Saudi Arabia's Non-Oil Sector: A Resilient Investment Opportunity Amid PMI Gains and Strategic Diversification

Saudi Arabia's non-oil private sector continues to defy global economic headwinds, with recent Purchasing Managers Index (PMI) data underscoring its resilience. In June 2025, the PMI for the non-oil sector rose to 57.2, a three-month high and well above the 50.0 expansion threshold. By July, the index edged down to 56.3, reflecting a moderation in output growth but sustained momentum in hiring and input activity. These trends, coupled with Vision 2030's strategic diversification efforts, position the Kingdom as a compelling long-term investment destination, albeit one that requires careful navigation of competitive pressures and global trade risks.

PMI Trends: A Barometer of Resilience

The PMI data reveals a sector in transition. While output growth slowed in July to its lowest rate since early 2022, employment surged at the fastest pace since 2011, driven by rising backlogs and a surge in demand for skilled labor. Companies are passing on higher input costs—particularly in labor and raw materials—to customers, with output prices rising at the strongest rate in 1.5 years. This cost-pass-through, however, is mitigated by robust domestic demand, which remains a cornerstone of growth.

The International Monetary Fund (IMF) has revised Saudi Arabia's 2025 GDP growth forecast to 3.6%, citing improved financial conditions and non-oil GDP growth of 4.7% in Q2 2025. Yet, the IMF cautions that risks loom large: U.S. tariffs, geopolitical tensions, and potential supply chain disruptions could dampen momentum. Investors must weigh these risks against the sector's demonstrated ability to adapt, as evidenced by the PIF's $941.3 billion assets under management and its strategic bets in technology, renewables, and infrastructure.

Diversification Gains: Key Sectors Driving Growth

The non-oil sector's expansion is underpinned by five pillars of diversification:

1. Manufacturing and Industrialization: The Giga Projects, including NEOM's Oxagon (a floating industrial hub), are attracting global partners with advanced technologies like 3D printing and automation. These projects are projected to generate $1.2 trillion in economic value by 2030.
2. Agriculture and Food Security: A $14 billion collaboration with China in 2025 focuses on smart food cities, vertical farming, and biofertilizers. This aligns with the Kingdom's goal to reduce food import dependency and expand exports of high-value products like dates and bottled water.
3. Tourism and Hospitality: With 362,000 hotel keys projected by 2030, luxury developments in Jeddah, Riyadh, and the Red Sea Project are transforming Saudi Arabia into a global tourism hub. The sector's growth is further bolstered by the 33% increase in international visitors in 2024.
4. Technology and Innovation: The $38 billion National Gaming and Esports Strategy aims to establish 250 gaming companies and produce 30 top-tier games by 2030. AI and cloud computing initiatives, led by the PIF, are also accelerating digital transformation.
5. Renewables and Energy Efficiency: The National Renewable Energy Program (NREP) is on track to generate 50% of electricity from solar and wind by 2030. ACWA Power's Al Shuaibah projects and the PIF's investment in Skyborn Renewables signal a strategic pivot to green energy.

Global Trade Exposure and Competitive Pressures

While Saudi Arabia's non-oil exports to the U.S. remain largely tariff-exempt (96% of U.S. imports are oil-based), broader trade tensions could indirectly impact the sector. For instance, the construction and infrastructure industries, which rely on global supply chains for materials like steel and machinery, face risks from U.S.-China trade disputes. Similarly, the tourism sector's reliance on international visitors makes it vulnerable to geopolitical shocks or economic slowdowns in key markets.

Labor costs are another critical factor. Companies are offering steep salary packages to retain skilled workers, with staff costs rising at the fastest pace since 2009. This trend, while a sign of a strong labor market, could compress profit margins if not offset by productivity gains or pricing power.

Investment Outlook: Balancing Opportunities and Risks

For long-term investors, Saudi Arabia's non-oil sector presents a mix of high-growth opportunities and manageable risks. The PIF's focus on renewable energy, technology, and infrastructure offers exposure to sectors with strong policy tailwinds. Additionally, the Kingdom's strategic partnerships—such as its $50 billion joint investment with Chinese banks—underscore its ability to attract foreign capital.

However, investors should remain cautious about overestimating the pace of diversification. The non-oil sector still accounts for just 35% of GDP, and oil remains a critical revenue source. Competitive pressures in sectors like manufacturing and tourism may also intensify as global players enter the market.

Key recommendations for investors:
- Sector Allocation: Prioritize industries with clear government support, such as renewables, technology, and hospitality. The PIF's $2.67 trillion 2030 target provides a strong anchor for these sectors.
- ESG Considerations: Favor companies aligned with Saudi Arabia's sustainability goals, including those in smart grid technology and green finance.
- Geopolitical Hedging: Diversify regional exposure to mitigate risks from U.S. tariffs or Middle East tensions.

Conclusion

Saudi Arabia's non-oil sector is a testament to the power of strategic vision and institutional resilience. While the PMI data shows a moderate but sustained expansion, the broader narrative of diversification—driven by Vision 2030 and global partnerships—offers a compelling case for long-term investment. However, success will hinge on navigating competitive pressures, managing input costs, and monitoring geopolitical risks. For investors with a multi-year horizon, the Kingdom's non-oil economy represents a rare blend of growth potential and structural reform, making it a cornerstone of the next decade's global investment landscape.