Saad A. Alrashed, the founding partner of law firm ZS&R in association with Hogan Lovells, speaks to Arab News about the investment climate in Saudi Arabia and why 2019 is set to be the year of deal-making.
Q: We are seeing the return of merger-and-acquisition activity in the Gulf, at its highest in a decade. How is this likely to play out in Saudi Arabia, and in which particular sectors — beyond Saudi Aramco’s proposed acquisition of a controlling stake in SABIC — are we likely to see deals being done?
A: Apart from SABIC/Aramco, there are two large ones taking place: NCB and Riyad Bank, and before that SABB and Hollandi, and negotiations are still ongoing.
Banks in Saudi Arabia have among the highest profitability in the world, and local boutique banks are usually good for the economy and end-consumer, therefore it’s difficult to foresee more logical mergers in this sector.
Q: How would you describe international investor sentiment toward the Kingdom currently, and to what extent will Saudi Arabia benefit from improving investment interest in emerging markets?
A: The Saudi economy in 2017 was in slight negative growth (real gross domestic product at -0.7 percent), yet it grew (in 2018 by almost) 2.5 percent and is upgraded to reach about 2.7 percent this year. The G20 can be split into two sections: Advanced and emerging. Both have been downgraded by the IMF as per growth (as seen in 2018 and as estimated for 2019). For example, the US economy grew last year around 2.9 percent (real GDP growth), and is expected to slow down this year. Saudi Arabia is one of the few countries in the G20 that have an upgraded growth forecast for this year and next year (along with Italy, Canada and Russia).
Japan got a downgraded growth forecast along with Australia and South Korea, and even China and India got downgraded forecasts (China’s GDP growth, which was 6.9 percent in 2018, was downgraded from a forecast of 6.6 percent to 6.0 percent for 2019). India’s economy is expected to slow down slightly to 7.3 percent.
As for how the Saudi economy is viewed internationally juxtaposed to all this, there’s a push to ‘buy Saudi Arabia’ from international funds (such as Passive Funds, with little or no active management, which usually seek to emulate their international exposure for emerging markets), also reflected in light of the Kingdom’s inclusion in the MSCI and the FTSE’s Emerging Markets Index.
This was clearly reflected as well in the national Saudi market (Tadawul) from the beginning of last year until today, with leading company stocks soaring, which indicates a general positive view of the whole economy. Of course, this is all in retrospection against 2017.
In terms of investor sentiment, there’s some hesitation that I believe is totally unjustified, since the real local feel and mood of the Saudi populace is a positive one in light of all the changes and new adaptations taken by the leadership.
And generally it’s difficult to ignore Saudi Arabia and its economy, which is the largest in the Middle East and North Africa, with a stable and deep system, a large local population, and massive growth potential and oil reserves.
Q: Which areas of the economy would benefit from further reforms?
A: It’s difficult to say, but a lot of the SMEs (small and medium enterprises) have been impacted by hikes in import labor fees, utility fees and different tax measures. And consumer spending is seen to have slowed down last year. This is of course as a result of Saudization measures and localizing labor.
Reforms benefit the whole economy. There are many sectors that need reform and can benefit from it, and now there are many courageous government initiatives in all directions really. Just last month, we saw around 34 excellent openings in all fields, from infrastructure to mining to logistics. Thankfully, there’s a huge push now by the Ministry of Commerce and Investment to cut down business establishment costs in order to encourage entrepreneurship and help initiate SMEs across the country (right now, according to unofficial figures from the ministry, setting up a new business in Saudi Arabia is more expensive than in Turkey and Dubai, for example).
This will definitely help alleviate the hikes mentioned earlier that affect SMEs and consumer spending. There seem to be real efforts and measures to cut red tape and start-up costs, led by the Saudi government.
Q: Given the prevailing sentiment in markets, are we likely to see many initial public offerings (IPOs) this year, and in what sectors?
A: I believe there are around six offerings this year in the stock market, which is a healthy number. This can be addressed further by financial experts.