Saudi officials sign new trade agreements and expand export markets while ushering in legislative and regulatory reforms

 

Firming oil prices have brought about an improvement in Saudi Arabia’s trade balance in 2018. The government’s longer-term ambition, however, is to protect itself from the uncertainty of the energy market by a diversifying the export base away from hydrocarbons. The Kingdom’s newly formulated economic strategy also aims to boost the level of foreign investment in the country, thereby reducing the economy’s dependence on public spending for growth.

Both of these objectives are being pursued through a cross-government effort that is reshaping Saudi Arabia’s business environment. The changes being made to the legislative and regulatory frameworks that govern trade and investment bode well for economic growth in the long term, although concrete results in the short term have yet to be secured.

Trading Activity

With oil reserves of 266.2bn barrels, according to BP’s “Statistical Review of World Energy 2018”, Saudi Arabia is the owner of nearly 16% of global oil stocks. In 2017 it was the world’s second-biggest producer behind the US, accounting for nearly 13% of total supply. Since domestic consumption in Saudi Arabia is lower than in the US, the Kingdom is able to ship a larger share of its crude oil to foreign markets, affording it the title of the world’s biggest exporter of oil, accounting for 12.2% of the global total. Hydrocarbons play a central role in the economy. According to the Organisation of the Petroleum Exporting Countries, the Kingdom’s oil and gas sector accounted for about 50% of GDP and 70% of total export earnings as of late 2018.

The dominant position of oil within the export portfolio means that there is a direct correlation between oil price and the health of the country’s trade indicators. In 2012, when oil prices were close to their all-time high, the trade surplus stood at $247bn, according to the Saudi Arabian Monetary Authority (SAMA). However, after a significant reduction in benchmark oil prices, the trade balance slipped to a low of $44bn in 2015. This period also saw the current account balance dip into the red for the first time since 2009, showing a negative value of $57bn and $24bn in 2015 and 2016, respectively. The episode served as a reminder of the importance of economic diversification — a long-term goal of hydrocarbons-dependent economies around the Gulf. The Kingdom’s most recent answer to this challenge is contained within Saudi Vision 2030, the strategic blueprint that is guiding the economic and social development of the country. One of the three central pillars of the strategy is to establish the Kingdom as an “epicentre of trade and the gateway to the world”, taking advantage of its strategic location connecting the three continents of Europe, Asia and Africa. This effort calls for a major restructuring of the Saudi economy, increasing non-oil government revenue from SR163bn ($43.5bn) at the time of the blueprint’s formulation in 2016 to SR1trn ($266.6bn) by 2030, and boosting non-oil exports as a percentage of non-oil revenue from 16% to 50%.

Non-Oil Exports

In its attempt to boost non-oil exports, the Kingdom is starting from a low base. In 2017 mineral exports – mostly oil – accounted for about 74% of total export value, according to the General Authority for Statistics (GaStat). The next biggest category of exports was plastics, rubber and related articles, which made up 7.5% of total export value, followed by chemical products (6.1%), base metals (1.7%), live animals and animal products (0.7%), and prepared foodstuffs and beverages (0.6%).

In the short term, efforts to boost the low level of non-oil exports is being steered by the National Transformation Programme (NTP), the first of 12 Vision Realisation Programmes to be implemented under the umbrella of Vision 2030. The NTP aims to increase the value of non-oil commodity exports from a baseline of SR185bn ($49.3bn) to SR330bn ($88bn) by 2020, as well as increase the number of exporters from 1190 to 1500. These goals are to be reached through a collaborative effort between a number of ministries. The most prominent among them is the Ministry of Commerce and Investment, which established an export-processing zone and an electronic platform for exporters. The Ministry of Economy and Planning, meanwhile, is improving the governing framework that supports export processes.

Local Production 

The Kingdom’s trade policy also calls for a reduction in its reliance on imports. Import activity expanded to $123bn in 2017 during a period of depressed oil prices. The domestic appetite for sophisticated hardware means that machinery, mechanical appliances and electrical equipment was the largest category of imported goods in 2017, accounting for 23.9% of the total value of imports, according to GaStat. Demand for personal transport and the Kingdom’s drive to enhance its transport infrastructure helped to establish transport equipment and parts as the second-largest import category, accounting for 15.7% of total value. This was followed by chemical products (9.9%) and base metals (8.6%). In terms of geography, China was the biggest partner for imports in 2017, making up 24.3% of the total, followed by the US (21.5%), the UAE (10.4%), Germany (9.3%), France (6.9%), Japan (6.5%) and India (6.4%).

Slowing the rate of import expansion is among the government’s goals under Vision 2030, and one way it intends to achieve it is by boosting domestic production across a range of economic sectors. Currently, approximately one-third of products consumed in the Kingdom are produced domestically, and the NTP strategy foresees this figure increasing to more than 50%, or SR270bn ($72bn), by 2020. Ramping up domestic manufacturing is an obvious starting point in this effort, and a number of sectors – such as pharmaceuticals and renewable energy – have been identified by the NTP as promising areas in which Saudi Arabia might be able to reduce import dependence.

Trade Agreements

Establishing new trading relationships and lengthening the roster of export markets is another strategic priority of government planners, and there has been a concerted effort in this regard in recent times. In October 2018 Pakistan and Saudi Arabia agreed to negotiate a free trade agreement (FTA) or preferential trade agreement to increase the volume of trade between the two countries. The Kingdom is a major source of petroleum for Pakistan, and in early 2019 Saudi Arabia signed eight deals worth a combined investment of $20bn that will see the Kingdom fund an $8bn oil refinery in the Pakistani city of Gwadar, among other initiatives.

Trade issues were also high on the agenda during Crown Prince Mohammed bin Salman bin Abdulaziz Al Saud’s visit to India in February 2019. The tour of Asia continued with a trip to China, where discussions centred on China’s contribution to Vision 2030 and investment opportunities arising from the Belt and Road Initiative – which will see significant volumes of trade pass through the Red Sea on the way to Europe. In March 2019 a Ministry of Commerce and Investment delegation to Bangladesh signed several investment contracts and agreed to form a joint working group to establish the Saudi-Bangladeshi Business Council. The UK’s exit from the EU may provide another opportunity for Saudi Arabia to enhance its relationship with the country. At a conference organised by the Arab-British Chambers of Commerce in September 2018, attendees were told that the UK would be ready to discuss a FTA either multilaterally with the GCC as a trading bloc, or bilaterally with Saudi Arabia or other individual countries in the Middle East.

The Kingdom’s trade outreach efforts aim to build on an already well-developed structure of bilateral and multilateral agreements. Saudi Arabia has been a member of the World Trade Organisation since 2005, and its position within the Greater Arab Free Trade Area provides it with privileged access to markets in 17 economies in the MENA. As a member of the GCC, Saudi Arabia benefits from the Customs union agreed by the bloc in 2003, as well as FTAs the GCC has signed with countries such as Syria and Singapore.

Moving west, Saudi Arabia agreed to a comprehensive trade and investment framework deal with the US in 2003, which is aimed at improving legal protections for investors, boosting intellectual property protection, creating more transparent and efficient Customs procedures, and increasing transparency in government and commercial regulations.

Infrastructure

Improving the Kingdom’s global trade connectivity is also a matter of enhancing the physical infrastructure that underpins domestic and external commerce. The NTP charges the Ministry of Transport with the task of improving transport infrastructure, including reducing the percentage of behind-schedule projects from 60% to 25% of the total by 2020. The government is also seeking to co-opt the private sector to fund half of new rail projects and 70% of port development. Meanwhile, efficiency gains are being sought in areas such as the average duration of stay of containers in ports. Existing international gateways include Jeddah Islamic Port – the biggest container port in the Kingdom, with a capacity of around 5m twenty-foot equivalent units per year – and the King Abdulaziz Port in Dammam, the nation’s principal facility on the east coast. Industrial and commercial ports at Yanbu and Jubail, and the facilities at Jizan, Dhiba and Ras Al Khair add further connectivity.

In late 2018 the Kingdom revealed plans for a port project at Arar, which shares a border with Iraq. The SR259m ($69m) development will span an area of 1.7m sq metres and is to include a logistics zone that will serve as the Kingdom’s so-called northern economic gate to markets in Europe and Asia.

The primary air freight hubs are located at the Kingdom’s four international airports, which are currently the recipients of large-scale investment. Jeddah’s King Abdulaziz International Airport is undergoing the second phase of an expansion that will boost capacity to 43m passengers per year by 2025, while Riyadh’s main airport, King Khaled International Airport, is being expanded to accommodate 25m passengers a year.

The rail network is also growing its footprint. In October 2018 Saudi Railways Organisation launched the new Haramain High-Speed Rail project, which connects the cities of Medina, King Abdullah Economic City, Jeddah and Makkah along the Red Sea coast. The new rail infrastructure is to be linked to the capital city by the Saudi Landbridge project, the detailed design for which was completed in 2017, and from there to the coastal city of Dammam by the already existing rail network. Meanwhile, Riyadh’s new $22.5bn metro system is expected to be fully operational by 2021.

Foreign Direct Investment

Saudi Arabia’s efforts to enhance its trade infrastructure are also helping to improve its attractiveness as a location for foreign direct investment (FDI). One of the key goals of Vision 2030 is to increase FDI into the country from 3.8% of GDP to 5.7%. Meeting this challenge, however, will involve turning around a negative trend in inward investment that has persisted over a number of years.

According to a report released in the summer of 2018 by the UN Conference on Trade and Development, net inward FDI fell to $1.4bn in 2017, down from $7.5bn the previous year. This contraction continued to extend into 2018, according to a report by London-based consultancy Capital Economics, which showed that net capital outflows were equal to around 5% of GDP in the first three months of the year, compared to less than 2% of GDP in late 2016.

The Kingdom has a number of comparative advantages as it sets about improving its FDI figures. Since early in the last century it has been one of the most politically stable countries in the region. It enjoys good diplomatic relations with nations that have large pools of potential investor capital, such as the US, Europe and the emerging markets of the East, and it has secured strong sovereign ratings from the major global credit ratings agencies: “A-” from Standard & Poor’s, “A+” from Fitch and “A1” from Moody’s as of the first quarter of 2019. The Kingdom also has one of the largest consumer markets in the region, with more than 30m inhabitants, and the greatest number of high-networth individuals in the Middle East.

In addition to these advantages, the government has rolled out a number of investor-focused incentives, including a scheme by which foreign companies are eligible for low-cost funding from the Saudi Industrial Development Fund for up to 50% of the total cost of a project.The UAE was the Kingdom’s largest source of FDI in 2017, accounting for 21.9% of the total, according to the Arab Investment and Export Credit Guarantee Corporation. The US was the second-biggest origin of FDI, with 20.3% of the total, followed by France (9.1%), Singapore (6.9%), Japan (5.6%) and Kuwait (4.6%). In terms of sectors, the chemicals industry accounted for the single largest share of FDI inflows in 2017, with 30.8% of the total, followed by real estate (27.7%); coal, oil and gas extraction (7.9%); automotives (7.1%); hotels and tourism (6.9%); and plastics (5%).

Legal Framework

The Foreign Investment Law, revised in 2000, grants foreign investors access to all economic sectors, with the exception of those on a negative list, which includes oil exploration, drilling and production. Investment can take place as part of a joint venture with a Saudi partner in those industries or as a 100% foreign-owned enterprise in open sectors. Over the past decade the terms of investment as established by the law have been gradually liberalised, most notably in the removal of minimum capital requirements that were originally attached to agricultural, industrial and services projects. The Kingdom opened more sectors to 100% foreign ownership in 2018, adding film distribution, communications, rail, air and space services to previously liberalised sectors such as engineering, education and recruitment sectors.

In August 2018 Saudi Arabia’s new insolvency law came into effect. The legislation directly addresses one of the main weaknesses of the business environment: the World Bank ranked Saudi 168th out of 190 nations in terms of settling bankruptcy cases in its “Doing Business 2019” report. The law will make it easier for indebted companies to maintain their operations while rescheduling their debts, thereby establishing Saudi Arabia as a more investor-friendly destination. The legislation also establishes a specialised committee to oversee all bankruptcy matters, including the set-up of a bankruptcy register, granting licences for insolvency experts and trustees, and coordinating liquidation proceedings. The committee is considered an independent administrative and financial legal body, which reports directly to the minister of commerce and investment.

In October 2017 the Kingdom officially launched a new commercial courts system with locations in Riyadh, Jeddah and Dammam. Specialised commercial chambers were also established within public courts in a number of cities. The Ministry of Justice launched a “paperless courts” project, which by the outset of 2018 had cut around 45% of paper-based procedures and shortened the period for execution of judicial orders from two months to 72 hours. By October 2018 the new commercial court system was making between 44 and 190 rulings per day, according to the ministry.

Doing Business

As well as overhauling the legal system, the Kingdom is working to improve the general business environment. Saudi Arabia ranked 92nd out of 190 countries overall in the World Bank’s “Doing Business 2019” report, scoring above average in areas such as protecting minority investors and registering property, but performing poorly in fields such as starting a business, trading across borders, obtaining credit and resolving insolvency. The Kingdom’s goal, under the umbrella of Vision 2030, is to attain a top-20 rank on the index – an accomplishment that will require a wide array of regulatory reform.

Vision 2030 and its various implementing plans are addressing the weaknesses highlighted by the ease of doing business index, and some of the most challenging areas are already being tackled. In April 2018, for example, the minister of commerce and investment launched a new online service for company registration, which is part of a broader reform process that aims to reduce registration time to one working day. The Saudi Arabian General Investment Authority (SAGIA), meanwhile, has set up the Investment Services Centre in order to facilitate investment in the Kingdom. The authority has also made the process of obtaining a foreign investment licence, a requirement for all non-GCC investors, less onerous.

In 2016 SAGIA significantly reduced the documentary requirement for licence applications, and in 2017 it launched a new online licence application process that enabled major foreign investors to obtain a SAGIA licence within 10 minutes. The service is available to applicants listed on an international stock market or the Saudi Stock Exchange, and that also satisfy a number of financial conditions, such as showing a sustained annual revenue in excess of SR70m ($18.7m). The authority also made it easier for companies to maintain their licences, allowing existing ones to be renewed on a five-year basis rather than annually, and lowering subscription fees for strategic companies that support the government’s agenda of training, developing and employing Saudi nationals in high-paying, hightech and senior management positions. These efforts have begun to produce some favourable results. For example, the number of foreign investment licences granted by the investment authority in the first quarter of 2018 was around 130% higher than the same period in 2017, according to the authority. In addition, the positive trend proved to be a sustained one, with licence approvals up by 90% in the third quarter of 2018, which equates to approximately 500 individual foreign investment licences issued.

From the beginning of 2018 until the end of the third quarter that year, companies from across 50 countries had invested in the Kingdom, with the majority of them in the services sector, which accounted for 378 licences, followed by industry (63) and commercial (35).

Investment Locations

The government’s determination to attract investment has caused a rethink of its long-held policy of eschewing special economic zones (SEZs). Free trade zones and SEZs are a growing trend in the region, and according to the OECD, they added $500bn worth of trade-related value globally and provided employment opportunities for 66m people in 2018. The UAE is home to 45 free zones, with an additional 10 under construction in 2018. Saudi has historically preferred to promote its low-tax, low-cost input framework as a single economic area, but in late 2018 it revealed details of its first SEZ, to be located adjacent to Riyadh’s international airport. The zone will focus on integrated logistics, and will allow investors to operate under special rules and regulations.

As well as investment zones, plans to build an entirely new city promise to open up new investment landscapes. NEOM, a planned smart city and tourist destination to be located on the Kingdom’s border with Egypt and Jordan, is a long-term project, whose first construction phase is not due for completion until 2025. The $500bn development is one of the key initiatives of Vision 2030 and is being designed as a high-tech, renewable energy-driven mega-city that will cover a total area of 26,500 sq km on the Red Sea coast. Some of the proceeds from the upcoming sale of state-owned energy giant Saudi Aramco are earmarked for the project, and therefore the delay in the oil giant’s initial public offering has resulted in uncertainty regarding NEOM’s development timeline. Nevertheless, by October 2018 the project’s advisory board already contained some prominent names in the business world, including Masayoshi Son, CEO of Japan’s SoftBank; Marc Andreessen, venture capitalist and board member of Facebook; and Travis Kalanick, co-founder of ride-hailing app Uber.

Outlook

The recovery in oil prices since 2017 has resulted in the Kingdom’s trade balance moving into more positive territory since its dip in 2014-15, clocking in at an estimated $158bn in 2018, according to the Saudi Arabian Monetary Authority. However, the trend only serves to underline the correlation between oil prices and the Kingdom’s ability to maintain an external trade surplus. Given the importance of hydrocarbons activity to the economy, this link will not be broken in the foreseeable future; however, a weakening of the correlation through diversification of export activities would represent a success for the government’s ongoing economic reform programme.

The ambition to attract further FDI over the short term is a more challenging prospect. The expansionary budget for 2019 sets a positive outlook for the year (see Economy chapter). However, public spending remains the primary engine of growth, and foreign investors have yet to respond to efforts to attract them. A global retreat from emerging markets explains some of this antipathy, but factors such as Saudiisation – an official policy to replace foreign workers with nationals – are also having a cooling effect on investor sentiment. The year 2019 will show whether the Kingdom’s reform effort can overcome such concerns.

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The Report: Saudi Arabia 2019

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