Unlike most countries around the world, Saudi Arabia has weathered the impact of the 2008 global financial crisis rather well. Robust government spending has provided a strong stimulus to the non-oil sector, which grew by 5.5% in 2013, as it lays the foundations for growth and success in the future.
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While the country may be surrounded by political instability in Syria, Egypt and Iran, and troubles with neighbours in the Gulf, these concerns are having little or no impact on the new dynamism taking place in the economy. Today, Saudi Arabia’s economic fundamentals look remarkably positive, construction is at a new high, and reforms in education and labour are opening up huge opportunities, especially in employment.
Dr Fahad Al-Mubarak, governor of regulator the Saudi Arabian Monetary Agency (SAMA), says on the outlook for the economy: “Following a moderate 3.8% real growth in 2013, the prospects for 2014 are favourable, underpinned by steady fiscal spending, diminishing public debt, reasonable inflation and accumulation of budget and external surpluses.
“The domestic banks at the core of the financial system have strong balance sheets, are highly capitalised and remain liquid. The prospects for 2014 are bright with good growth in credit and deposits, as well as profitability.”
Dream city becomes a reality
King Abdullah Economic City (KAEC) was little more than a dream when it was announced by the Saudi ruler in 2005. But this SR207bn ($55bn) development on the Red Sea coast, 100 kilometres north of Saudi’s commercial hub of Jeddah, is about to change the trading and manufacturing landscape of the country.
Built by Emaar, a Saudi-listed company, and Saudi Arabian General Investment Authority, KAEC is already operational and will be completed by 2020.
KAEC incorporates King Abdullah Port, which is the largest in the region, covering 13.8 square kilometres and with a capacity of 20 million twenty-foot equivalent units of containers every year. It can handle cargo and dry bulk, and is able to receive the world’s largest vessels. Another key component of the port will be a custom-built Hajj Terminal with capacity for up to 300,000 pilgrims on their way to Mecca and Medina, the holy Muslim cities.
The port, which is already operational, will become the most effective and globally connected port in the entire region and will reduce transit time at the already overcrowded port facility in Jeddah. With its cargo rail station and connection to the nearby Haramain Railway Station linking all areas of the country, KAEC will revolutionise the landing and shipment of vehicles in Saudi Arabia.
The KAEC’s industrial zone is estimated to cover 63 square kilometres, and will be dedicated to industrial and light manufacturing facilities – identified as key growth drivers for the Saudi economy. The area can now host 2700 industrial tenants.
KAEC also has a planned residential area that includes 260,000 apartments and 56,000 villas, many of which are already occupied. With hotels, schools, shopping and medical facilities, KAEC is already well under way, and is hugely attractive to visitors and investors alike with its beach access and well-serviced manufacturing facilities. Chocolate giant Mars has already built a huge complex there to service its Middle Eastern and African markets, while Saudi British Bank is the first bank to set up a major branch in the city.
KAEC is close to another massive world-class project: the King Abdullah University of Science and Technology. It is one of four new cities being built in the country to diversify the oil-based economy, attract foreign investment and create up to 1 million jobs in areas where youth unemployment is high.
Oil alternative
The positive signs are reflected in various sectors of the economy, with banks showing record profits in 2013 and construction hitting even greater heights. A contraction of 0.6% in the oil sector in 2013 led to Saudi Arabia’s economic growth moderating to 3.8%, but overall the economy has been buoyed by government spending and the vibrant non-oil private sector. Both the SAMA governor and the International Monetary Fund forecast growth of 4.4% in 2014.
The Saudi construction market is set to expand by 35% over the next three years, according to local press reports in April. With the total value of projects planned currently estimated at $732bn, the sector is poised to become the fastest growing in the country by 2015. According to National Commercial Bank (NCB) chief economist Dr Said Al-Shaikh, the value of awarded contracts in the construction sector reached SR293bn ($78.1bn) in 2013, about 25% higher than the previous year, and the NCB Construction Contracts Index reached 465.03 at the end of 2013 (base year 100 in 2008) as a result of capital expenditure directed towards expanding physical and social infrastructure capabilities.
Saudi Arabia is reported to hold about 39% of the construction market in the Gulf Co-operation Council (GCC) region. Major project allocations include $116bn for King Abdullah Economic City, $40bn for Sudair Industrial City, $66bn for the construction of 500,000 housing units, $16.5bn to revamp the transport system in Mecca and $7.2bn for King Abdulaziz International Airport.
In April, work on the $22.5bn Riyadh Metro project began. This ground-breaking project is designed to improve the city’s clogged traffic system. It is expected to be completed in 48 months and, according to Spanish construction group FCC, employs more than 30,000 people.
Slowing growth
The country’s macroeconomic fundamentals remain the envy of most, but are likely to change this year with lower expected oil revenues. Dr Fahad Al-Turki, head of research at Jadwa Investment, forecasts that oil export revenues in 2014 will be $284.8bn, down by 10% on 2013's $314.8bn. In 2012, oil export revenues amounted to $337.4bn.
NCB’s Mr Al-Shaikh agrees that lower oil production and prices in 2014 are likely to lead to a sharp drop in budget and current account balances this year, but remains positive. “Although oil production was lower in 2013 in comparison with 2012, the current and fiscal account balances in the country recorded sizeable surpluses in 2013 on still-high oil prices at 17.4% and 7.4% to gross domestic product, respectively.” He forecasts current account and budget surpluses of 13.9% and 0.7% of GDP, respectively, which although lower than previous years, are still enviable surpluses by global standards.
The country’s macroeconomic picture has also been enhanced by a reduction in public debt and a growing accumulation of foreign assets. The government has gradually paid off its outstanding domestic debt, which stood at SR75bn at the end of 2013, or 2.7% of GDP, well below the domestic debt figures in 2006 of SR365bn or 25.8% of GDP. Foreign assets were officially said to have reached $725.7bn at the end of 2013, with Jadwa forecasting that they will rise to $764.7bn in 2014, well over three times their 2006 level of $225.8bn.
Commenting on the reduction in debt and these strong macro trends, NCB’s Mr Al-Shaikh notes in an April report the reactions of rating agencies: “As such, Standard & Poor’s affirmed the country’s sovereign rating at AA- with a positive outlook in 2013, while Fitch recently upgraded the country to AA with a stable outlook,” he said.
While the macroeconomic picture is gaining strength and the support of a growing band of international investors is welcomed, there are other factors that are impacting on the dynamics of the country. Major social reforms in the labour market and in education are having a significant long-term impact in terms of creating jobs and reducing the country’s high level of unemployment, which Jadwa estimates stood at 11.5% at the end of 2013.
Workforce revolution
For decades, women have been practically non-existent in the workforce but recent reforms pushed through by King Abdullah have led to the massive expansion of work opportunities for women. Between 1992 and 2010, women’s participation in the labour market more than trebled to 14.4%. And recent labour law changes allowing women to work in shops is revolutionising employment for women. Banks, with the creation of women’s branches, are employing more women and now the first female chief executive of a Saudi investment bank has recently been appointed.
The women-in-the-workforce revolution is a radical change for Saudi Arabia and is part of the government’s plans to build a knowledge economy. Higher education has been given top priority, and in April King Abdullah approved the creation of three universities in Jeddah, Bisha and Hafar Al-Batin. Economy and planning minister Mohammed Al-Jasser says the establishment of more universities will boost the country’s progress and prosperity.
Economists highlight the fact there are now 150,000 Saudi youngsters studying overseas at universities, mainly in the US and UK. It is hoped that they will eventually return home to create a new dynamic in the Saudi labour market, reduce the number of expatriates employed and alleviate the high unemployment rate for Saudis.
Poor uptake for financial district
Looking north from central Riyadh, the skyline is dominated by a massive construction project known as the King Abdullah Financial District (KAFD). This forest of skyscrapers is designed to be Riyadh’s equivalent to London’s Canary Wharf and Dubai’s International Financial Centre.
But while the huge SR29bn ($7.7bn) project, which consists of 34 towers in an area of 1.6 million square metres with office space of 900,000 sq m, is nearing completion, there are serious concerns that the development will never be fully utilised.
Some bankers see it as an expensive and unsuccessful venture, creating an oversupply of unwanted office space. Press reports in May 2013 said only 10% of the district’s office space had been leased.
Saudi Hollandi Bank chief executive Dr Bernd van Linder is more optimistic. “KAFD is extremely impressive, but will take time to be fully utilised,” he says. Others believe it is a challenge to the status quo and KAFD will take time but will eventually force change in other areas.
Saudi Arabian Monetary Agency governor Dr Fahad Al-Mubarak says: “KAFD is a major project that will have significant long-term impact in enhancing the efficiencies in the financial sector by bringing [together] all key participants – the financial institutions and their related service providers – in the same district. This should help exploit various synergies. Such a visionary project will positively impact the Saudi financial system which will further support the development of the local economy.”
Tenants will include Saudi Arabia’s stock market regulator, the Capital Market Authority, and one large local bank, Samba. Commentators agree that Canary Wharf took a long time to become established, but bankers are disappointed by how poorly the project seems to be progressing. One of the largest banks, Al Rajhi Bank, decided to build its new headquarters about one kilometre outside KAFD; not an encouraging sign.
The new financial district is reported to have three times as much high-end office space as the rest of Riyadh, but it is unclear who will fill all the space and at what price. KAFD seems a rare example of a major Saudi project that is having difficulty finding its way.
Real estate reforms
Other major reforms are taking place. Recent new finance laws have placed strong emphasis on developing the housing sector and residential real estate markets. SAMA’s governor Mr Al-Mubarak explains their significance: “The passage of the three laws – real estate, finance lease, finance companies – in July 2012 was an important milestone in broadening home ownership and financing activities in Saudi Arabia," he says. SAMA has been designated as the licensing and supervisory authority. It is to play a key role in creating a vibrant and dynamic mortgage market and complement the various governmental initiatives in the housing sector. So far SAMA has issued 14 licences to banks and finance companies in this sector.”
The new mortgage law, and reforms in education and the workplace, are driving change in the country. Increased employment opportunities are providing incentives for banks and the private sector. But all these improvements and developments also carry some concerns.
The government may be making strides in reducing unemployment and involving women in the workplace, but Saudi Arabia also has to deal with some major concerns. Jadwa’s Mr Al-Turki highlights “the elephant in the room – the country’s large domestic energy consumption”. While reforms have been introduced regarding more efficient home appliances and air conditioners, he is concerned about the huge increase in domestic energy consumption and its long-term impact on the economy.
In a report from December 2013 entitled The Outlook for Unconventional Oil and Gas Production, Jadwa stated: “We remain of the opinion that the key factor that will impact Saudi Arabia’s long-term position in the world’s energy industry is the high, and growing, internal demand. We believe that high internal demand, spurred by low internal energy prices, will not only distort internal economic decisions, but will also, in the long-term, crowd out and reduce the income from Saudi Arabia’s oil exports.”
Mr Al-Turki strongly believes much more needs to be done to control the efficient use of domestic energy. “We do not believe that the growth in oil production from tight rock formations in the US, or from shale formations elsewhere, will materially affect Saudi Arabia’s long-term position in the oil industry.” Put bluntly, he believes Saudi’s oil future, particularly in regard to domestic consumption, is clearly in its own hands.
Investment partnerships
Mindful of using its oil resources carefully, there are myriad new structures aimed at boosting Saudi Arabia's economy. Alinma Investment won an award in 2013 for its involvement in the SR7.5bn Sadara Chemical Company sukuk, a partnership deal between Saudi Aramco and the US’s Dow Chemical to produce one of the world’s largest integrated chemical facilities. Elsewhere, Alinma Bank has entered into a SR350m long-term finance facility for the Saudi Centre for Particle Therapy, the first such specialised cancer facility in the GCC.
Saudi Arabia has also been looking east to develop its trade and interests. Links with China have been growing and Saudi British Bank (SABB) managing director David Dew notes that Saudi Arabia and China “are key players in the emerging global economy”.
He says: “Trade between the two countries has been growing at a rapid pace, with a compound annual growth rate of 30% over the past 10 years… China is currently the second largest trading partner for [Saudi Arabia]. This, together with the growing popularity of the renminbi as a settlement currency, has led to an increased demand from Saudi corporates seeking consultancy and guidance from banks to structure and facilitate renminbi-denominated transactions. SABB has remained at the forefront by being the first bank to launch a comprehensive renminbi proposition to meet existing and emerging requirements of our customers.”
While regional political concerns remain, particularly with regard to Syria, the macroeconomic picture in this country of 27.3 million people continues to grow stronger. Inflation is expected to fall to 3% this year, according to Jadwa, and bankers are seizing the opportunity to expand.
A March 2014 report from NCB says: “The Saudi banking system is embarking on a new playing field, as the majority of banks are increasing their capital by as much as 100%, as in the case of Riyad Bank. The new capital infusion will provide banks with the opportunity to increase their lending activities and avoid breaching the credit concentration requirements, stipulated in the banking control law of 1966. Given that the loans-to-deposits ratio peaked last August at 83.1%, banks have been attempting to lower that ratio as per SAMA’s guidelines.”
The Saudi economic and business story continues to be extremely positive.
