THERE is no point beating about the bush. For many Saudi businesses, it is an uncertain time. Intensified by the downward pressure on oil prices and worsened by the events of Sept. 11, the global winds of recession have reached Saudi Arabia and are blowing through the economy. The figures from the Saudi Arabian Monetary Agency are not inspiring: Overall market performance has contracted over half a percent since the attacks. But people do not need to look at figures to grasp what has been happening. They can see with their eyes. Shops were not as active as normal during Ramadan; hotels are operating at way below capacity; aircraft flying into and out of the Kingdom have been more than half empty. The business community is frank about the recession: The advertising industry reports a 20 percent downturn in business. Even prior to Sept. 11, Umrah agents were reporting a 15 percent decline in visitors because of recession in countries such as Egypt, Turkey and Indonesia; since then the decline has doubled. People simply do not want to fly.
But how serious is this? Will the effects of the global recession be short or long term? What are the local factors that might have a beneficial or adverse effect on global trends?
Crown Prince Abdullah, deputy premier and Commander of the National Guard, came out with a stern warning recently, advising Saudis to tighten their belts and not to expect the Kingdom to be immune from the economic problems that the rest of the world is suffering. "Saudi Arabia is integrated into the global economy and is consequently affected by developments that take place in any part of it. In the light of the current international economic difficulties, it would be better to tighten our belts until we have weathered the storm."
What may surprise many, however, is that prior to Sept. 11, the economy was doing well — very much weathering the storm. "The global recession has not affected the Saudi economy last year" was the analysis of Dr. Said Al-Shaikh, chief economist at the National Commercial Bank (NCB) last month. He was not being bullish. The figures bear him out. They show that between last January and September, private sector imports financed through commercial banks (imports account for 80 percent of Saudi consumption) were up 11.3 percent over the same period the previous year.
Within those figures, certain sectors were up significantly. Imports of vehicles were up 24 percent. Machinery was up 31 percent; building materials up 20 percent and textiles and clothing up 19 percent. This indicates a healthy and growing economy. But the figures stop in September. The fourth-quarter figures are not yet available, although all expectations are that they will be down. The year 2001 as a whole, however, was still well up on 2000.
The encouraging performance of the private sector in the first three quarters of 2001 bears this out. Companies such as Savola, which saw net profits rise 8.6 percent for the first nine months of 2001 compared with the same period in 2000 — SR124.1 million compared to SR114.3 million — are the norm.
There are other signs that the pre-Sept. 11 global recession had little effect on the Saudi economy. The Saudi stock market was doing relatively well until the WTC attacks. "It bucked the international trend," said Al-Shaikh. "It did not follow the NASDAQ, the FTSE or the Dow Jones." Over the year, it rose 15 percent — until Sept. 11.
The reason for this healthy trend was that the price of oil remained buoyant until September despite the recession elsewhere — and oil remains the key to the Kingdom’s performance. Despite efforts at diversification, the economy remains driven by government expenditure which is still almost wholly dependent on oil revenues.
Sept. 11 changed everything. It not only hit the world’s share prices, it hit oil prices too. Demand dropped. But in fact even that should not have any immediate effect on the Saudi economy. Oil is sold in advance. The government’s income for the last quarter of 2001 was not affected. Indeed as Al-Shaikh reports, "There is no evidence of rationing on government expenditure." But there was a more compelling element in the fallout. There is a question of confidence.
"When the oil price goes down, consumers and companies become wary. They buy less. They hold off on expansion," says Al-Shaikh. "That puts a downward pressure on the economy." And that is the prime reason for the changed economic atmosphere. It is the reason why, post-Sept. 11, the economic picture started to look very different. Businesses began reporting a sharp fall in activity. Although the fourth-quarter statistics were not available to support such a claim, there has been plenty of anecdotal evidence of a downturn in the retail sector. "I have heard figures as high as 50 percent and as low as 30 percent," said Hussein Shobokshi, president of the Shobokshi Development & Trading Company and a member of the Makkah Chamber of Commerce and Industry. Advertising agents too, claiming that their turnover has been cut by a fifth, say that their clients — even those in the food retail business — report a reduction in public consumption. "It is strange; people still need to eat, but supermarkets have been telling us that takings are down," said one Lebanese advertising agent.
Mohamed El-Khereiji, head of one of Jeddah’s prominent construction companies, has a convincing answer. Yes, he says; the Kingdom was "definitely affected" by Sept. 11. It was the shock of it; it put a "psychological break" on a number of developments. But like nearly everyone else, he too believes that the slowdown started way before the terrorist attacks on America.
A more striking comment came from Wahib Binzagr, chairman of the Kingdom’s well-known Binzagr Company. His office, in Jeddah’s downtown Mahmal Tower, overlooks the city’s massive port, point of entry for much of the country’s imports. "You see all those cranes and unloading equipment? Do you see them moving?" Nothing was moving. "When you see them moving, you’ll know that the economy is moving again."
There is a wide range of views as to what the future will bring in the wake of Sept. 11 and the downward pressure on oil prices. Some see damage to government efforts to diversify the economic base by attracting inward investment. "The xenophobia directed at Saudi Arabia following Sept. 11 has had the effect of putting a freeze on negotiations for joint ventures between foreign investors and local companies," said Shobokshi. It is a view backed up by Western diplomats in the Kingdom. "Western investors are going to hold fire on any ideas they might have had about investing here or anywhere else in the Middle East until the present crisis has blown over and they are convinced that their investments will be safe," said one European diplomat.
Others, however, see the exact opposite — or rather, that Saudis will want to bring home the billions of dollars now invested abroad. Saudi money, they say, is looking for a safe haven, and where better than at home.
Zaki Farsi, one of Jeddah’s most prominent developers and the Kingdom’s eponymous mapmaker, is inclined to this view. Saudi players on the international investment market have been badly hurt for three years in a row, he says. Two years ago, many who had invested in the Asian tiger economies had their fingers burned in the collapse there. They turned to the IT sector, only to see it plummet a year later. Now they have seen their investments take a battering after Sept. 11. "It has made a lot of Saudis think that it’s time to bring their investments home. That is understandable when the value of what you might have had in the US has fallen by half." El-Khereiji also subscribes to this view. "People want to invest at home," he says.
One encouraging development that bears up the theory about the search for a save haven is the recent boom in property values. In Jeddah, prices have risen 13 percent since Sept. 11. People are buying property, even empty lots, explains Shobokshi. "They want to put their money into tangible assets." Whether monies are coming from abroad to fund this, or from funds within the Kingdom, is unclear. But it is creating quite an active market in itself as buyers rush to profit from the trend.
On the other hand, developer Farsi admits there may be a reluctance to invest in projects in Saudi Arabia, particularly industrial projects, not because of the political or economic situation but because of the lack of a level-playing field for entrepreneurs. "You fear that someone else may be given an unfair advantage over you." The worry is that one person, investing SR100 million in a project, will abide by all the regulations on building and employment standards and the number of Saudis he should employ only to learn that someone else, using wasta (influence or connections) has been able to cut corners and been allowed to use a higher percentage of cheap foreign labor and thus produce a cheaper product. "You may be a brilliant businessman or engineer, but you are not going to invest your money if you think that someone else will have an advantage because of his contacts and as a result, produce a product 20 percent cheaper than yours," Farsi explained.
His other big bugbear is red tape. Saudis want to invest in the country rather than abroad. But bureaucracy needs to be eased. It threatens to "kill off enthusiasm" for investing at home, he fears.
Al-Shaikh of the NCB is not so sure about the repatriation of funds — estimated at between $500 billion and $750 billion. The Saudi financial market simply does not have the capacity to absorb such an amount, he says. Sixty percent of Saudi investments are in the US and 35 percent of that is in the US capital market: Equities and bonds. The rest is mainly in property. Total Saudi market capitalization, he says, is $75 billion. It is "wishful thinking" that funds will be repatriated. "They cannot be absorbed. If Saudis reallocate their assets, they will place them where they can gain a higher return; they are not going to bring them back and put them into a current account where they earn nothing."
That said, he is confident that, despite the shock of Sept. 11, the economy will be seen to have grown by 3 percent in 2001, and that there will be further growth this year. Much — almost everything — depends on oil prices. "This year is going to be a big challenge. If the government decides to retain around the same level of expenditure as 2001 it will result in minimal growth." In fact, this year’s budget is marginally down on last year’s — SR202 billion compared to SR215 billion — which indicates that the authorities expect the average price of oil this year to be around $17 a barrel, compared to last year’s figure of $23. Providing, however, that the private sector continues to grow, albeit slowly, it should be enough to pick up the slack and achieve just a little bit more. Minimal though it may be, Al-Shaikh still anticipates growth. The shock of Sept. 11 will wear off, he believes, and normality will return, and with it confidence. He expects the private sector which accounts for 34 percent of the economy to register a 2 to 2.2 percent growth in 2002.
Unlike some businessmen and officials, the NCB’s chief economist is not someone who puts a spin on the situation in order to present it in the best possible light. There are those who swear blindly that Sept. 11 has had no consequences whatsoever upon the Saudi economy. Perhaps too many. In the light of the facts, their protestations do little for their own credibility. Al-Shaikh has a reputation for telling it as it is. Thus if he says that the private sector will grow by around 2 percent, it is a figure that can be relied upon. The conclusion then is that while Sept. 11 will be a blip — a big blip — it is a blip nonetheless. Economic growth will continue.
That is firmly believed by the entire business community in the Kingdom, notwithstanding the shock waves from the WTC attacks. "I’m not saying that because I’m a Saudi and want to believe it; I’m saying it because I genuinely believe it to be true," said El-Khereiji. "I am sure that in the next two months, things in the economy are going to be a lot better."
In the view of some businessmen, Sept. 11 may even have a "silver lining" — one that could help the economy. The damage that it has done to investment potential will, in the view of Shobokshi and others, "force" the authorities to further liberalize the economy in order to make the market more attractive.
Ultimately, that will help small and middle-sized businesses multiply and grow. The answer is not more shopping malls and office blocks, which are likely to lie empty and untenanted. It is the environment in which business operates. It is less red tape, less regulation — and all businessmen agree there is far too much of both.