Historically, Saudi Arabia’s economy has been a difficult one for investors to access, but the kingdom has undergone radical transformations in recent years and is now leading the Middle East and North African (Mena) countries in having the region’s best investment regime.
Liberalisation was accelerated in 2004, with the Saudi Arabia General Investment Authority’s (Sagia) launch of the national “10×10” programme, which seeks to make the kingdom one of the world’s 10 most-competitive countries for doing business by 2010.
As a result, over the last five years Saudi Arabia has been rapidly climbing the World Bank’s Ease of Doing Business Index, which evaluates business environment and investment competitiveness in 183 countries.
|Foreign direct investment in Saudi Arabia in 2008||$38.2bn|
|The kingdom’s position in the World Bank’s Ease of Doing Business Index||13th|
|State spending on healthcare, infrastructure and development over the next five years||$400bn|
From a lowly 67th place in 2004, the kingdom jumped to 23rd place in 2007 and then rose to 15th position in 2008. It stood at number 13 in 2009, and its aim to make the top 10 seems almost within reach. The new rankings for 2010 will be released in May.
Saudi Arabia was granted membership to the World Trade Organisation in 2005 and was hailed by the World Bank as one of the top 10 reformers in 2007, most notably for reducing the days required for setting up a company from 39 down to 15, and launching a commercial credit bureau.
Indeed, the country has been making great strides in opening up its markets to foreign investors through many economic, financial and legal reforms. One of the results has been an increase in foreign direct investment (FDI), which increased by 24 per cent
from $18.3bn in 2006 to $38.2bn in 2008, according to the 2009 World Investment Report released by the UN Conference on Trade and Development.
The kingdom has taken steps to involve foreigners by opening up its stock market to foreign investments
John Sfakianakis, Banque Saudi Fransi
Such figures dwarf the $183m invested in 2000 and serve to highlight just how much progress the kingdom has made. Data on 2009 FDI has not yet been released, but it seems almost certain levels will have dropped due to the global financial crisis.
“I expect FDI flows to have fallen in 2009 as the global financial crisis worsened and oil prices fell precipitously,” says John Sfakianakis, chief economist at Banque Saudi Fransi. “One factor behind the likely downturn is FDI into Saudi Arabia tends to mirror oil price movements, with higher prices lending confidence to investors and lower prices deterring them.”
|Saudi Arabia’s ranking in Doing Business 2010|
|Ease of Doing Business||13|
|Starting a Business||13|
|Dealing with Construction Permits||33|
|Trading Across Borders||23|
|Closing a Business||60|
1=Best-performing country. Doing Business 2010 report covers the period June 2008 through May 2009.
Source: The Word Bank
Oil prices fell from a record $144 a barrel in July 2008 to average $62 a barrel in 2009.
According to Samba Financial Group, $62bn-worth of private projects were cancelled or put on hold in the kingdom between October 2008 and April 2009. The result was that state rather than private funds were drawn on to keep expansion projects on track, with $137bn of new public sector contracts being awarded over the same period.
Furthermore, at the start of 2009, the government allocated $400bn to be spent on healthcare, infrastructure and development over the next five years.
The kingdom has set itself some ambitious targets – in 2008, it announced that it wants to attract up to $900bn in FDI over the next 10 years in the energy, power, financial services and real estate sectors.
Central to attracting this investment is the $26.6bn King Abdullah Economic City (KAEC), the largest construction project in the Middle East, which is playing an indispensable role in Saudi Arabia’s drive to expand and diversify the economy. The kingdom has also launched five other such cities.
The first stage of KAEC is planned to be completed in 2010, while the entire project is expected for completion by 2020.
“We’re creating a new nerve centre for global businesses that look at the investment opportunities provided by the kingdom,” says Mohamed Ali Alabbar, chairman of Emaar Economic City, the company given the contract to build KAEC. “This aligns with the vision outlined by King Abdullah to make the kingdom among the top 10 most competitive nations in the world by 2010.”
Centres of industry
KAEC comprises six components – a seaport, industrial district, educational zone, a financial island, resorts and residential areas.
Covering 13.8 million square metres, the seaport will be the largest in the region with a capacity of more than 10 million containers a year and will be equipped to receive the world’s largest vessels. The port will have a designated zone for light industry and logistics, and is designed to serve as trans-shipment centre for onward movement of goods to Europe, Africa, Asia and beyond.
One of the major objectives behind KAEC is the creation of industrial centres, which will serve as a magnet for overseas investors. Industry is considered a key growth area for the economy, with petrochemicals and refining industries accounting for most of the increase in FDI in 2008, up 57 per cent to $12bn.
“This is an important project whose mandate is to attract a considerable degree of foreign funds,” says Sfakianakis. “Recent statistics show that petrochemicals and refining industries, as well as real estate, are the key industries that have succeeded in attracting FDI, estimated at about 70 per cent of total inflow.”
The industrial district will cover 40 million sq m, cater to 2,700 tenants and will have specific start-up initiatives to attract entrepreneurs.
“Sagia is also working with the King Abdulaziz City for Science and Technology (KACST) to encourage entrepreneurs to set up new business and to bring innovative ideas to life,” says Walid Abu Khalid, director of portfolio management at British Offset, a joint initiative by the UK government and BAE Systems, which helps international companies take part in joint ventures in the kingdom. “The Badir Programme is a good example,” Khalid says.
KACST launched the Badir programme and established its first national technology incubator – BADIR-ICT in 2008. The programme is focused on supporting the development of technology entrepreneurship; it has already assisted the creation and growth of a number of ICT businesses.
The government is also working hard to funnel investment into other areas of the economy.
“The kingdom has taken steps to involve foreigners more fully in its development by slowly opening up its stock market to foreign investments,” says Sfakianakis.
In August 2008, swap agreements were introduced on the Saudi stock exchange, the Tadawul, which allow foreign investors to trade in local stocks through Saudi intermediaries.
In a separate effort to attract foreign investors by offering greater transparency, later that year the exchange published the identity of shareholders with stakes of 5 per cent or more in a company.
Earlier this month, Saudi Arabia approved its first exchange-traded fund (ETF) to be accessible to foreigners. Riyadh-based Islamic investment bank Falcom Financial Services won approval to list the Falcom Saudi Equity ETF on the bourse.
Analysts say the move may coax big international investors, such as pension funds, to invest in the kingdom on a larger scale.
With a capitalisation of $399.24bn at the end of February 2010, the Tadawul is the largest Arab bourse in the Mena region. Major stocks include Saudi Basic Industries Corporation (Sabic), whose petrochemicals stocks are attractive to foreign investors because of its subsidised feedstock allocations and consequently high profit margins.
However, as the most restrictive of the Arab bourses, foreign investment on the Tadawul remains low at between $3-4bn.
In July 2008, the kingdom released a draft of the long-awaited mortgage law, although efforts to get it approved have been protracted. But according to Mohammed al-Jasser, governor of the Saudi Arabian Monetary Agency, the kingdom’s first sharia-compliant mortgage law will be approved imminently.
“I’m optimistic that the law will be issued in the next few months,” said Al-Jasser, speaking at the Global Competitiveness Forum held in Riyadh in January this year.
The Saudi mortgage market is significantly underpenetrated, with home loans comprising just 2 per cent of the country’s gross domestic product. The successful implementation of this law is expected to provide a significant boost to the real estate sector, bringing investment opportunities both in the financing of properties and their construction. But with Riyadh having debated the law for six years, the chances of it being passed imminently are arguably not as good as the government suggests.
The current stock of commercial space is planned to increase by more than 60 per cent by 2012 and the residential sector is also poised for considerable growth. In a country where 70 per cent of the population is below the age of 30 and only 22 per cent of locals currently own their own homes, according to data published by the Saudi Home Loans Company, there is an entrenched demand. It is estimated that about 200,000 homes are needed a year for low-income families.
Saudi Arabia is working hard to create a wealth of investment opportunities for foreigners. It efforts to date are commendable but stumbling blocks persist. Discarding the need for local companies to rubber-stamp a foreign company’s entry into the Saudi market was considered a major breakthrough. But while the Commerce and Industry Ministry has fast-tracked the process of starting a business for 100 per cent Saudi-owned firms, which can now be licensed within a few days, it can take weeks or months for foreign investors to obtain and maintain the various licences and visas required.
Furthermore, while Saudi-owned companies pay a modest 2.5 per cent tax on their total holdings, foreign companies are required to pay a 20 per cent corporation tax.
The nature of doing business in Saudi – principally the need to know the right people – means that, to date, most investment projects have involved joint ventures.
Although it secured 13th position in 2009 closer inspection reveals it fell two places to 140th position in the “enforcing contracts” category, as well as in “employing workers” where it fell to 73rd.
“Bureaucratic efficiency is an area that requires attention,” says Sfakianakis. “Improvements have to be made in commercial court settlements, which the kingdom is now addressing, as well as the ability to close a business.”
Indeed, long-promised judicial reforms may be gaining traction. In March this year, after years of deliberation, the Supreme Judicial Council approved the establishment of commercial courts in Riyadh, Jeddah and Dammam.
However, obtaining visas and work permits for overseas workers remains a major hurdle. There are 4-8 million foreigners in Saudi Arabia, many of whom are employed illegally. Business people complain the sponsorship system is deliberately designed to make employing foreigners difficult so as to encourage the hiring of Saudi nationals.
The kingdom has come a long way in opening up its markets to foreign investors and improving the business environment over the last six years, but still has some way to go.
However, even taking these hurdles into account, there is no doubt foreign investors can find a compelling investment case for Saudi Arabia owing to its strong fiscal position, low government debt to GDP ratio, and robust demographics, which ensure high domestic demand.
In May the kingdom will learn whether it has achieved its target of making it into the Top 10 Doing Business rankings, but Sfakianakis remains fairly confident it will.
“It seems Saudi Arabia will be able to attain its target,” he says. “In case it doesn’t, Saudi Arabia has made tremendous improvements
in its business climate and its willingness to reform.”