LONDON, 11 September 2006 — Competition between the Gulf Cooperation Council (GCC) states in business and financial services such as attracting foreign direct investment and regulatory reforms should be seen as an advantage by Saudi Arabia, because it acts as a driver for reform in the Kingdom itself.
In the banking sector, for instance, the Kingdom has lagged behind other GCC states especially Bahrain and Dubai in introducing necessary reforms and regulations. According to Dr. John Sfakianakis, chief economist at SABB, one should not “look at this as a disadvantage but an advantage. Saudi Arabia is reforming rapidly; therefore it has also been a learning process which is bound to result in some errors. The good thing is that both the reform process and mistakes are reviewed periodically and corrected. As such, the reform process is dynamic. Certainly some of the issues which the banking sector has been facing, are no longer an issue.”
It is good that there is added competition in the wider GCC, he advises. “Saudi Arabia then tends to reform faster because of the competition. If the Kingdom was the only country adopting reforms then the process would be much slower. The fact that there is competition between Bahrain and UAE; and Qatar and the UAE, means that the Kingdom can also learn from this experience.”
Sfakianakis is clearly bullish about the business and investment opportunities in the Kingdom, especially in an era of highly liquidity driven by high oil prices. “There is great business for all of us to be taken and done,” he stresses. “Clearly the opportunities are huge, both for local businesses; private individuals and investors; and for foreign entities in Saudi and the wider GCC.” These opportunities range in sectors such as construction, real estate, independent water and power plants (IWPP), oil and gas — including upstream through the subcontracting Saudi Aramco does to both local and foreign companies, and downstream such as refining and petrochemicals.
The Saudi economy, according to SABB, is the regions’ powerhouse. Nominal GDP is forecast at $364.5 billion at end 2006. This is a nominal GDP growth rate of 16-17 percent in 2006, declining to a projected 12 percent in 2007. In real terms this is a GDP growth rate of 5.67 percent for 2006. The average for 2006-2010 is forecast at 5.38 percent. This compared with a regional average of 4.46 percent. The private sector, Sfakianakis, is the major contributor to economic growth. In 2004, for instance, the non-oil private sector accounted for almost 60 percent of GDP. This compared to 30 percent by the oil and gas sector.
High liquidity does present its own sorts of problems. At end July 2006 the foreign assets of Saudi Arabia totaled $194 billion which is estimated to increase to $221 billion at end 2006. Not surprisingly, SAMA (the Saudi Arabian Monetary Agency) is keen to keep these assets invested outside the Kingdom partly because it is not capable of absorbing such huge amounts of liquidity over a short period. The rise in per capita income is projected to increase from about $15,500 in 2006 to $17,935 in 2008.
Other economic fundamentals are equally encouraging. The Kingdom at 1.7 percent has one of the lowest inflation rates in the Middle East region. SABB forecasts inflation to rise marginally to about 2 percent in 2009 before coming down again.
Sfakianakis is confident that the impact of the Kingdom’s membership of the World Trade Organization (WTO) would be positive. “It has been a process whereby economic reforms and changes have been gradually implemented in order for Saudi Arabia to comply with WTO,” he explains. “It is not a case whereby the Kingdom had suddenly to enforce certain rules and regulations out of the blue. Both the government and the private sector were aware of the changes and these have been slowly coming about.
“In banking for instance, you see more competition than before. Banks can open up and there is 100 percent ownership, HSBC, Deutsche Bank and BNP Paribas have set up entities here. You will see this with the financial services sector soon. Even Citigroup is willing to come back, The major investment banks are also interested.”
SABB predicts that WTO membership will see the Kingdom gradually from now until many years to come being transformed by the full process of becoming a globalized partner. Here the advantage is that “you do open your market to foreigners, but foreigners also open their markets to you.”
In the petrochemicals sector, for instance, the Kingdom under the WTO rules has the right to follow any violators who charge a tariff above 6.5 per cent for petrochemical exports. Saudi Arabia indeed has a sizeable 7 percent market share of global petrochemicals exports, which is expected to grow substantially in the years to come.
SABB contends that the Negative List of activities and sectors from which foreigners are banned from investing in should not be an impediment to investing in the Kingdom. This list is regularly reviewed every three months by the government and the Saudi Arabian General Investment Authority (SAGIA). The list would not be same now as it was a year ago.
Despite the fact that in relative terms, the GCC does not attract the FDI flows of such countries as China, the flows have been improving over the last three years. The Kingdom, for instance attracted FDI flows of just over $20 billion between 2003 and the end of April 2006.
“In absolute terms, yes China receives more. If China did not, it would not have had the spectacular growth rate it has been experiencing in past three years,” stresses Sfakianakis. In the banking sector, Sfakianakis sees growth in all the areas — retail banking, corporate finance, project finance, and consumer lending, especially real estate.