Foreign investment opportunities abound in Saudi Arabia. Reasons are not far to seek. The Kingdom's positive policies have been drawing investments from abroad. However, foreign investments are still faced with challenges at different levels, said Engineer Abdullah Al-Rashoud, CEO of BLOMINVEST Saudi Arabia. In an exclusive interview with Diana Al-Jassem of Arab News, Al-Rashoud stated that the growth of foreign investment in the Kingdom is not as fast as in other emerging markets.
Al-Rashoud advised foreign investors to understand the cultural nuances of Saudi market in order to survive. "Doing business can be much more easy if the Kingdom's cultural aspects are understood. There is no better way than involving foreign talent and expertise, and pairing it with local Saudi talent and resources," he said. Mortgage law will impact the housing problem indirectly; it would increase the supply of housing and reduce prices, said Al-Rashoud.
Success recipe
What differences, if any, have emerged in business practices in Saudi Arabia during your career? Any surprises?
There are a lot of changes like an increase of awareness of knowledge, regulations; investors are getting more professional about their investment decisions. However, not everything is on the positive side. Investment world is getting more complicated, faster than regulations to control it. The boom of technology has facilitated the transfer of information and thus transfer of wealth from country to country. The Arab Spring has created a lot of concerns in the region. There are no safe places for money as such. Investors are investing more in real assets rather than securities, which are built on securities over securities.
What are the main positive changes you noticed in Saudi stock market in the past few years, and what are your expectations for the coming years?
It certainly is no easy task to restore trust in a market that has witnessed two acute corrections over a span of four years, yet in the years that followed the 2009 market's bottom we've seen a noticeable upbeat in what turned out to be successful new public offerings in sectors of interest within the Saudi economy. We have also been experiencing gradual pickup in transparency of corporate disclosures, governance and guidance. True, much more is still needed, but at least we know we are on the right track. After all, investors tend to value earnings of transparent corporations dearer than the opaque ones. And local investors will most probably notice that once the stock market is open for direct foreign investment.
What are your expectations of BLOMINVEST’s Saudi performance in 2013? Are you aiming to boost revenue or cut expenses?
It is an investment banking belief that expenses and revenues correlate. Thus, expenses are always made where revenues are expected. In 2013, BLOMINVEST plans to diversify its revenues by expanding both real estate and corporate finance activities along with already established funds. More products are hidden in the hat and will be presented in time to enrich the diversified basket of products and services.
Bank agenda
What projects BLOMINVEST is currently planning in Saudi Arabia and is the amount of debts slowly creeping back?
Real estate funds provided by BLOMINVEST have two success stories - Maskan Real Estate Fund in 2011 (above SR 500 million in debt and equity) and Manazel Makkah Fund in 2012 (SR 103 million). BLOMINVEST believes in investors' appetite for real estate funds; as a result, BLOMINVEST will capitalize on its previous success in real estate funds by launching 4 funds in 2013 summing up to SR 1.4 billion. On the other hand, the outstanding performance of BLOMINVEST public fund, Blom Saudi Equity Fund, encouraged BLOMINVEST to launch a new public fund in 2013 - Arab Market Equity Fund (approval granted by CMA).
What challenges BLOMINVEST may face in 2013? And what strategies you have to address these challenges?
Market demand for investment solutions is far from being satisfied; yet, this demand is getting more sophisticated with the increasing number of service providers. The challenge is to meet the demand and match the required sophistication. BLOMINVEST is empowered with high caliber professionals backed with geographically widespread experienced financial group, both of which are qualities to capitalize on to transform challenges into opportunities in 2013. Furthermore, BLOMINVEST is enriched with iconic local partners whose continuous commitment toward the organization paves the way to a prosperous 2013.
Similar to other local banks, BLOMINVEST of Saudi Arabia is exposed directly and indirectly to the fragile real estate sector and local stock market. What remains your greatest challenge, and how are you going to mitigate risks?
BLOMINVEST always diversifies its investments and activities with a thorough analysis of every investment and decision to dilute accompanying risks as much as possible. Moreover, it is a group strategy to be conservative, and BLOMINVEST always complies with those guidelines. As for Saudi real estate, BLOMINVEST finds it undermining to the sector to be described as fragile. The sector may lack legal infrastructure and legal enforcement tools, but it still presents itself as a promising, growing and profitable sector. It is far from saturation and gains are still to be made at relatively acceptable risks. As for the local stock market, with CMA empowerment, BLOMINVEST expects positivity on that front.
KSA's funding portfolio
Globally, there is increased optimism and focus on Saudi Arabia in terms of investment. How would you evaluate the Saudi investment sector in terms of opening up foreign investment opportunities?
Today the foreign investor sees the following in the Kingdom:
1. SAGIA (Saudi Arabian General Investment Authority), as the first gate to startup business with concentration on the following sectors: Energy, transport and logistics, ICT, health, human capital. Foreign investors can startup 100 percent foreign-owned Saudi companies in the Kingdom.
2. Government incentive spending plan of $ 130 billion issued in 2011 whereby many foreign companies have been seeing more opportunity to win government contracts.
3. Plans of the government to diversify the economy and limit dependency on the energy sector.
4. In 2012, the World Bank has rated the Kingdom as the 12th county in terms of ease of doing business, and the Heritage Foundation rated the Kingdom economy as "moderately free."
5. Financial services sector (excluding commercial banking) is open to foreign investment.
6. Commercial court system that does not have a comprehensive legal framework in place for resolving commercial disputes.
7. Requirements on employment of Saudi nationals and more restrictive measures on foreign employment.
8. Foreign direct investments have increased and this is due to the positive policies, which have been encouraging foreign investments. Challenges remain at different levels and the foreign investment inflow is not growing as fast as in other emerging markets, but the expectations are that due to favorable comparative advantages of the Kingdom's economy, more policies would be introduced and investments would grow.
What advice would you have for multinationals looking to do business in Saudi Arabia?
Understanding the cultural nuisances is extremely important in the Kingdom. Doing business could be much more easy if the cultural aspects were understood. There is no better than involving foreign talent and expertise and pairing it with local Saudi talent and resources, and that is the basis for success. The market lacks high quality services that fit the local taste.
Where do you see the biggest funding opportunities at the moment in Saudi Arabia?
Energy sector historically has taken the largest share of funding, but with the rate of growth of population in major cities and the lack of development in rural areas, the introduction of the mortgage law and plans of mega projects, real estate development is expected to ramp up and its financing will follow as well. Meanwhile, we expect to see in the medium term more of downstream industrial sector investments, which will also increase the financing base of industrial projects.
What are your views on the mortgage law and its contribution toward solving the housing problem?
The mortgage law package, with 3 out of its 5 regulations passed on Feb. 24, is very important to the legal infrastructure of the country. However, contrary to the thoughts of many people it would not have a big impact on housing loan interest rates because such rates are already at a very low level. But it can help the housing sector indirectly through encouraging banks to lend to the real estate development companies, which in turn would increase the supply of housing and reduce prices.
How do you see the economic development plan adopted by the government in 2012 and how do banks contribute to support the government development projects?
The banking sector plays a vital role in the implementation of the government's medium- and long-term strategies. In Saudi Arabia, the major source of capital for development projects, be it public or private, is banks' balance sheets. Though at the outset this might seem profitable for banks operating in such an environment, these institutions will be better off in the longer run promoting alternative sources of funds, such as sukuk. A developed bonds' market would create diversification of capital and in the process enhance the quality of such funds and their availability during times when higher banking provisions and balance sheet restructuring would limit the supply of credit.
Are the Saudi banks doing enough to support the investment sector?
The Saudi banks currently provide financing for real estate development, limited project expansions of companies with long history and those with solid balance sheets, and large project financing that are guaranteed by the government. The banks depend on the Saudi Industrial Development Fund, the Saudi Agriculture Bank and other related government lending institutions to fund projects in the industrial and agro business. There is minimal private venture capital or project finance offered on the market. Further, micro finance and support to SMEs (small and medium enterprises) is extremely limited. The banks are not doing enough to arrange venues for financing such projects.
Do you wish to see further contribution from the banking sector for funding mega projects? What is your opinion about adopting Islamic bond system to fund mega projects?
If mega projects make an economic and developmental sense then I do not see why banks should not fund such projects yet. Banks should be careful in financing such projects otherwise they would end up with a lot of illiquid assets. Adopting Islamic bonds or sukuk does not decrease the risk of financing rather it spreads the risk geographically. We believe that banks should adopt strict measures for assisting issuers; we certainly do not wish to see low rated sukuk being issued by banks at any time.
With many other banks also expanding into debts and funding, do you see competition increasing in the future?
Although the Saudi economy is buoyant and stable, there is a limited number of banks offering debt facilities. Lending is never going to be substituted by any form of equity financing such as that arranged by small financial institutions. As such, banks will never feel competition as profitable business will always be available for them and they will always have an upper hand.
Some foreign banks have expressed themselves in favor of having branches in Saudi Arabia and benefit from its sustainable development. What's your opinion about foreign banks wanting to have branches across the Kingdom?
With technological developments, it's highly debatable whether foreign banks should open more branches. Nevertheless, we believe that banking is a relation-based service. The one to one banking experience is a must for every bank; as a result, it is fundamental for branches to promote and manage client relations. Furthermore, Saudi Arabia is a large country with a geographically dispersed population; what is more, the nature of Saudi culture cherishes one to one relations in business practices. No bank will grow or survive this competitive market without a spread out of a reasonable number of branches.
Have the euro crisis and political changes in the Middle East influenced your views about the emerging markets?
Crisis and political turmoil in any part of the world are a major component of the fabric of history and economic development, though they do certainly vary in their degree of severity. Having said that, the driving forces behind the positive prospects of emerging and frontier economies, namely demographic growth and labor productivity, remain more or less intact. Therefore, severe crisis might postpone the unfolding of positive results but will not on their own stop them altogether.
