IT is boom time again in Saudi Arabia, thanks to consistently high oil prices — and the investment spree is on a par with the more famous boom of the 1970s. Hardly a week passes without another mega project being announced — new hospitals, universities, schools, cities, roads, railways, increased oil capacity and a positive tidal wave of new industries that must be the envy of any major industrial economy.
In July, it was estimated that there were some 420 major projects in progress and due for completion by 2012, costing just over SR1 trillion. But the figures continue to rise. Among the recently announced projects are the SR100 billion industrial city in Jizan, new universities, colleges and hospitals in the south plus the decision to expand five-fold the size of the economic city in Rabigh. Taken together with the increased costs at Aramco’s massive refining and petrochemical complex at Ras Tanura, the total money spent has been pushed up to an estimated SR1.3 trillion.
And there are many more projects to come. A new refinery for Jizan is likely to cost as much as SR37 billion; a fifth economic city is to be announced soon, either at Tabuk or in the Eastern Province and is expected to cost SR100 billion. In addition, there will be a number of new private sector joint projects in the petrochemicals sector; they will run into tens, if not hundreds, of billions in the next couple of years. There are two other major developments as yet unannounced. Prince Alwaleed bin Talal, head of Saudi Arabia’s top company, Kingdom Holding, has told Arab News that his company has two massive real estate projects in the pipeline, in Riyadh and Jeddah, on a par with the new economic cities. Investment is going to run into “tens of billions of riyals,” he says.
The money is there. The private sector is flush with liquidity, often sitting unproductively in the bank, and foreign investment has begun to pour in since last year’s accession to the World Trade Organization.
Government funds too are overflowing. Analysts estimate that oil price highs throughout the year will translate into a year-end surplus of between SR200 billion and SR250 billion. Probably the latter. A senior government official told Arab News at the beginning of the month that government revenues were 50 percent in excess of the budget’s expected figure of SR390 billion. Given that the 2006 budget anticipated a surplus of SR55 billion, that means a potential surplus of $250 billion; the excess for the last two months of the year should add a further SR20 billion or so. Clearly there is plenty of room for expenditure overruns although Arab News has also learned that the government has been carefully setting aside 20 percent of excess for future development. The set-aside will continue in future years. The policy is to maintain a substantial kitty for development.
The scale of growth can perhaps be seen better through GDP figures. In real terms, GDP grew 6.5 percent in 2005 (23.5 percent in nominal terms), compared to 5.3 percent the previous year. It is expected to grow a further six percent in real terms this year (compared to estimated global GDP growth of 4.7 percent) but the actual figure will be higher, possibly in excess of seven percent.
At the end of 2005, GDP was SR1,160 billion ($309.3 billion) and was estimated for 2006 to grow to SR1,343 billion ($364 billion). In fact, it is now forecast to be SR1,368 billion ($385 billion) this year and by the end of 2008 between SR1,700 billion and SR1,800 billion. “If GDP continues to grow as it has done for the past three years, it will be equal to that of all the other 21 Arab countries combined,” says Fawaz Al-Alamy, Saudi Arabia’s chief technical negotiator at the WTO. As a result of this consistently strong showing, in April Standard & Poor’s upgraded the Kingdom’s long-term FC credit rating from A to A+.
The big difference between the new boom and the earlier one in the 1970s is that then the country was building from scratch. This time round, it is a boom built on a relatively advanced base — infrastructurally, educationally, commercially and socially.
What is especially striking about the boom is the anticipated growth in industry on a scale seen nowhere else other than perhaps China. Saudi Arabia is about to take a quantum leap forward, becoming, on a grand scale, an export-focused, industrialized economy.
Inevitably much is concentrated in the oil and gas and downstream petrochemicals sectors (where the Kingdom has its competitive advantage) and in linked service industries. However, there is also a developing minerals industry based at the Gulf port of Ras Azzour, north of Jubail, plus investment in other areas — notably construction equipment and steel. Inevitably too, much of that investment (around 60 percent) will go to the Eastern Province, home to the oil and petrochemical industries and the obvious location for shipping exports to Saudi Arabia’s growing markets in the east. Despite the spread of industry to the new economic cities, the Eastern Province is set to remain the beating industrial heart of the Kingdom.
If nonoil exports are one of the prime targets in the industrialization plan, jobs are another. With the population expected to double to 40 million by 2020, they have to have to happen. At the beginning of 2005, there were 3,723 factories and processing plants in Saudi Arabia, with a total investment of SR265 billion and some 356,000 employees.
The mushrooming of export-oriented new industries and new service businesses will more than quadruple that figure. The new industrial cities alone are planned to eventually add 1,055,000 jobs.
The $40 billion deal on 72 Eurofighter jets from British Aerospace will create 15,000 jobs — and with it lie the foundations of a Saudi aerospace industry; half the aircraft are to be assembled at an as yet undecided location in the Kingdom. The new mining industry based at Raz Azzour will add 16,000 jobs; other related projects in the new city are expected to take that figure up to 70,000 with another 30,000 in subsequent developments in services and downstream industries in this remote area. For the whole of the Eastern Province, the direct employment potential of upcoming projects (and many are capital- not labor-intensive) is put at 200,000 jobs.
It has taken a year for the boom to sink into public consciousness. Today, people are almost blase about it. New projects and future prosperity are taken for granted. Despite personal worries and pain over the state of the stock market, gone is the nervousness over the country’s economy and social stability that was never far from the surface a mere 12 months ago.
The reason for that confidence — and for confidence among foreign investors — is threefold, says Al-Alamy. “First: The vision of Custodian of the Two Holy Mosques King Abdullah. Second: The crushing blow inflicted on terrorism. Third: WTO membership. Since joining, FDI has jumped 250 percent. Membership of the WTO, says Al-Alamy, has created a level-playing field. Overseas investors have more confidence in the Saudi market because of transparency, predictability and due process. They see our market as mature and applying the rule of law. They feel they can invest.”
One aspect of the king’s vision merits particular mention: Making Saudi Arabia a self-reliant, knowledge-based economy.
The boom has brought home to both the authorities and to business a worrying lack of skills in the Kingdom. This could put the brakes on growth even before it has begun. The government’s answer is to open the education floodgates. It is no coincidence that in tandem with all the major industrialization projects, there has been a flurry of announcements on new educational facilities. Billions are being spent on new universities at Hail, Taif, Tabuk, Abha and Jizan and new colleges and vocational training institutes across the Kingdom. The number of places in higher education is set to quadruple. The government hopes to create a work force ready for the advanced industrial economy Saudi Arabia is to become.
The royal vision is one that many businessmen comment on. It is what has made the difference, they say. “The king is anxious to have wealth spread throughout society, not just to the rich and powerful,” notes Khalid Al-Abdulkarim, of the Dammam-based Abdulkarim Group and a member of the board of directors of Eastern Province Chamber of Commerce and Industry. “He wants people to invest in new companies and have a stake in the economy.”
Dr. Abdul Rahman Al-Zamil, chairman of the Zamil Group and of the Saudi Export Development Center and one of the country’s leading businessmen, exudes confidence about the future. With the projects that are taking place, Saudi Arabia is going to be “No. 1 in the petrochemical business in 10 years,” he predicts. Foreign industrial manufacturers are going to relocate to the Kingdom because their products will not be able to compete with Saudi ones. Not just petrochemicals and plastics, but steel and electronic goods as well. Saudi Arabia has the location, the raw materials, the managerial capacity, the financial incentives and a business acumen as sharp as anywhere in the world, he says.
There has, however, been one evident downside to the boom. With demand soaring, construction costs have risen apace. “They have about doubled what they were three years ago,” says Ahmad Al-Ohali, president of Sipchem. Proof of that can be seen in the original cost of the Aramco-Sumitomo refinery and petrochemical complex at Rabigh more than doubling from $4.3 billion two years ago to $9.8 billion today; the mirror Aramco-Dow Chemical complex at Ras Tanura has similarly gone from $8 billion to $16 billion. This inflation in the construction sector is bound to have consequences for other mega projects; already there are reports that the minerals project at Ras Azzour is now estimated at $25 billion, not $8 billion, although that may reflect an expansion of plans. But construction inflation is not only a Saudi problem, it is a global one, says Al-Ohali.
There have been questions about whether Saudi Arabia will be able to fund the boom if the price of oil drops. “I doubt if we would see this boom continue as it is if the oil price plunged,” says Jeddah-based financial consultant Ismail Sajini, “but that’s extremely unlikely.” Even if the oil price stabilized as low as $40 a barrel (though he and most observers think it is more likely to settle round the $50 mark), the government can easily fund all its projects. Its reserves are more than sufficient. And on top of that, there is the private sector and foreign investors. Not that it is going to matter. “Even if in the medium term, oil revenues decline,” comments one Riyadh-based economist, “you can now see a momentum to growth. All these new projects are going to stimulate further expansion — and fill government coffers.” The economy is like a Jumbo jet, he says; it is heading along the boom runway; it has reached critical speed and is committed to takeoff. “All it can do is soar.”
