Saudi Arabia’s economy is booming. By most estimates, nominal GDP expanded by 12% in 2006, and with the oil price failing to ease significantly, growth this year is expected to remain in double digits. But Riyadh is well aware of the fickle nature of its economic lifeblood. The kingdom is widely credited with prudent deployment of the recent oil windfall, investing in economic diversification, while taking advantage of the benign environment to implement economic reform. The latter was both signalled and spurred by accession to the WTO in December 2005, after more than a decade of negotiations.
Diversification is taking many forms, but at the heart is the goal of creating jobs for a rapidly rising population and of spreading wealth more evenly throughout the kingdom. Both aims are in evidence in the programme of “economic cities” – self-contained developments designed to attract investment in a host of industries. Four have been announced so far at Rabigh, Hail, Madinah and Jizan, with planned investment of SR300,000 million ($80,000 million). (For more analysis on Gulf real estate development, see "Tall order for Gulf real estate".)
Speaking in early April, Saudi Arabian General Investment Authority (Sagia) governor Amr al-Dabbagh estimated that the cities would contribute $120,000 million to GDP by 2020 and create 1.3 million jobs.
Not all are convinced of the merits, however. “I fear these are white elephant schemes,” a Dubai-based economist tells Emerging Markets. “Most of the jobs will end up going to foreigners both during and post-construction. The pay-off from investing in existing cities and industries would be far greater.”
Questions might also be asked about the plans for a financial district in Riyadh, unveiled to great fanfare in mid-2006. As it is the Gulf’s biggest economy, offering enormous opportunities across the range of financial services, providers are likely to flock to the kingdom anyway. As is obligatory under WTO rules, licences have been offered to foreign banks, with both global and regional heavyweights taking advantage – among them BNP Paribas, JP Morgan, National Bank of Kuwait and Emirates Bank.
Mixed views
Liberalization of the insurance sector illustrates both the best and the worst of the reform effort. Best: a law opening up the sector to new local and foreign providers was issued in 2003 and progress is being made; worst: the process has moved slowly; the recipients of the first batch of licences were often unclear about the status of their applications. Nevertheless, in December 2006, the debutants submitted their applications to the Capital Markets Authority (CMA) to stage the mandatory initial public offering (IPO) before beginning operations, and the first share sales have taken place.
IPOs have been made mandatory for new ventures in certain sectors, including petrochemicals and telecoms where, in line with WTO rules, Saudi Telecom’s monopoly has been broken through the sale of second and third mobile licences. The aim is laudable, to spread national wealth and develop the local stock market. However, the bourse hit the headlines when it crashed from a peak of more than 20,000 points in February 2006 to less than 10,000 a year later. CMA chairman Jammaz Al-Suhaimi paid with his job, and the slump drew attention to the market’s many failings in listed companies’ disclosure, investor education and market manipulation.
However, the collapse has galvanized reform efforts. In mid-April, for example, Al-Suhaimi’s replacement, Abdulrahman Al-Tuwaijri, announced that more than 80 local firms were under investigation either for insider trading or for failure to provide accurate financial statements.
The problem of a retail-dominated market remains. “What the bourse needs is institutional investors, both local and foreign, who look to the long run,” Khan Zahid, vice-president and chief economist at Riyad Bank, tells Emerging Markets. Trading by non-resident foreigners is currently prohibited, although discussions are understood to be in train about easing the rules for international institutions.
Debt appeals
Across the Gulf, as equity financing loses its sheen, companies are looking to the debt capital markets to raise funds – and Saudi Arabia is no exception. As befits the kingdom’s largest corporate, Saudi Basic Industries Corporation (Sabic) issued the first domestic sukuk in July 2006, with the protracted structuring running parallel to the CMA’s efforts to create a legal framework for such instruments. Yet the onerous nature of the approval process has discouraged others from following suit, and the only other three local firms to have tapped the market have done so through special-purpose vehicles registered abroad.
Accessing the debt capital markets for project finance, an approach pioneered by Qatar, appears a long way off, and traditional bank borrowing remains dominant. The kingdom’s project finance requirements over the coming years will be enormous. Competitive advantage, coupled with diversification, are driving investment in petrochemicals, and a bewildering array of schemes are in train that require loans. Both the raft of planned industrial schemes and rapid population growth are also creating vast power demands.
The good news, though, is that doubts expressed about international bank appetite for Saudi debt have proved unfounded, with enthusiasm increased due to the shrinking margins on offer elsewhere in the GCC. “We have seen very strong international bank interest on both the petrochemicals and power deals done over the past year,” Ghazali Inam, vice-president and senior corporate finance officer at Riyad Bank, tells Emerging Markets.
Reform of such a large and complex economy inevitably moves slowly. But fundamental change is gradually being effected. And encouragingly for Riyadh, the response of the private sector, both domestic and foreign, has been overwhelmingly positive, laying the foundations for continued economic health beyond the oil price boom.