Transcript Saudi Economy Overview

An Overview of Saudi economy:
challenges ahead
KING FAHD UNIVERSITY OF PETROLUME
& MINERALS
DHAHRAN 31261
SAUDI ARABIA
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Saudi Arabia: Major Challenges
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Despite diversification of economic base, still reliant
on oil and oil-related products for exports,
Despite massive expenditure on education, yet
mismatch between market needs and graduate
output,
Despite massive government subsidies, yet so little
on internal R&D to develop a knowledge based,
sustainable economic infrastructure.
But there is a light at the end of the tunnel.
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Table 1 Achievements and Directions
Overall national priorities
 Safeguard Islamic values in
conformity with Shariah.
 Improve standard and quality of
life
 Develop human resources,
increase productivity and replace
non-Saudis with qualified Saudis
 Realize balanced growth in all
regions
 Diversify economic base and
reduce dependence on production
and export of oil
 Provide favourable environment
for activities of the private sector to
encourage it to play a leading role
in development
First
Second
(1970 - 1974)
(1975 - 1979)
 Focus on provision  Large infrastructure
of modern
expenditure and
infrastructure, basic economic resources
government
 Large subsidy outlays
services
 Expansion in
 Expansion of
transport, electricity,
human resources water and housing
and beginning of  Starting hydrocarbon
infrastructure
industries
growth.
 Establishment of
modern administrative
infrastructure
Source: Ministry of Planning
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Table 2 Achievements and Directions (Continue)
Third
(1979 - 1984)
 Expanding
Infrastructure,
economic
resources
 Human resources
and educational
base expansion
 Hydrocarbon
base expansion
 Undertaking
regional economic
initiatives
Fourth
(1985 - 1989)
 Concentration on
operation and
maintenance
 Reconstructing the
economy to allow more
private sector
participation
 Human Resources and
health expenditure rose.
 Shift from Central
planning projects
approach to programme
planning approach
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Fifth
(1990 - 1994)
 Encouraging more private
sector participation
 Expanding the technology
base
 Emphasis on human services
and Saudization.
 Drop in gross fixed Capital
formation
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Table 2 Achievements and Directions (Continue)
Sixth
(1995 - 1999)
 Human resources
emphasis as well
as social and
health.
 Aiming for
balanced budget.
 Reduction in
foreign Labour
 Private sector
expansion
 Beginning of
partial
privatization
 Reduction of
subsidies.
Seventh
(2000 - 2004)
 Solving human
resource problems
 Diversify the economy
 Increasing gas
production
 Consolidating
efficiency in production,
refining and
distribution.
 Reducing State budget
deficit
 Increasing Saudization
 Preparing for
globalization, WTO.
 Privatization as
Eight
(2005-2009
 Improve the quality of life
 Enhance national unity
 Continue improving the
service provided to Hajj and
Umrah informers
 Develop national human
resources & increase the
supply of manpower
 Enhance the private sector's
participation in economic &
social development
 Develop the science &
technology system
 Conserve & develop water
resources
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Table 3 Conditions for growth
Factor Component
Necessary conditions for growth
 Macroeconomic stability
- Government deficits
- Inflation
- Exchange rate stability
- Solvency of financial system
 Openness to international trade
- Low import tariffs
- Low hidden import barriers
 Quality of government
- Public expenditure not wasteful
- Subsidies improve productivity
- Admin. regulations burdensome
Saudi Arabian setting
Low Medium High
X
X
X
X
X
X
X
X
Adapted from the Arab World Competitiveness Report 2005
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Table 4 Conditions for growth (Continue)
Factor Component
Necessary conditions for growth
 Infrastructure
- Road quality
- Efficient electrical generation
Saudi Arabian setting
Low Medium High
 Education
- Years of schooling in population
- Perceived quality of public education
- Companies invest in training
 Rule of law
- Independent judiciary
- Ability to successfully litigate against
government
 New economy
- Internet hosts
- Computers per capita
- Development of laws in support of new
economy
X
X
X
X
X
X
X
X
X
X
Adapted from the Arab World Competitiveness Report 2005
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Table 5 The changing face of the Saudi capital market
1970s
 No disclosure
 External funding
on selective basis
 Poor regulatory
and legal structure
 Commercial bank
funding on
secured basis
 Dominance of
family companies
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1980s
Regulatory
regimes
improving
External
funding
Government
soft loans
Syndicated
loans
 Some
disclosure
available
1990s
 Technology
utilization
2000 onwards
 Commercial paper and
bonds
 Specialized funds
 Family businesses
going public
 Mergers and
acquisitions
 More disclosure and
transparency
 Government debt
increasing
 Islamic financing
 Foreign ownership
on joint venture
basis
 Non-recourse
finance
Ministry of Planning
 Securities and
Exchange
Commissions
 Foreign Inward
Investment
 Privatization
 IPOs
 Securitization
 Islamic financing
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Table 6 Saudi Arabia: Legal, commercial and
dispute settlement system
Legal System
Judicial
System
Observations
Consists
of both general courts and specialized tribunals. Courts may consist
of a combination of judges and non-judges. Decisions can be quick or lengthy.
Decisions may be appealed.
Jurisdiction
Sharia’h
Board
Has
Civil
courts are courts of general jurisdiction. Sharia’h judges preside
over almost any disputes, unless Saudi law provides otherwise. Sharia’h
judges apply Islamic law to decide a case. Decisions may be appealed.
of Grievance
Rights Directorate
Negotiable
Instruments
exclusive power to decide disputes over Saudi government contracts
and may decide some types of commercial disputes. Unlike Sharia’h, the
board observes a system of precedent. Decisions may be appealed.
Responsible
Decides
for enforcing judgement of Saudi courts or tribunals.
on cases involving bills of exchange, promissory notes and checks.
Committee
The
SAMA Committee
Conciliation
Preliminary
Committee
Committee for
Settlement of Labour
Disputes
Resolves
disputes between banks and clients
At
the Saudi Chambers of Commerce, assisting in problems between foreign
partners and Saudi companies, especially in agency matters.
Hears
all matters related to labour and employee relations.
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The SME Sector:
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Previously neglected, concentration on
intensive, high technology industry.
Available financial resources – state/private
Limited managerial experience
High foreign labor utilization
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But they are powerful employment generators.
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WTO uncertainties for big industries.
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capital
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Saudi Family Businesses:
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A powerful positive and potentially negative
economic force.
 Hold around SR 250 billion in domestic
investment, with 200 family companies
dominating commercial life.
 Majority of franchises and agencies owned by
no more than 100 of the top Saudi companies.
 Time for change
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Saudi Women and the National
Economy:
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More urgency on this matter. Government
sympathetic as long as in conformity with
Islamic principles.
 Substantial women’s investment in domestic
economy and impact:
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60% of bank account
Deposits SR 62 billion
20% corporate shares
15% of private companies
10% real estate
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Table 7 Saudi businesswomen’s operating
barriers:
Barriers
 Difficulty for businesswomen to
accomplish official business in person
without using male intermediary
 Lack of training organizations and
specialist women-related business
programmes
 Difficulty of obtaining required market
information
 Difficulty in qualifying for loans
 Limited allowable investment sectors
 Unavailability of women’s sections in
major government ministries
 Clarification of legal rights of
businesswomen with government
agencies
 Limited networking groups for
businesswomen
Status
 Government is studying allowing women to submit
applications directly without intermediary
 Chamber of Commerce establishing training
programmes
 Special sections of Chamber of Commerce set up to
provide data
 Government lending institutions instructed to handle
female loan applicants on equal basis
 Industrial zones planned and special investment
advisory service from SAGIA set up
 Some progress in this field and some ministries have
established women-only sections
 Steps are being taken to ensure that women can
correspond direct in their own legal capacity without
intermediaries
 Businesswomen’s associations established to facilitate
networking
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Table 8 Private sector challenges and solutions
Challenges
Opportunities and Solutions
 Promoting government-business  The private sector has to engage the government in a dialogue on
competitiveness and impediments to improving productivity
dialogue and collaboration
 Up-to-date information on local and international market
 Internal business environment
opportunities made available as well as comparing relative costs
and international competitive
and efficiency with international standards
comparisons
 Private sector must engage in dialogue to ensure that transfer is
 Expansion of the privatization
done on a transparent basis with no “hidden” costs and
policy
commitment;; flexibility in hiring and firing
 Poor communication between the productive sectors and research
 Paying attention to scientific
centres must be overcome through R + D funding, and developing
research that might serve the
science park/incubator concepts
production sector
 Better coordination with SAGIA and Chambers of Commerce to
 Increasing investment locally
create business and investor friendly environment; update and
harmonize business regulations; create a demand driven economy
 Reduce national unemployment  Short term “fix” through expatriate labour reduction vs. long-term
solution of employing productive Saudis; ensure that the market
knows of the skill needs of the private sector
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Table 9 Foreign direct investment:
Saudi Arabia stock sheet
FDI Factor
POSITIVE
FACTORS
1. Capital
Formation
2.
Productivity
Growth
Analysis
Saudi Arabia
Applicability
This is more stable than other forms of investments.
Essentially it is an equity investment – profits are
repatriated when projects yield returns and part of the
profits are reinvested in the host country.
 Risks are borne by foreign shareholders.
 FDI will not lead to debt crises (like bank lending)
that require bailouts.
 A new understanding of the growth process treats
technological changes as endogenous growth. This
also involves the “soft” side of technological
advances (organizational structure, managerial
practices, etc.) that contribute to productivity growth.
Rather than re-invent technological advances,
developing countries can benefit from best practices in
standards, embodied technology and markets of parent
company.
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Applicable: In Saudi
Arabia investments
are in either Saudi
majority-owned
companies, or, now,
in 100% foreignowned companies.
 Applicable: This is
the main reason why
SABIC established
international joint
venture affiliates as
examples.
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Table 9 (Continued)
FDI Factor
3. Economic
Linkages
Analysis
 The impact of FDI on domestic economic growth
depends on spreading out best practices through
backward linkages with local producers and
distributors, horizontal linkages with local competitors,
and linkages with local institutions such as Universities
and research institutes.
Saudi Arabia Applicability
 Applicable: Local sourcing
is an important stimulant to
domestic companies.
Linkages to Universities are
also important (e.g. Science
park, Institute of Research
at KFUPM).
 More is needed on
backward linkages with
local suppliers, but this
varies with the industry.
 Applicable: The quality of
4.Employment  Employment can be created via 3 areas: (a) direct
employment in operations, (b) backward and forward
labour employment and the
and Labour
linkages in enterprises that are suppliers, subcontractors creation of best
Standards
and service providers, and (c) employment in sectors
employment practice has
not directly related to FDI project.
been more important to
 Quality of labour standards is improved in the domestic
date than the quantitative
economy, through good labour practices, superior
aspect of employment.
working conditions and positive career prospects.
 Adopting international global management-labour
practices that are different from host country and
ensuring that practices are of international standards
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Table 9 (Continued)
5. Environmental * FDI can lead to higher environmental controls and procedures.
Standards
NEGATIVE
FACTORS
1. “Crowding
Out” effect
 FDI
may remove investment opportunities of the domestic firms and
drive them out of business (e.g. in financial markets).
 If FDI borrows locally, interest rates could rise if there are scarce
resources, making borrowing for local firms uncompetitive.
 FDI could pre-empt entry into the market of some types of production,
especially if the foreign company employs aggressive marketing
practices.
2. Balance of
Payments
Problem
 FDI
3. “Enclave
Economies”

profits could be repatriated, constituting financial outflows to be
set against net annual FDI inflow. This is important for countries with
exchange controls.
* Applicable: Saudi
Arabia insists on the
latest environmentalfriendly technology.
 There is not yet any
evidence of this in Saudi
Arabia, as most FDI has
been capital intensive and
the joint venture majority
is Saudi owned.
 This
is not an issue for
Saudi Arabia as no
exchange control regime
exists.
FDI investments could be narrowly based with a limited overall
 Not applicable as oil
impact on domestic economy and benefiting only a small group of
sector in state hands and
population. Examples are in mining natural resource extraction or
no foreign owned
“Export Processing Zones whereas if mining is only for exports, then exclusive zones exist.
it will not generate secondary industry employment. Neither would
repackaging of goods in a duty free “export processing zone.”
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Table 11 Saudization impact on selected Saudi industries
Sector’s share in
total employment
% of Saudi
participation
4.19%
9.3%
Oil & Mining
19.70
11.5%
Manufacturing
0.70%
55.7%
Public Utilities
17.07%
9.8%
Construction
31.66%
13.4%
Wholesale & Retail
5.55%
4.7%
Hotels & Restaurants
6.59%
28.8%
Transportation & Storage
1.64%
52.4%
Banking & Insurance
7.14%
25.4%
Real Estate & Business
1.36%
16.9%
Education
2.05%
9.8%
Health
2.36
13.1%
Community & Personal
Source: National Commercial Bank, 2005, SAMA, 2005.
Service
% of NonSaudi
participation
90.7%
88.5%
44.3%
90.2%
86.6%
95.3%
71.2%
47.6%
74.6%
83.1%
90.2%
86.9%
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Saudi economy indicators
(2006)
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GNP for 2006 is $ 373.00 billion dollars (ranking # 20
world wide).
 Hard currency reserves up to 2006 is 269 billion dollars
 Saudi economy ranks # 12 in the volume of exports and
# 20 in the volume of import world wide according to
SAMA statistics (2005).
 80 % of Saudi income comes from sales of crude oil
 The Growth rate of Saudi economy is in the range of 3.5
to 4 %
 Emerging lucrative market in stocks & real state:
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
Over 500 billion dollars in Saudi stock market
Over 250 billion dollars in Saudi real state market
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Why to invest in Saudi Arabia
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Saudi Arabia is a full member of WTO since 2005
Political stability
Free economy system
Excellent infrastructure
Availability of reasonably cheap labor (Mainly from Egypt, India,
Pakistan, and Philippine).
Genuine government support they target to have Saudi Arabia among
the top 10 countries to attract F.D.I. by 2010
Saudi Arabia ranks # 38 out of 177 countries in the most favored nations
for investment opportunities according to world bank 2006
Low inflation rate (1% in 2006 & expect to be 2.2% by end of 2007)
Government spending in the next few years for already approved &
under execution projects are as follows:
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69 billion dollars in oil & gas section
45 billion dollars in petrochemicals
43 billion dollars in infrastructure
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Key indications on Saudi labor
movement
60 % of Saudi population are below 50 years old
24 % of the Saudis labor force work in the industry sector
31 % of the Saudi labor force work in the commerce sector
350,000 Saudis enter the labor market every year
The unemployment rate is considerably high among Saudis.
Approximately one million Saudis work in government agencies, out of
which 400,000 are women.
About 1.8 million Saudis work in private sector, out of which 20 % are
women.
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Challenges Facing the
education system
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High growth rate (3.4%) of Saudi population currently 20
millions
 The co density of the population is scattered all over the
country (2.1 million K. square)
 The cost of education is reasonably high compared to
industrial countries (9% of G.N.P. vs. 5% in developed
countries).
 Lack of certain skills that are needed in the private sector
 Slowness in updating the school books.
 50% of the higher education are in non-engineering
disciplines
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But, As I said there is a light at
the end of the tunnel
Thanks
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