Kingdom, Come

Saudi King Abdullah bin Abdul Aziz’s announcement of billions of dollars of domestic investment in March came amid intense regional unrest and fears that the turmoil would trickle into the kingdom.

An estimated 60 per cent of the population of roughly 26 million is under the age of 25, and the country suffers from an unemployment rate of around 10 per cent.

These factors, combined with a chronic housing shortage, a lack of skilled Saudi workers in the private sector, and an underdeveloped infrastructure in certain areas, all fell into the spotlight as matters for concern.

The government responded fast – and with unprecedented levels of investment – to address the frustrations of its citizens, but also because it needed to turbo-drive its economic aspirations of becoming a top-10 global economy.

Back in 2005, Saudi Arabia was ranked 67th by the World Bank in its annual rankings of 183 economies for “Ease of Doing Business”. That year, the government ambitiously announced its 10×10 programme based on the goal of becoming a top-10 economy by 2010. And it got close – only six years later, in 2011, KSA is ranked 11th.

The country looks set to further climb the rankings, if only slightly, next year on back of the mega spending which is pushing the kingdom into a bright economic renaissance affecting all major industries and sectors – particularly banking and finance, oil and energy, technology, and infrastructure.

A PUBLIC PRIVATE AFFAIR

The dramatic turn for the better for Saudi Arabia has been steered by the government’s efforts to relax regulations around doing business in the country in order to stimulate the private sector – making it easier for businesses in the kingdom to operate in both the public and private spheres.

One way this has been achieved is through the facilitation of PPPs, or public-private partnerships. In the past the banking sector has functioned in a sphere where lending has been a challenge, and government efforts to address this have resulted in a stimulation of private investment.

The banking sector may still need to go through a natural maturation process, but Shady Shaher, Middle East economist at Standard Chartered Bank, says the Saudi government is making credible moves. “In 2008, the world was going through a financial crisis and when that happens you need the government to step in with counter-cyclical policies, and all of that trickled through and helped the private sector grow,” says Shaher. “Long term, I see the government continuing to encourage private sector companies to come in and more public-private partnerships (PPPs). The Saudi Arabian General Investment Authority (SAGIA) launched a major programme a few years back to stimulate private investment.”

Clearly marketing the country’s credentials as a great place to do business is important – on its website, SAGIA notifies visitors looking to apply for an online business licence, “KSA is the easiest place to do business in the whole of the Middle East.”

OIL AND ENERGY

Saudi Arabia is the region’s largest economy, fuelled by oil – which has been both a blessing and a thorn in its side because the country’s vast wealth and dependence on oil income has caused a degree of underdevelopment in other industries. Now with only a few more projected decades of oil remaining, the country, not unlike Abu Dhabi, is rapidly developing other sectors.

Problems caused in the past, such as a dramatically unequal distribution of wealth and a vast, frustrated and unemployed youth population, are being addressed in tandem with developing the public and private spheres, and this investment is possible because the government – especially in recent years – has been able to develop enormous surplus wealth due to the high price of oil.

“Oil prices have been favourable to KSA, It’s able to sustain this type of spending because of high oil prices,” explains Dr John Sfakianakis, chief economist at Saudi Fransi Bank.

“The macroeconomic profile of the country is solid, and given that oil prices are at the level of $100 and above allows the country to appear very healthy on the inside and outside, as well as spend a lot of money. Saudi Arabia has little domestic debt and no external government debt. That’s important. On top of that, the economy will attain fiscal surpluses this year and next year as long as oil prices remain high.”

While current oil prices are certainly good for Saudi Arabia’s booming economy, Glenn Lovell, senior associate at Al-Tamimi law firm in Riyadh, says the government recognises that its oil won’t last forever and alternative energy sources are being explored. “There are some challenges in the oil sector, and that is the consumption rate internally,” he says. “For example, to supply the country’s electricity generators, there’s a huge internal consumption of oil; the government is addressing this and is looking at alternative power generation methods.”

Addressing the need to safeguard energy supplies and provide for a fast- growing population, and noting that solar and nuclear power are the best alternative energy options, the government seems to have responded proactively.

In April 2010, the Saudi leadership announced a Royal Decree to establish the King Abdullah City of Atomic and Renewable Energy in Riyadh, to manage future energy resources. The step was hailed by the president of King Fahd University of Petroleum and Minerals, Khaled Al Sultan, as a “massive step toward securing additional sources of energy and preserving oil for many a decade.”

Overall, the government has committed to spending approximately $100 billion on solar, nuclear and other alternative energy sources in the coming years.

fINANCE AND ECONOMY

Clearly KSA is enjoying a period of prosperity and stability, “especially when compared to surrounding GCC countries,” says Lovell. “It’s in a unique situation because it had time to build its financial reserves.”

One thing Lovell points to is the King Abdullah Financial District (KAFD), being built 10km from the centre of Riyadh, the country’s financial capital. The KAFD will accommodate the Central Bank, the capital market authority and a number of other supporting bodies, while all financial institutions in KSA will moved there.

Banks are further set to benefit from new laws on the horizon. “This is the year for banks in KSA,” says Lovell. “We are waiting for the government to issue a number of laws – finance, mortgage, etc. Once they’re passed, there will be more framework within those regulations.”

“One key challenge in the past was growth of credit and availability of liquidity, but since last year that has improved,” explains Shaher. “The situation would have been different if the government had not spent and focused on key areas of the economy; the private sector would have contracted significantly.”

A key challenge for the banking and finance sector in KSA now is “increasing balance sheet size without compromising on risk management,” says Julian Johansen, a partner at Allen & Overy in association with Abdulaziz Al Gasim Law Firm, Riyadh. Meanwhile, for the government, Johansen says the major challenge is to maintain the “right balance” between government and private sector funding.

He explains: “A preponderance of government funding tends to diminish the private sector role, which may have an adverse effect on bank profitability. Too much emphasis on the private sector, with banks remaining cautious following the global financial crisis, carries the risk that essential projects may be under-funded.”

INFRASTRUCTURE

Unprecedented levels of infrastructure development have begun in the kingdom. With the population set to increase dramatically, and on the back of 500,000 new homes to be built in the next few years – as announced by Royal Decree in March – tremendous amounts of infrastructure need to be put in place.

Beyond water desalination, telecommunications, and energy, it also includes technology and transport. Saudi Arabia has put aside billions to invest in its infrastructure, from power, roads and rail to hospitals and schools. A huge national and regional GCC rail network is underway, which, when completed, will play a significant role in the cost and energy-efficient movement of goods and people.

Lovell explains that the supply of water and electricity are issues in KSA, firstly as there is major pressure on the current systems to supply electricity, and, with water, the price that consumers pay for a glass is one tenth of its cost of production – “When you have that, it’s very hard to privatise those industries.”

The construction sector is one of the big industries set to benefit from government spending on infrastructure, both residential and commercial, including the development of planned economic cities. A total of SAR624 billion over the next five years has been earmarked for government expenditure housing the planned six economic cities. Facilitated by SAGIA, each city, will be developed by the private sector “…around one globally competitive cluster or industry, which will serve as an anchor and a growth engine for the city, around which other businesses will locate” and consequently create infrastructure, real estate and industry opportunities.

Infrastructure and technology firms are set to benefit from investment in infrastructure and across industrial sectors in KSA, says Walid Abukhaled, president and chief executive of GE Saudi Arabia. “The economy has always been good in Saudi Arabia. GE has been there for 80 years and we’ve done this through a strategic partnership with the Saudi government – that is, creating value for the Saudi government and, in return, we get value.”

“In the past 20 years, GE has invested SAP 1 billion in localisation and manufacturing projects. This investment cuts across energy, healthcare, aviation, power and water industries,” explains Abukhaled.

Overall, Lovell notes a challenge for the government is the need to get top quality products for the right price, while controlling the pace of development: “It must be an enormous task for ministries.” Another challenge, he says, is classification of foreign entities – “Some of these companies are classified as ‘A’ in their own countries, but they may have to change here. This is an issue because certain government tenders require certain classification for contracts and contractors.”

UNEMPLOYMENT AND INFLATION

The Saudi American Bank (SAMBA) expects the kingdom’s population to rise to 29.7 million by 2013. Organisations in both the public and private sphere have implemented Saudiisation policies, as industry-specific quotas for the employment of Saudi Arabian nationals have been introduced in order to promote the employment of locals, as well as skill enhancement in the local professional labour market, and, ultimately, decrease the country’s dependence on imported talent.

“Around 140,000 Saudis are currently studying abroad under Saudi government sponsorship,” explains Abukhaled, a Saudi national. “They’ll all come home with the best education in the world and we’ll be looking to recruit that talent.

“We have a vigorous plan for Saudiisation – we’re concentrating on bringing in Saudi talent,” he adds.

Most nationals tend to prefer jobs in the public sector where they benefit from better salaries and packages than what is typically available in the public sector. The wage gap between sectors is an area of concern as private firms often struggle to compete.

However, Shaher explains an estimated five million jobs need to be created by 2025 as the number of Saudi nationals grows from 20 to 30 million in the next decade.

“Currently, unemployment is approximately 10 per cent. I think the way the Saudis are dealing with it is right in terms of addressing the structural issues that cause unemployment, such as education, and if you look at the big area of spending in past few years, it is education,” he says.

“The population is are very young in Saudi. If you look back 10 years ago, there were 10 universities in the country. Now there are 25.” says Ali Riza Kucuk, Intel regional retail manager for Middle East Turkey and Africa. This young population has become tech-savvy. “They are very interested and willing to know about and use technology, so that’s why in this renaissance the King’s packages are helping; lowering the broadband price is helping,”

“Policymakers in the region have been active in dealing with the demographic challenge and that’s why they’ve been investing and diversifying – to create job opportunities,” adds Shaher. “I’m optimistic on the back of all the spending. In the past two years they’ve spent almost $200 billion on infrastructure investment.”

The next decade will be crucial in building the kingdom’s impact as a truly diversified economy. Key to this will be the country continuing to hold its arms open to investment; and turning its vast youth population into an asset.