna: That's a huge point. And it ties into education — Saudi has one of the highest tertiary enrollment rates in the region. So you have a more educated workforce, more women working, and the PIF funding startups. That's a recipe for something real. Lucas: Now, the flip side is that the non-oil economy is still heavily dependent on government spending. Private sector investment is growing, but from a low base. The IMF recently estimated that non-oil GDP growth would moderate to 4.5 percent next year as fiscal consolidation kicks in. Luna: So the sustainability question is: can the private sector take the baton from the government? And that's where things like the IPO of Aramex, and the broader capital markets development, become really important. Lucas: Exactly. The PIF is also listing some of its own assets. There's talk of a potential IPO for Saudi Telecom's tower unit. And the exchange itself is modernising — they've introduced derivatives, short selling, and are working on a link with the Hong Kong exchange. That's a big deal for foreign capital. Luna: And for ETF investors, the main vehicle is the iShares MSCI Saudi Arabia ETF, ticker KSA. It's up about 16 percent year-to-date, tracking the index. The top holdings are banks — Al Rajhi Bank, Saudi National Bank — plus Saudi Aramco, and some petrochemical firms like SABIC. Lucas: So it's still tilted toward financials and materials. But that's changing as more sectors come to market. And the valuation — the forward price to earnings ratio for the index is around 17 times. That's not cheap, but it's in line with the broader EM average. Luna: So for a listener thinking about adding Saudi exposure, what's the right way to think about it? Lucas: I'd say it's a conviction play on the reform story. If you believe Vision 2030 is more than a slogan, then Saudi offers a diversifier within EM — it's not correlated with China or India, it's got a different risk profile. But you have to accept the geopolitical premium and the oil linkage. The KSA ETF gives you diversified exposure, but you're still heavily in financials. Luna: And the oil linkage — even though non-oil GDP is growing, the government budget is still 60 percent dependent on oil revenues. So if oil crashes, the reform momentum could stall. Lucas: That's the big risk. But the PIF is building a buffer. They've got over 900 billion in assets, and the break-even oil price for the budget has fallen from over 90 dollars a barrel in 2016 to around 75 now. So they've made progress. Luna: All right, so to wrap: Saudi is the standout EM performer in 2026 so far. The reforms are real, but risks remain — geopolitical, oil dependency, and a strong dollar. The KSA ETF is the easiest way in. Lucas: And the story is still early. The next big test will be the pace of non-oil private sector investment and whether the IPO pipeline can sustain itself. That's what I'll be watching in the second half of the year. Luna: Great angle. Thanks, Lucas. Lucas: Thanks, Luna. And thanks to our listeners — if this was useful, buy me a coffee dot com slash fexingo. See you next time.