JEDDAH, 5 March 2007 — “Saudi Arabia’s economy is doing well and growing despite a major correction in the stock market last year. The non-oil private sector will grow and that will be the main engine of growth along with government spending which will be important for the economy because it will act as catalyst for growth in the years to come,” SABB Chief Economist Dr. John Sfakianakis told Arab News in an exclusive interview.
“Overall, I’m very optimistic. Definitely the Saudi economy is on a growth path. The only factor that will affect GDP growth is oil output decline. So the real GDP for 2007 will be lower this year than 2006. We expect the real GDP to be around 3.5 percent for 2007. Last year, GDP was 4.2 percent and in 2005 it was 6.5 percent. But if you look at the nonoil private sector growth, which is the most important segment along with the oil sector, non-oil private sector growth is doing very well and we anticipate that it will grow by around 6 percent,” he said at the Jeddah Economic Forum 2007.
When asked about the impact of the Kingdom’s entry into the World Trade Organization, Sfakianakis said “a lot of people think that Saudi Arabia’s accession to the World Trade Organization has dramatically changed the country and also there were expectations that Saudi Arabia’s import regime would change as a result of the country’s accession. However, both these ideas are incorrect. Saudi Arabia’s economy changed prior to accession and that is one of the key principles of the WTO — that prior to any country becoming a member, it has to reform and change. So a lot of the changes were pre-WTO accession.”
“Also, we give a lot of importance to the WTO as an instrument of change but we have to remember that the WTO brought changes to the country’s trade regime but some of the challenges that the Kingdom faces have very little to do with trade,” he said. Reforms in Saudi Arabia took place over several years. They weren’t sudden. Also, the other common fear among people in Saudi Arabia was that suddenly the market would be flooded with imported goods. The agency agreement would change and the trading sector in Saudi Arabia would appear different as a result of the WTO. None of these has taken place, he said.
While describing the fall in the stock market, Sfakianakis said, “I don’t think it was a sudden drop. Some people were anticipating that it would lead to decline because it was an overvalued market. And at some point, we were anticipating there would be a correction in the market and it happened.”
He added that “valuations were extremely high, P/E ratios were extremely high and they did not represent reality. Prices did not represent earnings and that had a negative effect. In one way, the recent correction in the Chinese stock market was similar to the Saudi stock market bust: equities had outpaced economic growth even if both China and Saudi Arabia overindulgence and exuberance did not represent real economic growth. In the Saudi corporate sector, companies were doing very well in 2005 and 2006 as a result of the boom. Overall growth in net income was 19.1 percent in 2006, down from the 40.1 percent seen in 2005 but, nonetheless, very respectable,” Sfakianakis said.
“Stock market corrections are common and you will find in all markets. Usually in the developed world, according to empirical evidence, you have a correction or stock market bust every 13 years. So a lot of people felt that this was unsustainable. It couldn’t have gone to 30,000 or 40,000 within a short period of time. Unfortunately, very well placed analysts outside the Kingdom and also inside were expressing their views that the market would continue to sustain high price growth levels. Remember, two years ago, an international banker anticipated the market would grow by 31,000 within a short period of time which, of course, proved to be false and was much too high.”
As the Kingdom has embarked on a major economic cities plan, Sfakianakis said, “The development of these cities in the near- to medium-term will create growth; it will create incentives for the private sector, especially the contracting sector and all the sectors related to contracting which has definite positive ripple effect to take advantage of the opportunities. These economic cities will take place in the not so distant future and will take advantage of the general growth path which we see in the Saudi economy.” He pointed out that Saudi Arabia had opened up its banking sector to foreign banks. The SABB chief economist said that in order to establish new banks, time was needed. “However, you are beginning to see the introduction of new banks in the Saudi market and it has somewhat changed the competitive scene. I still though cast doubt on the performance and longevity of the new entrants, I am concerned about the time horizon these banks have with regard to the Saudi market. We as SABB/HSBC believe in this country and have deep and long-lasting relations with the Kingdom and its people. I feel proud to work and live here.
“There is a limited number of banking experts in Saudi Arabia and the arrival of new banks will create more competition that goes after the limited number of people to run those banks. As a result, the banking sector is witnessing high wage inflation as demand is rising and the supply is quite limited. At that level, there is competition and then there is competition in product,” Sfakianakis said.
“New banks are coming out with new products which are often most competitively priced and that is good at the end of the day for the consumer who has a greater pool to choose from,” he said, adding that “at the retail level, we don’t see a lot of changes as a result of the new entrants because change at the retail level takes time and one needs to create a critical mass in order to make a difference in the retail sector. The retail sector is all about banks and bank outlets, so you don’t see a lot of competition from the new banks but it will come given that these banks go beyond the one-shop mentality, which currently prevails. So, in the coming years definitely there will be more competition in the retail sector.”
Sfakianakis is also optimistic about Islamic banking. The emergence of Islamic banking in recent decades is one of the most important trends in the financial world. We estimate the Islamic financial services industry’s size stands at around $800 billion. Islamic banking is trying to address the difficulties often found in the market place; Islamic banking can be seen as a confluence between modern banking and ethical norms that are widely acceptable by Muslims and others.
He said, “I see growth in Shariah-compliant banking products such as SABB’s Ammanah. HSBC Ammanah was established in 1998 with the aim of making HSBC the leading provider of Islamic financial services worldwide. The trend in Saudi Arabia as well as in the GCC is toward Shariah-compliant products.”
He also said, “Saudization in the banking sector is strongly progressing because all the banks have accommodated the Ministry of Labor’s Saudization policies. SABB, for instance, has completely complied with Saudization as 75 percent of SABB staff are Saudis. In 2005, out of nearly 30,000 bank staff in Saudi Arabia, 25,000 were Saudis which means that it is more than 86 percent Saudized. What I am concerned more about is the ability of local banks to retain staff, both local and expatriates, as the entire GCC is witnessing high growth levels that are clearly sustainable for the next five years. The boom that the Saudi economy is experiencing is different in one major way from the one it experienced in the late 1970s: the entire GCC is booming and the rest of the MENA region (Egypt, Syria, Jordan and North Africa) is also growing at a fast pace, all competing against each other which creates opportunities as well as important challenges.”
