Saudi Arabia's Non-Oil Sector Surge: Spotting Undervalued Gems in a Diversifying Economy

The Kingdom of Saudi Arabia is undergoing a historic economic transformation. As it pivots away from oil dependency, its non-oil private sector has emerged as a powerhouse of growth, driven by domestic demand, government-led projects, and a workforce expansion fueled by Vision 2030. Recent Purchasing Managers' Index (PMI) data and sector-specific trends reveal compelling opportunities for investors willing to navigate the nuances of this evolving landscape.

PMI: A Tale of Resilience Amid Moderation

Saudi Arabia's non-oil private sector PMI hit a high of 60.5 in January 2025, marking a decade-high expansion in output, new orders, and employment. By April 2025, the PMI dipped to 55.6, signaling a moderation in growth but remaining firmly above the 50 threshold that separates expansion from contraction. This slowdown reflects a recalibration of global demand pressures, particularly in exports, but domestic activity remains robust. The latest data points to a June 2025 rebound in new order volumes, driven by domestic sales and hiring surges.

Domestic Demand: The Engine of Growth

The IMF's revised 2025 GDP forecast of 3.5%—up from 3%—hinges on domestic demand, which accounts for nearly 70% of non-oil GDP. Key drivers include:
- Government projects: Infrastructure, tourism, and housing initiatives like NEOM and the Red Sea Project are fueling construction and logistics demand.
- Consumer spending: A record-low unemployment rate for Saudi nationals (7% in 2024) and rising credit growth (16.26% YoY in banking loans) have bolstered consumer confidence.
- Tourism and services: The 2023 Hajj expansion and growing inbound tourism are boosting hospitality, retail, and leisure sectors.

Sectors to Watch: Where Value Lies

1. Construction & Infrastructure
   The backbone of Saudi's diversification, construction is supported by $200 billion in planned projects by 2030. Firms like ACWA Power (renewables) and Emaar Saudi (real estate) are well-positioned to capitalize on demand for housing, utilities, and smart cities.

2. Consumer Services
   Companies serving domestic demand—such as Almarai (food and dairy) and Souq.com (e-commerce)—benefit from rising disposable income and urbanization. Almarai's dividend yield of ~4% and steady revenue growth highlight its defensive qualities.

3. Technology & Infrastructure
   Saudi's push for digital transformation has made tech infrastructure a priority. Telecom giant Zain Saudi and cloud-based firms like STC Digital are critical to expanding broadband and data services, underpinning productivity gains.

Challenges: Navigating Cost Pressures and Export Limits

• Input cost volatility: Surging material prices (e.g., steel, cement) and labor shortages could squeeze margins. However, easing inflation trends (input costs fell to a four-year low in March 2025) offer some relief.
• Export constraints: Foreign sales grew at their slowest pace in seven months in May 2025, underscoring reliance on domestic demand. Investors should prioritize firms with strong local market penetration.

Investment Strategy: Play the Long Game

The non-oil sector's resilience, coupled with the IMF's bullish outlook, suggests a strategic allocation to Saudi equities is warranted. Key recommendations:
- Overweight construction stocks: Exposure to firms tied to Vision 2030 projects.
- Underweight export-heavy sectors: Focus on domestic-facing businesses.
- Leverage ETFs: The Saudi Arabia Energy Transition Fund (SETF) offers diversified exposure to energy, tech, and infrastructure.

Conclusion

Saudi Arabia's non-oil sector is no longer a niche play—it's a mainstream opportunity. While challenges like cost inflation and export softness persist, the structural tailwinds of domestic demand, government spending, and workforce expansion are too strong to ignore. For investors willing to look beyond oil, sectors like construction, consumer services, and tech infrastructure offer a rare blend of growth and valuation upside. As Vision 2030 hits its stride, the Kingdom's diversification story is just beginning.

Stay hungry, stay bold—and keep an eye on Riyadh.