JEDDAH, 28 April 2008 — The Kingdom needs to adopt a wait-and-see policy on the issue of depegging from the dollar, said Dr. Ghassan Ahmed Al-Sulaiman, president of Ghassan Ahmed Al-Sulaiman Development Co. and former chairman of the Jeddah Chamber of Commerce & Industry.
In a wide-ranging interview with Arab News, Al-Sulaiman said that the need for action would only arise if the dollar depreciates further, adding that there is every chance that the dollar would soon appreciate, allowing the riyal to do the same.
Al-Sulaiman further called on the government to enhance incentives for the private sector, and talked about rising inflation and oil prices, the impact of Saudi Arabia joining the World Trade Organization, and the contribution of economic cities to the economy and stock market.
Al-Sulaiman, who served as member of the board of directors of major companies such as Almarai Co., Arabian Cement Co. and Maghraby Hospitals & Centers Company Ltd., is the sole owner of IKEA - Saudi Arabia. He is also the chairman of the Saudi-Turkish Business Council.
The excerpts:
Q. Inflation is the hot issue in Saudi Arabia and other GCC countries. What are the reasons for the current price hike?
A. For many, many years Saudi Arabia has had very low inflation. It was almost negligible. But any increase in inflation, though not major, will create unease among people. This is the norm; whenever there is an economic boom you will have high inflation. This you cannot escape. Saudi Arabia is now going through another economic boom. Look what had happened in China and India. As their economies are enjoying solid growth, inflation is also very high.
We had runaway inflation during previous booms in the early 1970s and 1980s. Much higher than what we have seen in this boom. So it is normal, it is part of an economic cycle that whenever there is a boom there is inflation.
If we are complaining about inflation in Saudi Arabia, go and see the inflation in Dubai. The cost of living is unbelievable there. In some places in Dubai the rent is equivalent to the cost of buying property in Saudi Arabia. I believe Saudi Arabia is still the cheapest place to live when compared to other GCC (Gulf Cooperation Council) countries.
Q. Do you think Saudi Arabia should continue pegging its currency to the US dollar?
A. The currency issue is very important for the economy. Last year the pegging of the riyal to the dollar alone had an impact of at least 37 percent on inflation. In the beginning, I too favored depegging. It still is a hot topic of discussion. Every time we businessmen met in the last few months, this was one of the topics discussed. Here, I had the chance to listen to other opinions and counter arguments. The choices that emerged were threefold. One is to depeg, go to a basket of currencies; two, to remain pegged and continue as we are; and third, to remain pegged but reevaluate the peg to the dollar.
I am leaning toward the third option - remaining pegged to the dollar, but reevaluating the value of the peg. So the riyal has to be strengthened versus the dollar. If you look at projections to the dollar against the euro for example, for the next year most financial institutions assume that the dollar will strengthen against the euro. So if the dollar strengthens versus the euro or other currencies, then we might have just hit the bottom now and things might improve, the dollar might strengthen. Nobody has a magic ball to see the future. So we have to adopt a wait-and-see approach over the next two to three months. If the dollar deteriorates further then the government has to take action, but if the dollar starts strengthening then leaving things as they are would make sense.
Q. Saudi Arabia joined World Trade Organization (WTO) in 2005. What has its impact been on the Saudi economy so far?
A. We are no longer part of the few countries that are outside this club. It is important to note that the government had the political will to effect some economic reforms and the WTO became a mechanism to help usher these reforms. I see the WTO as a catalyst to economic reforms in Saudi Arabia.
Q. Where is the Saudi stock market heading?
A. I am not an expert on the stock market. But what little I know is that many countries go through such cycles, which we are undergoing now. I think, presently, most companies in the Saudi stock market are undervalued. If there was normalcy, the proper value should be somewhere from 12,000 to 13,000 for the Tadawul All-Share Index. Now it is slightly above 9,700. Hopefully, slowly we can move toward a fair value for the stock market. Of course one of the inhibiting factors of the increase in the stock market is that non-Saudis have no direct way of investing in the stock market. At present expatriates can invest in the Saudi stock market through mutual funds. I think if that regulation is streamlined to that of other markets of the world, which allow foreign companies and individuals to invest directly in the stock market, then that will definitely hopefully push the stock market up to realistic values.
All studies I have seen show that the volume of liquidity that will be needed to finance the aspirations of Saudi Arabia, in terms of projects that we want to do, cannot be fulfilled by local liquidity alone. We need substantial foreign investments to finance these projects. One way of bringing liquidity into the companies is to open up the stock market to foreigners.
There are some big IPOs (initial public offerings) in the pipeline. So when these IPOs materialize, the number of companies in the Saudi stock market will increase substantially from the present 115 companies. So I think the Capital Market Authority has to consider seriously soon the possibility of allowing investors outside Saudi Arabia to invest directly into the stock market.
Q. How will the planned economic cities contribute to the economic development?
A. The economic cities will create an infrastructure, a cluster for a new lifestyle to attract people to produce better results. This is the whole idea. We have to admit that in the last 20 years or so, we have not spent much on infrastructure. So there's lots of demand for the improvement of buildings and infrastructure. Now the government has money and many places in Saudi Arabia are in need of improvement in infrastructure. Jeddah is one of them. We have mega problems in many areas. Parts of these problems relate to providing better housing, especially budget housing for the poor. One of the reasons is that we, the private sector, couldn't participate effectively in addressing these problems, as there was no regulation to allow mortgages in this country. Now the mortgage law is in the final stages of being approved by the Shoura Council. So, with the upcoming mortgage laws and setting up of more mortgage finance companies, I expect demand for housing will surge and this will be one of the major sectors that will enjoy a boom.
Q. Oil prices have touched a record $120 a barrel recently. Do you think this is realistic?
A. Oil prices are at an all-time high of $120 a barrel and going up, and this, I think, is due to speculation. There is nothing to justify this high price. They are not speculating on oil only. Look at gold, nickel and even the prices of some food commodities. Prices have gone up because of speculation rather than demand. Unfortunately, these speculators are playing havoc in the market.
One of the priorities now is the issue of investing in developing better quality oil products. One of the strongest criticisms about oil is its negative impact on the environment. I think some of our money should go into research and development to create more environment friendly end products to reduce the negative impact.
It is absolutely not in Saudi Arabia's interest to maintain a high price of oil for longer period, as that will encourage the use of alternative sources of energy.
Q. What is the private sector's role in Kingdom's development?
A. Government in the past has been the main instrument of development. In the last few years the private sector's contribution to the economy increased substantially because restrictions on the private sector have been removed. For example, in the past, the private sector was not allowed to invest in certain sectors such as telecom, airlines, petrochemicals, electricity and water. But now many sectors have been opened for private sector investment.
The government needs to further improve the investment environment and needs to work to enhance incentives for the private sector. It will be much cheaper for the government to pass on the work to the private sector than doing the work itself.
Q. Acquiring visas are a major problem in Saudi Arabia. Does it affect development?
A. Visa issuance in Saudi Arabia is a major problem. I know the situation faced by many of my fellow businessmen in Saudi Arabia. Many times we have to travel elsewhere to meet our counterparts because, for some reason or another, a visa to visit Saudi Arabia is not available at short notice. Another problem is that there is no accessibility in Saudi Arabia. There is a need to increase airline and hotel capacity in the Kingdom, because you don't get airline reservations, you don't get hotel bookings, especially in Riyadh. The need for accessibility needs to be addressed.
Q. What do you think of the education system in Saudi Arabia?
A. I must admit that the education system needs to be improved at all levels. There were many centers of excellence, but unfortunately over a period of time even their standard has deteriorated. Look at how many Saudi students are studying abroad now. It is understandable that such large numbers would go abroad when this country was still in its early stages of development. We started our First Development Plan 40 years ago, but why after 40 years are we still talking about a poor education system?
Q. Despite major opportunities in the Kingdom, why do Saudis go abroad to work?
A. I understand that is because of a better lifestyle, better working environment and better salaries. Saudi women, who do not get a chance here to work in a women-friendly environment, are also working in neighboring countries. Although I have to admit that opportunities for women to work have substantially improved here in the last few years.
