KUWAIT, 26 May 2004 — Saudi Arabia, the biggest economy in the GCC, has taken several positive steps resulting in increasing investor confidence in the region as a whole and in Saudi Arabia in particular. Also, the Saudi Arabian government’s intention in opening up the economy especially in case of the banking and infrastructure sectors has improved its business case among the international business community, according to the Kuwait-based Global Investment House.
The government plans to introduce political reforms by announcing elections for local council but without any time frame. The government has given priority to reducing unemployment in the country. Saudi Arabia’s population is witnessing a high growth rate that has added to the problem of unemployment, now estimated to be around 15-20 percent. To counter this, the government has embarked on a “Saudization” program in which employment in certain sectors is reserved for Saudis.
The government is also allocating additional resources to manpower development in order to better train and educate Saudis. Actual revenues in 2003 were far more than expected in the 2003 budget due to the increase in oil prices. As a result, the deficit projected in 2003 budget became a surplus of SR45 billion.
Saudi Arabia has traditionally shown a huge current account surplus trend. But we expect the trade gap to decrease as oil prices decline.
Also the non-merchandise outflow of funds on account of services and transfers such as repatriation of funds by expatriate workers is likely to decrease as they are replaced by Saudi nationals.
The process of reforms and privatization is taking place and the government has reduced its stake in key companies such as the Saudi Telecommunications Company (STC) and Saudi Electricity Company (SEC).
Saudi Arabia is also inviting foreign participation in order to harness the gas sector. After the collapse of the “Saudi Gas Initiative”, it again restructured the gas initiative and awarded contracts to international companies. Construction activity has picked up, taking advantage of low interest rates and we expect to see new big-ticket projects especially in tourism. As a result, Saudi Arabia will require and invite huge investments in infrastructure sectors especially in the electricity sector where demand is increasing by 4-5 percent each year.
Saudi Arabia will also join the WTO soon which will require opening certain sectors to international players. A step toward opening the banking sector has been to allow Deutsche Bank into the country. GCC banks have also been permitted to operate in the country.
Inflation has been under control and has been either very low or negative in the past few years.
As the riyal is pegged to the dollar, the decline in the dollar has affected the price of imported goods, thereby marginally increasing inflation. We expect the average consumer price inflation to be below 1 percent in 2004-2005. Due to the peg, interest rates have followed US rates and we expect this to continue.
Saudi Arabia has huge foreign exchange reserves which it can utilize to contain any abnormal activity in the financial markets.
There has been a steady growth in money supply even though there has been a decline in time & savings deposits as investors diverted their funds toward the phenomenally performing stock markets.
Improvement in the economy and good performance by the corporates and banks had its effect on investor confidence and the Saudi market measured by the TASI index gained 76 percent, making it one of the top-performers in the region.
Market capitalization also shot up by 110 percent in 2003 as a result of increasing share prices and the listing of big corporates such as STC. We believe that another round of good performance by corporates and banks and government initiative in privatization will help in increasing the investor interest and could trigger another rally in the markets.
