LONDON, 18 August 2003 — Saudi Arabia may have problems with the neo-conservative elements in the Bush administration over the war against terrorism, but in the international economic arena it has received two major boosts in recent weeks.
First, international rating agency, Standard & Poor’s assigned an investment-grade debut rating to the Kingdom — a long-term foreign currency sovereign rating of A and a long-term local currency rating of A+.
Secondly, the Kingdom has announced that it is making final arrangements to join the World Trade Organization, after almost seven years of on-off negotiations. Accession to the WTO is not automatic, it will need the support of and several bilateral treaties with the major economies such as the US, Japan, and the UK. All in all, Saudi Arabia will also have to sign at least 16 bilateral agreements with WTO working party member countries.
After all these years of measured negotiations, it was implicit that the Kingdom is not interested in accession to WTO at all costs, but on terms with which Saudi Arabia could live with and without a major upheaval of its domestic economy.
However, there has been a newfound urgency regarding membership of WTO following the Saudi cabinet reshuffle in May and the appointment of Hashim Yamani as the new commerce & industry minister.
What are the reasons and the implications of this policy change? The Kingdom, according to unconfirmed reports, will announce its readiness to accede to WTO membership at the organization’s Fifth Ministerial Meeting in Cancun in Mexico next month.
The aim is to sign the remaining 16 bilateral agreements by yearend, by which time Riyadh could start the final accession negotiations and submission to the WTO governing council. The Kingdom, in any case has a grace period of up to 2005, by which time all outstanding issues will have to be resolved.
As such it is in the interest of Saudi Arabia to join well before the grace period expires because this would give Saudi companies breathing space to adjust to the new trading regime to which the Kingdom has acceded to, before it becomes fully liberalized.
But is it realistic to conclude the remaining 16 agreements by yearend? The two key agreements - the ones with the US and the EU — is going to be the acid test.
Agreement with the EU is conditional to a fully-fledged GCC Customs Union being in place, and the vexed questions of unfair subsidies to industries. Last year, the GCC agreed to have a Customs Union in place by Jan. 1, 2003. However, while the Customs Union is technically in place, several provisions including the collection and distribution of tariffs between the six GCC member countries, have been deferred. Nevertheless, the Kingdom already has lowered customs tariffs from 13 percent to a uniform 5 percent, which is a statement of intent.
The agreement with the US could be even more elusive. The US is emphatic that the Kingdom gives too much protection to its industries — free land, interest-free loans, protected market access, monopoly status in some instances — which would be unfair to foreign entrants.
The third area of concern is copyright and intellectual property. While GCC countries, including the Kingdom, have made tremendous strides in introducing the necessary copyright and intellectual property laws, monitoring and enforcement is still perceived as lax. The newfound urgency may be due to the general post 9/11 and post Gulf War II climate, with the calls for speedier reforms both in the socio-political and economic arenas gathering momentum.
In the internal scheme of Saudi politics, Hashim Yamani is firmly in the camp of the reformers. Despite the fact that the Kingdom has recently approved 22 trade-related laws, including a law on insurance, foreign investment, foreign ownership of property, and so on, some of the laws are tied with various conditions which give the impression that the reform process is being dragged out and not based on genuine free market principles.
The Negative List of the Foreign Investment Law which bars foreign investors from participating in selective industries and sectors, remains a serious bone of contention and arouses much suspicion among foreign investors that the Kingdom is not really serious about opening up the economy.
The internal differences among Saudi policy-makers have not helped either. Prince Abdullah ibn Turki, chairman of the Saudi Arabian General Investment Authority (SAGIA), for instance, is a keen proponent of speedier reforms and is keen to see the end of the negative list. He recently expressed serious concern over a law to impose a 25 percent tax on profits of foreign companies operating in the Kingdom.
The original level was put at 45 percent, but was lowered by the Majlis Al-Shoura (the Consultative Council). Some members of the Shoura are also keen proponents of faster reforms, but there remains a conservative statist rump in Saudi policy-making, which also has to consider the views of the neo-conservative religious establishment. As such, the reformers might hope that speedier accession of WTO membership will also underpin a speedier reform process in general.
In fact, despite the S&P’s debut investment grade rating (which incidentally was superceded by an upgrade by Moody’s of the Kingdom’s foreign currency sovereign rating to an investment grade rating of Baa2 from Baa3), both rating agencies have expressed concern over the Kingdom’s slowly developing sociopolitical system. The ratings were more to do with the Kingdom’s current macro-economic stability (stable exchange rate, low inflation, a sound banking system) and substantial external liquidity.
However, the constraints continue to mount up — limited fiscal flexibility (the Kingdom does not have income tax, and very little budget transparency), heavy dependence on oil for revenues, and insufficient private sector economic growth.
Unless these challenges are resolved whether through reforms or a change in the mindset of both policy-makers, business, and citizens, the investment grade ratings could prove meaningless.