SAUDI ARABIA’s growth is solid. It is the largest free market economy in the Middle East and North Africa holding 25 percent share of the total Arab GDP. The Kingdom’s geographic location provides easy access to export markets in Europe, Asia and Africa. It has a continuously expanding domestic market (annual population growth of 3.5 percent), which is adding to a young and consuming population with strong buying power. The investment environment in the Kingdom reflects traditions of liberal and open market private enterprise policies, and its new Foreign Investment Law allows 100 percent foreign ownership of projects and real estate. The Kingdom has an impressive record of political and economic stability and has a modern world-class infrastructure.
Saudi Arabia has the biggest oil reserves in the world (25 percent). Oil prices are soaring. On Sept. 18, oil surged to a new peak of over $82 a barrel, the fifth record in as many trading days, on concerns of a winter supply squeeze in the world’s top energy consumer, the United States. Consequently, the Kingdom’s oil revenues are also on the increase.
Its oil revenues are expected to reach SR618.7 billion, with foreign assets rising to SR1,008 billion in 2008. Its economic cities provide an important development model, offering opportunities for jobs, diversification and regional economic growth.
The Kingdom’s economy continues to grow as consumers return to the marketplace and increase their spending. Additionally, oil prices still command a high premium, giving confidence to both consumers and the government that state spending can be maintained at a high level, in turn creating further opportunities.
“The Saudi economic growth is robust,” SABB’s Chief Economist Dr. John Sfakianakis told Arab News on Friday. “Its GDP growth during this decade will continually outpace population growth, which means that per capita GDP will continue to rise. This should be contrasted with the 1980s and 1990s when real incomes were in decline and population growth rates were outstripping real GDP growth. Today’s economy is based on a growth story, which is carrying this economy forward.
“Sustainable growth is needed so as to bring real incomes and create more jobs for young Saudis,” said Sfakianakis, who has released the latest report on Saudi Arabia’s economy Q4 ‘07.
“With these thoughts in mind, we remain in line with our earlier forecast of 3.7 percent GDP growth by the year-end, although our forecast for 2008 has risen to 5.8 percent,” the report says.
Although Saudi Arabia did not feel the financial turmoil and stock market declines felt by the rest of the world in mid-2007 as a result of the sub-prime crisis, the report says, “We are not convinced that the economy is insulated from a global slowdown or, for that matter, a recession, as we are of the opinion that oil prices are sensitive to the state of health of the global economy.”
The report notes that as oil revenues continue to remain high, estimated at SR618.7 billion in 2007 and foreign assets continually rise, currently at SR942 billion, the Kingdom is giving detailed consideration to its future direction. Integral to this are the six economic cities, which have been announced offering opportunities to investors by capitalizing on the Kingdom’s comparative advantage -- low-cost energy.
Any boom follows development plans for the future. The economic cities, which have been announced over the last year and a half, have generated a lot of interest. The first boom of the 1970s saw the building of the industrial cities of Jubail and Yanbu. The current boom has brought to the fore the creation of six economic cities. They will contribute $150 billion to the country’s GDP by 2020, according to the Saudi Arabian General Investment Authority (SAGIA). They are also expected to provide job opportunities for 1.3 million people over the same period.
According to SAGIA, the cities will have four industrial core sectors -- aluminum, steel, fertilizer and petrochemicals, which can generate around 105,000 to 110,000 employment opportunities. At the core of the economic cities project is the question of job creation for Saudis.
One of the Kingdom’s competitive advantages lies in the petrochemical sector, which Saudi Arabian Basic Industries Corporation (SABIC) is a strategic player globally. The petrochemical sector will be further enhanced in the economic cities so as to crate several downstream factories for packaging, tires and car parts and toys.
The Kingdom can become an important global producer of steel, having the capacity to produce some 10 million tons per annum in direct-reduced iron. Fertilizer is the fourth industrial sector for the economic cities to develop.
The King Abdullah Economic City (KAEC), located in Rabigh, near Jeddah, is the largest of the four new cities planned. In all six new cities have been announced. These cities are intended to function as catalysts for regional development. According to SAGIA, the prime facilitator for KAEC, the city has the potential to crate one million jobs and become home to two million residents. The six economic cities will generate huge construction activity and also create enormous benefits for the construction and building materials sectors. Economically, KAEC offers a lot of opportunities as it attempts to assist the Kingdom’s drive to diversify its industrial base.
Plans are under way to establish an international airport in Rabigh, as part of servicing KAEC and nearby areas. The airport will support the city’s capacity to accommodate up to 500,000 pilgrims on their way to Makkah. The Haj terminal at King Abdul Aziz International Airport will continue to welcome no less than 50 percent of all pilgrims heading to Makkah. The airport in Jeddah is undergoing a SR1.12 billion overhaul, which is the first PPP in the Kingdom’s civil aviation history and will double the capacity of the Haj terminal from 4.5 million to 9.2 million by 2025. The Knowledge Economic City (KEC) in Madinah seeks to develop the Kingdom’s technology base. The investment cost of the city will amount to around SR25 billion, creating some 20,000 job opportunities.
Prince Abdulaziz bin Mousaed Economic City in Hail is expected to cost SR30 billion by the time it reaches its completion in 2016. The city aims to capitalize on Hail’s location on the trade route between northern Saudi Arabia, Jordan, the Levant and the rest of the GCC. It is expected to use Hail’s agricultural economy to generate clusters of agro-business. The plan is to create the largest agricultural and processing hub in the GCC, with a dry port near a new international airport providing warehousing, handling and transport services, linking road and air freight services to a new railway connecting Hail with the rest of the Kingdom.
Jizan Economic City (JEC) is intended to become another all-inclusive city similar to KAEC. Heavy industry will be a key sector for investment in JEC. Two other new cities in the Eastern Province and Tabuk are under consideration.
The Kingdom is endowed with other natural resources including a wide range of industrial raw materials and minerals such as bauxite, limestone, gypsum, and phosphate and iron ore. There are no restrictions on foreign exchange and repatriation of capital and profits. It has a very stable currency and has no foreign exchange curbs, and companies are allowed 100 percent repatriation of profits.
The Kingdom is among the few countries in the world that allows companies to carry forward losses indefinitely, effectively relieving businesses of the tax burden until they become profitable. The Kingdom does not impose personal income tax. Labor cost in almost all spheres is low. There are additional incentives offered to investors that include exemption of export goods from storage fees for 10 days, annual land rent in industrial areas fixed at 2 US cents/square meter, cut in corporate tax by 30 percent, 50 percent cut in port fees on all exports and exemption of industrial machinery and equipment from duties.
Its petrochemicals and downstream industries include natural gas extraction and distribution, water desalination, electrical power generation, IT, infrastructure, industrial equipment and spare parts, mining and tourism.
Saudi Arabia is fully committed to increasing private sector participation in economic growth. Privatization is a key element of the Kingdom’s economic liberalization and a host of sectors are being opened to the private sector. Telecommunications, electricity, airlines, postal services, railways, port services and water utilities are some of the potential areas for investment.
The Kingdom proposes to invest $200 billion in oil, gas, electricity and desalination and petrochemical industries. Global oil companies are also considering investing $100 billion over a period of 20 years in the production of natural gas. It is also expected that $6 billion worth of domestic capital will be invested in the tourism sector. Saudi Arabia is a founding member of Convention on Arbitration and is in the process of obtaining World Trade Organization (WTO) membership. The Kingdom is also a member in numerous other international and regional organizations.
Saudi Arabia’s privatization and economic diversification efforts have gained momentum since the creation of the new Supreme Economic Council (SEC). The SEC’s objective is to speed up economic reforms aimed at opening Saudi markets and ensure stability for investors. The SEC has been officially responsible for the Kingdom’s privatization efforts since early 2001. The SEC evaluates economic, industrial, agricultural and labor policies to assess their effectiveness and impact on the national economy, diversification of the country’s economic base and the growth of its competitive economic strength.
Saudi Arabia’s foreign trade runs into billions of dollar. It is the world’s 25th exporter/importer. Export markets have expanded tremendously following bilateral trade agreements with numerous countries in the region. Saudi Arabia benefits from international and regional trade financing and export guarantee programs offered by the Islamic Development Bank (IDB), the Arab Monetary Fund’s Trade Financing Program for financing trade and the Arab Investment Guarantee Corporation’s program for ensuring exports and investments. The United States, Japan, China, South Korea, Germany, France, Britain, Italy, Singapore, India, Holland, the UAE and Switzerland are among the Kingdom’s leading foreign trade partners.
The Kingdom’s non-oil exports continue to increase. The government reduced tariffs from 12 percent to 5 percent some years ago as part of the efforts to accelerate GCC tariff harmonization. The new Foreign Investment Law allows foreigners to invest in most sectors of the economy. Business activities that are closed to foreigners for a variety of reasons are specified in a negative list. The law has abolished the sponsor system and enabled foreign investors to own real estate for company activities and sponsor their foreign employees. The new Real Estate Law allows foreigners to own real estate except in the two Holy cities of Makkah and Madinah.
The Kingdom has been continuously revising its business-related laws to increase transparency and strengthen the country’s global competitiveness. They include the Capital Markets Law, the Company Law, the Agency Law, the Insurance Law, the Mining Law and the Labor Law. These are all aimed at forwarding the process of economic liberalization. If youth means potential, Saudi Arabia has plenty of it. Demographic reality of educated and trained youth coupled with the government’s emphasis on developing human resources offer distinct possibilities for foreign investors. Joint ventures with the Saudi government and the private sector have groomed a generation of managers and technocrats.
Saudi Arabia has established a sound regulatory and financial infrastructure based on financial standards and payment systems equivalent to those in major industrial countries. This has resulted in a strong banking sector that benefits from management expertise and the most sophisticated technologies. Foreigners can invest in the stock market through investment funds. The Saudi stock market is the largest in the region. The Saudi riyal has a strong record of stability and inflation rates in Saudi Arabia are very low. The Kingdom is signing bilateral agreements with an increasing number of countries to provide relief from double-taxation.
All these measures have been contributing to the development efforts and the consequent positive changes in the structure of the Saudi economy, especially during the past three decades. The Kingdom’s economic growth has remained robust.
