RIYADH, 30 December 2007 — While 2007 was a boom year for the Saudi economy, the New Year could bring in many challenges stemming from this economic surge, both in terms of combating inflation and in dealing with the dynamics of the labor market.
It was also a year of economic reforms that saw the Kingdom ranked 35th out of 131, according to the Global Competitiveness Report (2007-2008) released by the World Economic Forum in October this year. The capital market went through sweeping changes during the year to inject greater transparency into the functioning of the Saudi Stock Exchange (Tadawul). As a result, Saudi commercial banks had to delink their conventional banking and investment activities in order to prevent insider trading and make share transactions more transparent.
The record budget surplus of SR265 billion, five times more than the budgeted amount, and the lowering of domestic debt to SR366 billion came as icing on the cake for the national economy which was characterized by high liquidity, vigorous growth in the real estate sector, investment and Islamic banking. The oil and gas sector also remained vibrant.
On the economic front, the Kingdom did a great job by clinching the 35th slot in terms of its global competitiveness. This year’s GCI (Global Competitiveness Index) was based on 12 pillars of competitiveness. They include: Institutions, Infrastructure, Macroeconomic Stability, Health and Primary Education, Higher Education and Training, Goods Market Efficiency, Labor Market Efficiency, Financial Market Sophistication, Technological Readiness, Market Size, Business Sophistication and Innovation.
As a result of the economic reforms ushered in by the Saudi Arabian General Investment Authority (SAGIA), the growth rate of the corporate sector in the first quarter of 2008 is projected at almost 30 percent, surpassing the performance of the 18 percent growth rate in 2006. The Cabinet also decided to institute a SR1,000 fee for issuing multiple-entry visas valid for a year, enabling foreign businessmen to visit the Kingdom.
Not to be left behind, the Capital Market Authority (CMA), too, streamlined the functioning of the stock market. Consequently, stock prices which had dropped by 52 percent last year rallied this year and were in fact 27.42 percent higher than before on Nov. 8, 2007.
The buoyant trend in the corporate sector is expected to continue well into 2008, when the number of joint stock companies will have reached 108, with the Middle East Specialized Cables (MESC) and Al-Khaleej Training & Education Co. already approved for listing by the CMA. The market capitalization of the joint stock companies already exceeds SR1.6 trillion.
CMA also brought many new players into the market to guide and educate share traders on the complexities of the capital market. BMG Financial Advisors, a leading provider of financial services in the Kingdom, signed a memorandum of understanding with Coffee Bean and Tea Leaf (CBTL) to explore the possibilities of introducing e-trading for young investors and provide them with financial research about the companies listed on the Saudi Stock Exchange (Tadawul). CBTL is heavily involved in worldwide corporate social responsibility in developing countries.
Private banking will be another high growth area in the Kingdom, as the number of high net worth individuals, those with more than $1 million in investable assets, in the Middle East is set to increase by 2.8 percent next year. Credit Suisse has taken the plunge by deploying a team of six private banking relationship managers for Saudi Arabia as part of its strategic move to improve its private banking team in the Kingdom.
In the field of Islamic banking, financing agreements worth SR1.7 billion were signed this month for the development of the third container terminal project of the Jeddah Islamic Port. Red Sea Gateway Terminal Company Ltd. is implementing the project on a build-operate-transfer basis.
Islamic housing finance is set to make dramatic inroads in the GCC and Middle East markets in 2008 as more mortgage corporations come on stream and several countries adopt the legal and regulatory infrastructure to facilitate what in many developed countries is a basic consumer finance necessity.
The Kingdom has a huge market potential in this regard with 88 percent of the Kingdom’s population based in urban areas, and with 55.8 percent of this population being under 25. The Dubai-based Islamic mortgage company, Amlak Finance, said it plans to raise six billion dirhams ($1.63 billion) next year to fund Middle East expansion, including selling shares in a planned Jordanian affiliate. The fundraising will be done through various vehicles, such as sukuk or covered bonds.
In the real estate sector, NCB Capital launched an open-ended Shariah-compatible Al-Ahli Global Real Estate Fund, described as the world’s first. It seeks to generate long-term capital appreciation and invest in companies engaged principally in the real estate industry all over the world.
NCB Capital also introduced a new investment product, Al-Ahli BRIC Secured Equity Fund, which would invest in Shariah-compliant companies in the surging economies of the four BRIC countries — Brazil, Russia, India and China.
Abdul Mohsen Al-Hokair Group, a major player in the real estate sector, has nearly completed four towers designed to house large administrative offices and headquarters of international standard at a strategic location in the Eastern Province. Known as Novotel Business Park, it will include a five-star hotel to cater to both domestic and international businessmen and tourists visiting the region. Al Hokair said 40 percent of the towers have already been booked by international companies working in the fields of oil, energy, water, electricity and contracting, in addition to banks and real estate firms. The Al-Hokair Group runs 30 hotels in various areas in the Kingdom, while 10 new hotels are expected to be commissioned by 2010 at a total cost of SR6 billion.
The repatriation of funds from the US, which began in September 2001, brought in an estimated $1.5 trillion from American banks, a good portion of which found its way into Bahraini, Saudi and other Gulf banks.
In order to manage this huge liquidity and prevent the type of situation that led to the recent stock market crash, Abdullah Al-Suweilmy, general manager of the Saudi Stock Exchange (Tadawul), spelled out the key features of the new system in an interview with Arab News. He said they include an expanded capacity, the ability to support other services and products, and the implementation of an advanced surveillance system.
“It by far exceeds our previous systems,” he said. “It enables us to support larger volumes of transactions, which we anticipate by the new member participants coming in, new listings and new IPOs.” Al-Suweilmy said that on Day 1 of operation, the Saudi Stock Exchange was able to support two million transactions a day and that the market is able to expand to support larger volumes. He added that Tadawul’s contract with OMX, a Swedish company, which is the prime contractor for implementing the new system, includes the training of a large number of staff, including Saudis.
Speaking about the advanced surveillance system, Al-Suweilmy said: “It is called SMARTS and it is becoming the de facto surveillance system in major exchanges around the world... It is the same system that was recently deployed on the London Stock Exchange, Switzerland, Australia and Scandinavian countries.” He said the CMA was keen on educating investors on how to invest in the stock market. Banks and brokerage firms were very supportive of market awareness programs.
The CMA also issued statutes governing mergers and acquisitions by companies listed on the stock market. The order deals with all the rules related to offer, takeover, announcements, and do’s and don’ts in such deals. The statues also provide for terms and conditions of obligatory offers and optional offers for merger, the mode of payment, commitment to the competition system, etc.
In the field of international trade, Saudi Arabia’s total exports of goods and services were expected to grow by 6.7 percent in 2007 to reach SR900.8 billion ($240.2 billion), according to a report issued by the General Statistics Department. Non-oil exports of goods were anticipated to increase by 24.9 percent to SR106.8 billion.
Preliminary statistics issued by the Saudi Arabian Monetary Agency (SAMA) said the Kingdom’s trade balance in 2007 was estimated to record a surplus of SR555.6 billion with an increase of 1.1 percent compared to the previous year. Current account was estimated to record a surplus of SR344.4 billion in 2007 compared to SR371 billion in 2006, SAMA added.
The surge in national economy, together with the rising cost of imports due to the weak dollar, pushed inflation in the Kingdom to five percent this year, a record for a country that had the lowest rate of less than two percent for several years. The inflationary spiral prompted Custodian of the Two Holy Mosques King Abdullah to seek the opinion of the chambers of commerce in the Kingdom on the cause and cure of inflation.
According to expert opinion, the rise in inflation is the cumulative result of the surge in the prices of oil, cereals, gold, housing rents and construction material. In the health care sector, too, said Musharraf Ali Khurshid, chief pharmacist of a local hospital, prices of medicine went up by 10-12 percent this year due to the rising cost of imports and mark-up in prices in Europe and the United States. He said they are expected to rise further in the first quarter of 2008, when the new shipment will have arrived.
In the construction sector, the prices of rebar, a steel reinforcing rod used in concrete, has gone up in the Kingdom amid a booming construction industry, with distributors claiming that the rise was aggravated by a marked increase in demand from China and East Asia. However, building contractors, real estate investors and consumers accused accredited distributors of price manipulation by artificially creating a scarcity of supply with a view to raising the retail prices of rebar. The price of one-ton rebar stood at SR250.
According to the Jadwa Investment report, the lifestyle in the Kingdom and other countries in the wake of the economic boom has also triggered the price rise. The per capita income is rising at an annual rate of seven percent in India and nearly 10 percent in China. Production of crops for use as a feedstock for ethanol production (mainly corn, wheat and sugarcane) has reduced the area planted with food crops (particularly in the US) and sharply pushed up prices, it said. The rise in food prices has coincided with a falling US dollar, pushing up the cost of imports.
The inflationary cycle in the Kingdom also attracted the attention of The Economist, a leading British economic weekly, which suggested that the Gulf states should consider delinking their currencies to the dollar. One intriguing idea is to include the oil price as part of a basket that includes leading currencies. It said a revaluation would help inflation by making imported food cheaper.
In order to ease the financial burden on the government employees in the Kingdom, the Cabinet indicated that there would be a 30 percent salary increase after some private companies declared pay hikes of up to 40 percent as part of efforts to confront the unprecedented rise in consumer prices.
At another level, the Saudi government announced plans to subsidize sales of rice in the country at a rate of SR1,000 per ton. The subsidy for baby milk will go up from SR2 to SR12 per kg as part of the national effort to ease the financial burden on the public caused by soaring consumer prices.
What are the challenges ahead as the Kingdom ushers in 2008? A major one will be the shortage of skilled personnel, especially in the banking, health care, construction and oil and gas sectors. With the Kingdom set to embark on the development of six new economic cities in different provinces, it will need tens of thousands of jobs in those areas. It will be a major task to retain the existing employees and induct new work force, since the traditional catchment areas of South Asia are experiencing their own economic surges.
With expatriates feeling the impact of inflation in the Kingdom and appreciation of currencies in their home countries, employers will be hardpressed to retain their services given the fact that new employment opportunities are also emerging because of the economic boom in the Gulf states.