The Long Game: How Do Saudi CEOs Gauge Economic Reforms?
20 Apr 2018
For those of us who have kept a keen eye on Saudi Arabia, the past 12 months have been all about the fleshing out of Vision 2030. Just how will the ambitious plans come to fruition?
Despite the headline-grabbing announcement of the wholesale rejigging of the largest economy in the region, it is taking some time for the changes, particularly those in the private sector, to take effect.
Some elements of the national development plan, such as the Saudi Aramco initial public offering, are still works in progress. However, as our results show, respondents are confident in the prospects of sectors targeted by the plans. Tourism was highlighted as the most likely to drive growth, garnering 14% of responses when participants were able to select up to four sectors, closely followed by mining, with 12%.
This, of course, is hardly a surprise: the past year has seen major developments in the sector, including the legalisation of cinemas again and the announcement of tourist visas.
Given that the Kingdom’s population is predominantly young, tech savvy and, for the most part, endowed with higher-than-average disposable income, the potential is strong for the entertainment segment, which has hitherto been constrained by conservative legislation.
Other sectors that fall under the aegis of Vision 2030 are mining, manufacturing, health, transport and ICT, which survey respondents identify as particularly promising as well.
Therefore, it is difficult not to conclude that the Vision 2030 initiative is continuing to positively impact sentiment among businesspeople. When we asked survey participants about their expectations for business conditions over the coming 12 months, 72% were positive or very positive, and only 17% were negative or very negative.
Interestingly, the percentage of those with positive or very positive outlooks increased by two percentage points since we published the results of our last survey in June 2017. While not so significant in itself, if we break this down a little more, those responding as very positive increased from 5% to 15%.
Moreover, in comparison to CEOs of larger companies, those of small and medium-sized enterprises (SMEs) – companies with 750 employees or less – are more optimistic. It’s likely that larger firms are factoring in things like the new labour fee structure, which will impact sectors such as industry and other migrant worker-heavy segments. Accordingly, confidence was lowest in the construction and engineering sectors.
The construction industry, however, is not always in sync with other sectors, and there’s often a lag between investment and execution. It may well be that the effects of the government reducing infrastructure spending are still impacting related businesses. However, given demand for housing units in the Kingdom – with estimates ranging from 275,000 to 300,000 per year – it certainly seems as though this could turn around in the not-too-distant future.
Touching lightly on the new labour fees and Saudiisation – both key elements in Saudi Arabia’s plans to transform its
economy into a more sustainable model – the companies we surveyed employed over 170,000 people across the full gamut of sectors, with an average Saudiisation rate of around 52%. The authorities will likely want to see this figure increase significantly over the coming years, and it will, of course, be a major measure of the success of Vision 2030.
Key to creating the conditions for this will be the confidence of companies to make investments, particularly in the development of their workforce. To this end, 75% of those surveyed say they are likely or very likely to make a significant capital investment in the next 12 months.
When we break this down a little more, those in the SME segment were once again more positive than those from the larger businesses. This may well point to the labour issues, but could also be a hangover from when the government delayed payments on big contracts during the immediate revenue crunch of lower oil prices.
The fact that CEOs of SMEs are so relatively upbeat will be music to the ears of planners given that this is a segment pegged for major growth. However, one persistent challenge for small businesses has been access to credit.
In an economy which has traditionally been dominated by large conglomerates and government-related entities, the lending environment for small, riskier businesses remains nascent.
However, what is surprising is that while 44% of those surveyed say it is difficult or very difficult to access credit, just 39% of SMEs made this assessment compared to 56% of C-suite executives from larger enterprises. Overall, 47% of respondents described access to credit as easy or very easy.
When we asked how competitive the personal and corporate tax environment was in the Kingdom on a global scale, 84% answered that it was competitive or very competitive. This cannot be considered an unforeseen result, though it is markedly lower than in the June 2017 survey, when it stood at 94%. It is likely that measures such as the introduction of the 5% value-added tax (VAT), new labour fees, and reduced subsidies on utilities and fuel are all influencing this sentiment.
VAT, in particular, is a completely new concept for businesses in the Kingdom, and when we asked what impact it would have on respondents’ respective sectors, there were mixed feelings. The plurality anticipate a moderate impact, while 34% expect a high or very high impact, and 22% say it will have a minimal or very minimal effect.
The implementation of VAT is a Gulf-wide initiative, and most people I spoke to in my various meetings, both in the Kingdom and elsewhere, see it as a necessary measure: short-term pain for long-term gain.
The new levy is also ushering in an unprecedented level of transparency, and authorities will soon have greater clarity on transactions – again, a welcome change.
With this in the background and so much other change afoot, we asked respondents how satisfied they were so far with the level of execution achieved by national initiatives. In total, 46% are either satisfied or very satisfied, while the prevailing sentiment is that CEOs would like to see a greater pace of execution in the short term.
It is my feeling that this is perhaps the most telling of all our findings. Businesspeople are content to put up with short-term challenges, such as new levels of taxation, recognising them for what they are: reflections of a maturing and sustainable economic model. However, they will want to see, sooner rather than later, the fruits of the various changes to the long-established status quo.
When we assess our findings next time, it will be intriguing to see whether private sector CEOs remain as upbeat about the opportunities arising from Vision 2030 and, more broadly, from the Saudi economy.