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An Overview of Saudi economy: An Overview of Saudi economy: challenges aheadchallenges ahead

KING FAHD UNIVERSITY OF PETROLUME KING FAHD UNIVERSITY OF PETROLUME & MINERALS& MINERALS

DHAHRAN 31261DHAHRAN 31261

SAUDI ARABIASAUDI ARABIA

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Saudi Arabia: Major ChallengesSaudi Arabia: Major Challenges

Despite diversification of economic base, still reliant Despite diversification of economic base, still reliant on oil and oil-related products for exports,on oil and oil-related products for exports,

Despite massive expenditure on education, yet Despite massive expenditure on education, yet mismatch between market needs and graduate mismatch between market needs and graduate output,output,

Despite massive government subsidies, yet so little Despite massive government subsidies, yet so little on internal R&D to develop a knowledge based, on internal R&D to develop a knowledge based, sustainable economic infrastructure.sustainable economic infrastructure.

But there is a light at the end of the tunnel.But there is a light at the end of the tunnel.

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Table 1Table 1 Achievements and Directions Achievements and Directions

Overall national priorities First (1970 - 1974)

Second (1975 - 1979)

Safeguard Islamic values in conformity with Shariah. Improve standard and quality of life Develop human resources, increase productivity and replace non-Saudis with qualified Saudis Realize balanced growth in all regions Diversify economic base and reduce dependence on production and export of oil Provide favourable environment for activities of the private sector to encourage it to play a leading role in development

Focus on provision of modern infrastructure, basic government services Expansion of human resources and beginning of infrastructure growth.

Large infrastructure expenditure and economic resources Large subsidy outlays Expansion in transport, electricity, water and housing Starting hydrocarbon industries Establishment of modern administrative infrastructure

Source: Ministry of Planning

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Table 2Table 2 Achievements and Directions Achievements and Directions (Continue) (Continue)

Third (1979 - 1984)

Fourth (1985 - 1989)

Fifth (1990 - 1994)

Expanding Infrastructure, economic resources Human resources and educational base expansion Hydrocarbon base expansion Undertaking regional economic initiatives

Concentration on operation and maintenance Reconstructing the economy to allow more private sector participation Human Resources and health expenditure rose. Shift from Central planning projects approach to programme planning approach

Encouraging more private sector participation Expanding the technology base Emphasis on human services and Saudization. Drop in gross fixed Capital formation

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Table 2Table 2 Achievements and Directions Achievements and Directions (Continue) (Continue)

Sixth (1995 - 1999)

Seventh (2000 - 2004)

Eight (2005-2009

Human resources emphasis as well as social and health. Aiming for balanced budget. Reduction in foreign Labour Private sector expansion Beginning of partial privatization Reduction of subsidies.

Solving human resource problems Diversify the economy Increasing gas production Consolidating efficiency in production, refining and distribution. Reducing State budget deficit Increasing Saudization Preparing for globalization, WTO. Privatization as

Improve the quality of life Enhance national unity Continue improving the service provided to Hajj and Umrah informers Develop national human resources & increase the supply of manpower Enhance the private sector's participation in economic & social development Develop the science & technology system Conserve & develop water resources

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Table 3 Table 3 Conditions for growthConditions for growth

Factor Component Saudi Arabian setting Necessary conditions for growth Low Medium High Macroeconomic stability - Government deficits

- Inflation - Exchange rate stability - Solvency of financial system

X

X

X X

Openness to international trade - Low import tariffs

- Low hidden import barriers X

X

Quality of government - Public expenditure not wasteful

- Subsidies improve productivity - Admin. regulations burdensome

X

X

Adapted from the Arab World Competitiveness Report 2005

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Table 4 Table 4 Conditions for growth (Continue)Conditions for growth (Continue) Factor Component Saudi Arabian setting Necessary conditions for growth Low Medium High Infrastructure - Road quality

- Efficient electrical generation

X X

Education - Years of schooling in population

- Perceived quality of public education - Companies invest in training

X X

X

Rule of law - Independent judiciary

- Ability to successfully litigate against government

X X

New economy - Internet hosts

- Computers per capita - Development of laws in support of new economy

X X

X

Adapted from the Arab World Competitiveness Report 2005

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1970s 1980s 1990s 2000 onwards

No disclosure Regulatory regimes improving

Technology utilization

Commercial paper and bonds

External funding on selective basis

External funding

Specialized funds Family businesses going public

Poor regulatory and legal structure

Government soft loans

Government debt increasing

Mergers and acquisitions

Commercial bank funding on secured basis

Syndicated loans

Islamic financing More disclosure and transparency

Dominance of family companies

Some disclosure available

Foreign ownership on joint venture basis

Securities and Exchange Commissions

Non-recourse finance

Foreign Inward Investment

Privatization IPOs Securitization Islamic financing

Ministry of Planning

Table 5 The changing face of the Saudi capital market

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Legal SystemLegal System ObservationsObservations

Judicial SystemJudicial System

  Consists of both general courts and specialized tribunals. Courts may consist Consists of both general courts and specialized tribunals. Courts may consist of a combination of judges and non-judges. Decisions can be quick or lengthy. of a combination of judges and non-judges. Decisions can be quick or lengthy. Decisions may be appealed.Decisions may be appealed.

JurisdictionJurisdiction Sharia’h courts are courts of general jurisdiction. Sharia’h judges preside over Sharia’h courts are courts of general jurisdiction. Sharia’h judges preside over almost any disputes, unless Saudi law provides otherwise. Sharia’h judges almost any disputes, unless Saudi law provides otherwise. Sharia’h judges apply Islamic law to decide a case. Decisions may be appealed.apply Islamic law to decide a case. Decisions may be appealed.

Board of GrievanceBoard of Grievance Has exclusive power to decide disputes over Saudi government contracts Has exclusive power to decide disputes over Saudi government contracts and may decide some types of commercial disputes. Unlike and may decide some types of commercial disputes. Unlike Sharia’h, the Sharia’h, the board observes a system of precedent. Decisions may be appealed. board observes a system of precedent. Decisions may be appealed.

Civil Rights DirectorateCivil Rights Directorate Responsible for enforcing judgement of Saudi courts or tribunals.Responsible for enforcing judgement of Saudi courts or tribunals.

Negotiable Instruments Negotiable Instruments CommitteeCommittee

Decides on cases involving bills of exchange, promissory notes and checks.Decides on cases involving bills of exchange, promissory notes and checks.

The SAMA CommitteeThe SAMA Committee Resolves disputes between banks and clientsResolves disputes between banks and clients

Conciliation CommitteeConciliation Committee At the Saudi Chambers of Commerce, assisting in problems between foreign At the Saudi Chambers of Commerce, assisting in problems between foreign partners and Saudi companies, especially in agency matters.partners and Saudi companies, especially in agency matters.

Preliminary Committee for Preliminary Committee for Settlement of Labour Settlement of Labour DisputesDisputes

Hears all matters related to labour and employee relations.Hears all matters related to labour and employee relations.

Table 6Table 6 Saudi Arabia: Legal, commercial and Saudi Arabia: Legal, commercial and dispute settlement systemdispute settlement system

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The SME Sector:The SME Sector:

Previously neglected, concentration on capital Previously neglected, concentration on capital intensive, high technology industry.intensive, high technology industry.

Available financial resources – state/privateAvailable financial resources – state/private Limited managerial experienceLimited managerial experience High foreign labor utilizationHigh foreign labor utilization

But they are powerful employment generators.But they are powerful employment generators.

WTO uncertainties for big industriesWTO uncertainties for big industries..

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Saudi Family Businesses:Saudi Family Businesses:

A powerful positive and potentially negative A powerful positive and potentially negative economic force.economic force.

Hold around SR 250 billion in Hold around SR 250 billion in domesticdomestic investment, with 200 family companies investment, with 200 family companies dominating commercial life.dominating commercial life.

Majority of franchises and agencies owned by Majority of franchises and agencies owned by no more than 100 of the top Saudi companies.no more than 100 of the top Saudi companies.

Time for changeTime for change

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Saudi Women and the National Saudi Women and the National Economy:Economy:

More urgency on this matter. Government More urgency on this matter. Government sympathetic as long as in conformity with sympathetic as long as in conformity with Islamic principles.Islamic principles.

Substantial women’s investment in domestic Substantial women’s investment in domestic economy and impact:economy and impact:

- 60% of bank account60% of bank account- Deposits SR 62 billionDeposits SR 62 billion- 20% corporate shares20% corporate shares- 15% of private companies15% of private companies- 10% real estate10% real estate

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Table 7 Table 7 Saudi businesswomen’s operating Saudi businesswomen’s operating barriersbarriers::

Barriers Status Difficulty for businesswomen to

accomplish official business in person without using male intermediary

Government is studying allowing women to submit applications directly without intermediary

Lack of training organizations and specialist women-related business programmes

Chamber of Commerce establishing training programmes

Difficulty of obtaining required market information

Special sections of Chamber of Commerce set up to provide data

Difficulty in qualifying for loans Government lending institutions instructed to handle female loan applicants on equal basis

Limited allowable investment sectors Industrial zones planned and special investment advisory service from SAGIA set up

Unavailability of women’s sections in major government ministries

Some progress in this field and some ministries have established women-only sections

Clarification of legal rights of businesswomen with government agencies

Steps are being taken to ensure that women can correspond direct in their own legal capacity without intermediaries

Limited networking groups for businesswomen

Businesswomen’s associations established to facilitate networking

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Table 8Table 8 Private sector challenges and solutions Private sector challenges and solutions

Challenges Opportunities and Solutions

Promoting government-business dialogue and collaboration

The private sector has to engage the government in a dialogue on competitiveness and impediments to improving productivity

Internal business environment and international competitive comparisons

Up-to-date information on local and international market opportunities made available as well as comparing relative costs and efficiency with international standards

Expansion of the privatization policy

Private sector must engage in dialogue to ensure that transfer is done on a transparent basis with no “hidden” costs and commitment;; flexibility in hiring and firing

Paying attention to scientific research that might serve the production sector

Poor communication between the productive sectors and research centres must be overcome through R + D funding, and developing science park/incubator concepts

Increasing investment locally Better coordination with SAGIA and Chambers of Commerce to create business and investor friendly environment; update and harmonize business regulations; create a demand driven economy

Reduce national unemployment Short term “fix” through expatriate labour reduction vs. long-term solution of employing productive Saudis; ensure that the market knows of the skill needs of the private sector

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FDI Factor Analysis Saudi Arabia Applicability

POSITIVE FACTORS 1. Capital Formation

This is more stable than other forms of investments. Essentially it is an equity investment – profits are repatriated when projects yield returns and part of the profits are reinvested in the host country.

Risks are borne by foreign shareholders. FDI will not lead to debt crises (like bank lending) that require bailouts.

Applicable: In Saudi Arabia investments are in either Saudi majority-owned companies, or, now, in 100% foreign-owned companies.

2. Productivity Growth

A new understanding of the growth process treats technological changes as endogenous growth. This also involves the “soft” side of technological advances (organizational structure, managerial practices, etc.) that contribute to productivity growth.

Rather than re-invent technological advances, developing countries can benefit from best practices in standards, embodied technology and markets of parent company.

Applicable: This is the main reason why SABIC established international joint venture affiliates as examples.

Table 9 Foreign direct investment: Saudi Arabia stock sheet

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FDI Factor Analysis Saudi Arabia Applicability 3. Economic Linkages

The impact of FDI on domestic economic growth depends on spreading out best practices through backward linkages with local producers and distributors, horizontal linkages with local competitors, and linkages with local institutions such as Universities and research institutes.

Applicable: Local sourcing is an important stimulant to domestic companies. Linkages to Universities are also important (e.g. Science park, Institute of Research at KFUPM).

More is needed on backward linkages with local suppliers, but this varies with the industry.

4.Employment and Labour Standards

Employment can be created via 3 areas: (a) direct employment in operations, (b) backward and forward linkages in enterprises that are suppliers, subcontractors and service providers, and (c) employment in sectors not directly related to FDI project.

Quality of labour standards is improved in the domestic economy, through good labour practices, superior working conditions and positive career prospects.

Adopting international global management-labour practices that are different from host country and ensuring that practices are of international standards

Applicable: The quality of labour employment and the creation of best employment practice has been more important to date than the quantitative aspect of employment.

Table 9 (Continued)

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5. Environmental Standards

* FDI can lead to higher environmental controls and procedures. * Applicable: Saudi Arabia insists on the latest environmental-friendly technology.

NEGATIVE FACTORS 1. “Crowding Out” effect

FDI may remove investment opportunities of the domestic firms and drive them out of business (e.g. in financial markets).

If FDI borrows locally, interest rates could rise if there are scarce resources, making borrowing for local firms uncompetitive.

FDI could pre-empt entry into the market of some types of production, especially if the foreign company employs aggressive marketing practices.

There is not yet any evidence of this in Saudi Arabia, as most FDI has been capital intensive and the joint venture majority is Saudi owned.

2. Balance of Payments Problem

FDI profits could be repatriated, constituting financial outflows to be set against net annual FDI inflow. This is important for countries with exchange controls.

This is not an issue for Saudi Arabia as no exchange control regime exists.

3. “Enclave Economies”

FDI investments could be narrowly based with a limited overall impact on domestic economy and benefiting only a small group of population. Examples are in mining natural resource extraction or “Export Processing Zones whereas if mining is only for exports, then it will not generate secondary industry employment. Neither would repackaging of goods in a duty free “export processing zone.”

Not applicable as oil sector in state hands and no foreign owned exclusive zones exist.

Table 9 (Continued)

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Table 11 Saudization impact on selected Saudi industries

Sector’s share in total employment

% of Saudi participation

% of Non-Saudi participation

Oil & Mining 4.19% 9.3% 90.7% Manufacturing 19.70 11.5% 88.5% Public Utilities 0.70% 55.7% 44.3% Construction 17.07% 9.8% 90.2% Wholesale & Retail 31.66% 13.4% 86.6% Hotels & Restaurants 5.55% 4.7% 95.3% Transportation & Storage 6.59% 28.8% 71.2% Banking & Insurance 1.64% 52.4% 47.6% Real Estate & Business 7.14% 25.4% 74.6% Education 1.36% 16.9% 83.1% Health 2.05% 9.8% 90.2% Community & Personal Service

2.36 13.1% 86.9%

Source: National Commercial Bank, 2005, SAMA, 2005.

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Saudi economy indicators Saudi economy indicators (2006)(2006)

GNP for 2006 is $ 373.00 billion dollars (ranking # 20 GNP for 2006 is $ 373.00 billion dollars (ranking # 20 world wide).world wide).

Hard currency reserves up to 2006 is 269 billion dollarsHard currency reserves up to 2006 is 269 billion dollars Saudi economy ranks # 12 in the volume of exports and Saudi economy ranks # 12 in the volume of exports and

# 20 in the volume of import world wide according to # 20 in the volume of import world wide according to SAMA statistics (2005).SAMA statistics (2005).

80 % of Saudi income comes from sales of crude oil80 % of Saudi income comes from sales of crude oil The Growth rate of Saudi economy is in the range of 3.5 The Growth rate of Saudi economy is in the range of 3.5

to 4 %to 4 % Emerging lucrative market in stocks & real state:Emerging lucrative market in stocks & real state:

Over 500 billion dollars in Saudi stock marketOver 500 billion dollars in Saudi stock market Over 250 billion dollars in Saudi real state marketOver 250 billion dollars in Saudi real state market

2020

Why to invest in Saudi ArabiaWhy to invest in Saudi Arabia Saudi Arabia is a full member of WTO since 2005Saudi Arabia is a full member of WTO since 2005 Political stabilityPolitical stability Free economy systemFree economy system Excellent infrastructureExcellent infrastructure Availability of reasonably cheap labor (Mainly from Egypt, India, Availability of reasonably cheap labor (Mainly from Egypt, India,

Pakistan, and Philippine).Pakistan, and Philippine). Genuine government support they target to have Saudi Arabia among Genuine government support they target to have Saudi Arabia among

the top 10 countries to attract F.D.I. by 2010the top 10 countries to attract F.D.I. by 2010 Saudi Arabia ranks # 38 out of 177 countries in the most favored nations Saudi Arabia ranks # 38 out of 177 countries in the most favored nations

for investment opportunities according to world bank 2006for investment opportunities according to world bank 2006 Low inflation rate (1% in 2006 & expect to be 2.2% by end of 2007)Low inflation rate (1% in 2006 & expect to be 2.2% by end of 2007) Government spending in the next few years for already approved & Government spending in the next few years for already approved &

under execution projects are as follows:under execution projects are as follows: 69 billion dollars in oil & gas section69 billion dollars in oil & gas section 45 billion dollars in petrochemicals45 billion dollars in petrochemicals 43 billion dollars in infrastructure43 billion dollars in infrastructure

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Key indications on Saudi labor Key indications on Saudi labor movementmovement

60 % of Saudi population are below 50 years old60 % of Saudi population are below 50 years old 24 % of the Saudis labor force work in the industry sector24 % of the Saudis labor force work in the industry sector 31 % of the Saudi labor force work in the commerce sector31 % of the Saudi labor force work in the commerce sector 350,000 Saudis enter the labor market every year350,000 Saudis enter the labor market every year The unemployment rate is considerably high among Saudis.The unemployment rate is considerably high among Saudis. Approximately one million Saudis work in government agencies, out of Approximately one million Saudis work in government agencies, out of

which 400,000 are women.which 400,000 are women. About 1.8 million Saudis work in private sector, out of which 20 % are About 1.8 million Saudis work in private sector, out of which 20 % are

women.women.

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Challenges Facing the Challenges Facing the education systemeducation system

High growth rate (3.4%) of Saudi population currently 20 High growth rate (3.4%) of Saudi population currently 20 millionsmillions

The co density of the population is scattered all over the The co density of the population is scattered all over the country (2.1 million K. square)country (2.1 million K. square)

The cost of education is reasonably high compared to The cost of education is reasonably high compared to industrial countries (9% of G.N.P. vs. 5% in developed industrial countries (9% of G.N.P. vs. 5% in developed countries).countries).

Lack of certain skills that are needed in the private sectorLack of certain skills that are needed in the private sector Slowness in updating the school books.Slowness in updating the school books. 50% of the higher education are in non-engineering 50% of the higher education are in non-engineering

disciplinesdisciplines

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But, As I said there is a light at But, As I said there is a light at the end of the tunnelthe end of the tunnel

ThanksThanks