The Report: Saudi Arabia 2015

2015 has been a year of major significance for Saudi Arabia. The accession of King Salman bin Abdulaziz Al Saud in April 2015 was the start of a new chapter for the Kingdom, and with the fall in global oil prices and continued regional turbulence there are undoubtedly challenges to be met. However, domestic stability, combined with the government’s commitment to rolling out major infrastructure and development projects as well as a sustained focus on economic diversification and education programmes, indicate a positive overall outlook for the country moving forward.

Country Profile

2015 has been a momentous year for the Kingdom of Saudi Arabia. The accession of King Salman bin Abdulaziz Al Saud in April, which saw a reordering of the country’s line of succession and brought a reshuffle of the main cabinet positions, indicates a leadership with its sights firmly set on the future. In 2014 the Kingdom had a population of 30.77m, up 2.59% on the previous year. Hydrocarbons continue to provide the bulk of state revenues, with the country home to 15.7% of global reserves. Even so, the economy has undergone major diversification efforts in recent years, and non-oil sector growth now outstrips oil sector growth. Further afield, the Kingdom has been benefitting from an increase in ties between the GCC and Asia, and investment opportunities across Africa are on the rise.

This chapter contains a viewpoint from King Salman bin Abdulaziz Al Saud, Custodian of the two Holy Mosques; and interviews with Prince Faisal bin Bandar bin Abdulaziz Al Saud, Governor, Riyadh Region, and Chairman, Arriyadh Development Authority (ADA); and Abdalla Salem El-Badri, Secretary-General, OPEC.

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While hydrocarbons continue to form the bulk of Saudi Arabia’s revenues, the government has placed an increasing emphasis on economic diversification in recent times. Indeed the Kingdom’s economic growth is now being driven primarily by the non-oil sector, which expanded at a rate of 5% in the decade to 2014. Although low oil prices and the government’s commitment to maintaining spending levels mean the country is expected to run a fiscal deficit in 2015, Saudi Arabia’s ample fiscal reserves suggest it is well positioned to ride out the dip over the medium term. In the meantime, diversification drives will continue, with Saudi Arabia’s 10th Development Plan placing renewed emphasis on education and private sector development. Foreign companies are expected to benefit from the roll-out of e-government in public tendering, which authorities hope will make the system more efficient for foreign investors.

This chapter contains interviews with Prince Turki bin Saud bin Mohammad Al Saud, President, King Abdulaziz City for Science and Technology (KACST); Mofarrej Al Haqbani, Minister of Labour; and Ibrahim Al Hunaishel, Director-General, Saudi Credit and Savings Bank (SCSB).

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Trade & Investment

With its sound government finances and trade-friendly policies, Saudi Arabia presents an attractive option for investors. The Kingdom currently benefits from high levels of macroeconomic stability, combined with low debt and a budget that until 2015 had been consistently in comfortable surplus. In June 2015 the country’s stock exchange, Tadawul, was opened to qualified foreign investors for the first time, driving increased participation by institutional investors that is expected to help reduce the exchange’s recent volatility. Meanwhile, the Kingdom is investing heavily in education and vocational training to further enhance its attractiveness to foreign business, and the drive for economic diversification continues apace, with non-oil exports growing faster than oil exports in recent years.

This chapter contains interviews with Abdullatif Al Othman, Governor, Saudi Arabian General Investment Authority (SAGIA); and Yoon Sang-Jick, Minister of Trade, Industry and Energy, Republic of Korea.

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Having posted another year of positive results, Saudi Arabia’s banking sector is positioning itself to take advantage of the government’s expansionist fiscal policy and the large number of projects this has created. In the meantime, opportunities in other areas of the lending landscape are being explored, most notably among the nation’s smaller businesses. An ongoing process of regulatory reform and intense competition continue to present challenges to the Kingdom’s banks, but the underlying stability of the sector means that they can be tackled from a position of strength.

This chapter contains interviews with Fahad Al Mubarak, Governor, Saudi Arabia Monetary Agency (SAMA); Bernd van Linder, Managing Director, Saudi Hollandi Bank; and Patrice Couvegnes, Managing Director, Banque Saudi Fransi.

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Capital Markets

In June 2015, Saudi Arabia’s stock exchange entered a new era by opening to foreign participation, an event that has one of the most keenly anticipated financial events in the region. Yet this is only the latest step in a longer process of market reform that has seen the exchange evolve from a single-product market to an increasingly diverse investment platform. With a raft of regulatory changes in the pipeline, including alterations to the organisational structure of the exchange and its relationship with the regulator, the coming year promises to be an interesting one for Tadawul’s broadening base of market participants.

This chapter includes interviews with Mohammed Al Jadaan, Chairman, Capital Market Authority (CMA); Adel Al Ghamdi, CEO, Saudi Stock Exchange; and John Sfakianakis, Middle East Director, Ashmore Group.

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Alternative Investments

A growing role for the private sector has brought greater investment opportunities in Saudi Arabia, with both domestic and international players taking a greater interest in the local market. With the stock exchange opening its doors to foreign investors and a recovery in the number of IPOs, significant capital inflows are expected in the short to medium term. A number of corporate and private investors have increasingly started to deploy their assets in venture capital, and several angel investor networks have been established. Foreign interest is also on the rise with international private equity players paying closer attention to the Saudi market, attracted by its size, growth rates and large domestic consumer market. Elsewhere, the government has stepped up its efforts to enhance the level of corporate governance in family-owned businesses, in a bid to further streamline private sector involvement.

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The regulatory intervention that followed intense price competition in 2013 has enabled Saudi Arabia’s insurance market to return to a trajectory of sustainable growth over the course of 2014. Competition in the sector is still stiff, however, with 35 insurance and re-insurance companies in operation as of December 2014. In 2006 the authorities enacted the Health Insurance Law, which initially required all expatriates working in the Kingdom to have private insurance and in early 2011 was extended to cover all private employees. Meanwhile, the cooperative insurance model, a variation on sharia-compliant takaful insurance, continues to grow in the Kingdom, and in 2014 Saudi Arabia accounted for an estimated 48% of global takaful contributions. Elsewhere, local players can expect to benefit from new protocols and regulations that will enable domestic insurers to compete for upcoming mega-projects in the future.

This chapter contains an interview with Ali Al Ayed, General Director, Insurance Control Department, Saudi Arabian Monetary Agency (SAMA).

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Makkah’s Grand Mosque, which contains the Kaaba, is the holiest site in Islam and a place of pilgrimage for millions of Muslims worldwide. As pilgrim numbers continue to rise, the region’s hospitality and infrastructure services are witnessing significant expansion. Makkah currently has a total of 107,000 hotel rooms, with the wider Makkah region accounting for two-thirds of the Kingdom’s hospitality facilities. Meanwhile real estate saw strong growth in 2014 with the sector posting 22% growth in Makkah and Medina. Ongoing infrastructure upgrades include the Makkah Integrated Transport system. Announced in 2014, the system will feature a network of four metro lines covering a total length of 114 km, and a four-tiered bus system including bus rapid transit, local buses and a feeder service. Elsewhere, the $21bn expansion of the Grand Mosque, which began in the mid-2000s, is expected to boost its capacity to between 1.6m and 2.2m pilgrims when completed.

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The Kingdom’s second-largest city and its most significant seaport, Jeddah is one of Saudi Arabia’s key economic engines. While rapid population growth has placed a strain on both housing and public infrastructure, economic growth remains strong, with GDP per capita increasing by 2.4% in 2014 while employment rose by 3.4%. Expansion plans for Jeddah Islamic Port, which is key to the region’s growth and already handles 55m-60m tonnes of shipped goods per year, are expected to increase its capacity by 45%. Among the numerous other development projects are under way, most notable is Kingdom City in Obhor to the north of Jeddah, whose centrepiece will be the world’s first building to be over 1 km tall: Kingdom Tower.

This chapter contains an interview with Mazzen Batterjee, Vice-Chairman, Jeddah Chamber of Commerce and Industry.

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The recent fall in oil prices means that the energy sector’s contribution to Saudi Arabia’s economic growth will be limited in 2015, with expansion to be driven more by the non-oil sector, which is forecast to increase by about 5% in 2015. Saudi Arabia’s crude oil production averaged 9.71m bpd in 2014, compared to 9.63m in 2013 and 9.76m in 2012. However, despite lower oil prices, the Kingdom has increased production in 2015, with its output climbing above 10m bpd to reach 10.3m in March. The country had proven oil reserves of 269.5bn barrels, or 15.8% of the world total, at the end of 2013, and natural gas reserves totalling 290.8trn cu feet, or 4.4% of the global total. In the face depressed prices, and in a bid to expand and diversify its offering, the sector is continuing to invest in new downstream technology, feeding state-owned Saudi Aramco’s transformation from an oil and gas producer into an integrated energy company, with a growing emphasis on oil refining and petrochemicals.

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In 2015 Saudi Arabia will have generated twice as much electricity as it did in 2000 as demand in the Kingdom continues to expand. Energy-intensive industries, as well as highly subsidised utilities prices for customers, look set to push demand even higher in the coming years, and the government is increasingly looking to boost private sector participation in the sector. Numerous initiatives are under way that aim to manage demand and promote energy-efficient practices, particularly in construction, where there has been a focus on implementing cleaner and more efficient technologies. Meanwhile, advances in cogeneration technologies have boosted production at the country’s two largest cogeneration facilities, at Jubail and Shuaibah – advances which have saved power while boosting the Kingdom’s overall desalination capacities.

This chapter contains an interview with Jean-Pascal Tricoire, CEO, Schneider Electric.

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The abundance of hydrocarbons in the Kingdom has led to a proliferation of downstream petrochemicals businesses. The natural gas that is allocated to producers at a subsidised price forms a significant part of Saudi Arabia’s value proposition to foreign investors. Demand from rapidly expanding markets in Asia, as well as steady sales to established Asian centres, should ensure that the Kingdom’s petrochemicals industry strengthens its position in the medium term. Meanwhile, the country continues to focus efforts on diversifying non-oil growth, with the combined contribution of mining and non-oil manufacturing rising from 7.6% of GDP in 2012 to 8.2% in 2013 and 8.7% in 2014, while the Kingdom’s steel production increased by 15% from 2013 to 2014, the second-highest rise anywhere in the world. Four new economic cities are due for completion by 2020 in line with the country’s 10th Development Plan, which aims to deliver more even distribution of industrial development across the country.

This chapter contains interviews with Mohammed Al Kathiri, Secretary-General, Riyadh Chamber of Commerce and Industry; and Mohanud Helal, Secretary-General, Economic Cities Authority (ECA).

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Security, Aerospace & Defence

In 2014 Saudi Arabia spent 35% of its budget on defence, equivalent to roughly $80.7bn. The coming years are likely to see increased emphasis on homeland security in three areas: securing the Kingdom’s northern and southern borders, cybersecurity and counter-terrorism. The Kingdom remains focused on developing a sophisticated domestic defence industry, investing heavily to this end in research and development, with various agreements in place between defence companies and Saudi research institutions. These are complemented by a number of collaborative projects in defence-related disciplines that are being forged by leading US universities and their Saudi counterparts. Meanwhile, the offset rules in place ensure that Saudi companies and workers can benefit from the expertise offered by foreign firms that win tenders in Saudi Arabia’s defence sector.

This chapter contains interviews with Prince Turki AlFaisal bin Abdulaziz Al Saud, Chairman, King Faisal Centre for Research and Islamic Studies; and Prince Mutaib bin Abdullah bin Abdulaziz Al Saud, Minister, Saudi Arabian National Guard.

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Telecoms & IT

Competition in Saudi Arabia’s telecoms sector continues to grow, with companies continually seeking to invest in the infrastructure that will connect customers to a broader range of communications services. As the number of mobile internet users continues to rise, the Kingdom’s operators are seeing demand for traditional voice and text services become gradually displaced by data services and mobile broadband. Meanwhile, and in line with the country’s economic diversification targets, IT firms are increasingly viewed by the government as essential to sustainable development, with the Kingdom’s latest five-year plan committed to enhancing the country’s IT infrastructure. Spending on cloud services is rising rapidly and is expected to reach $31.3m in 2015.

This chapter contains interviews with Khaled Biyari, Group CEO, Saudi Telecom Company (STC).

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Despite the global fall in oil prices, Saudi Arabia’s retail sector continues to enjoy robust growth, fanned by its solid base of domestic consumers and strengthened by a growing youth population and rising disposable incomes. The strong performance of retailers across a number of sectors is leading to increased demand for dedicated mall space, which is expected to command a premium in the short term. Indeed, the existing rental environment presents a challenge for many retailers in the Kingdom, with rent in some cases reaching up to 25% of tenants’ sales revenue, although in the fast food segment it is a more manageable 15%. However, the overall mood in the industry is one of optimism, buoyed by the presence of strong fundamental conditions for growth.

This chapter contains an interview with Khalid Al Sehaibany, General Manager, Hamat Property Group.

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Saudi Arabia’s transport services have witnessed significant developments in recent times, and this is set to continue with an anticipated $190bn to be invested in the sector through to 2025. The majority of this – around $141bn – will go towards rail and public transport networks. Successive phases of railway development will extend the network across the entire country, with the aim of bringing the Kingdom’s total track length to 9900 km by 2040. In addition to the ongoing expansion of King Khalid International Airport in Riyadh and King Abdulaziz International Airport in Jeddah, a new airport has been completed in Medina and facilities are planned for Taif and Abha. Ongoing port developments – including King Abdullah Port, the first port in the Kingdom to be privately owned and financed – are seeking to capitalise on the Kingdom’s strategic location on the trade routes to many emerging markets.

This chapter contains interviews with Abdullah Al Mogbel, Minister of Transport; and Sulaiman bin Abdullah Al Hamdan, President, General Authority of Civil Aviation (GACA).

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With Saudi Arabia’s 10th Development Plan the Kingdom has committed itself to responsible stewardship of the environment. The plan emphasises the importance of creating incentives and regulations that will underpin environmentally sustainable growth moving forward. Initiatives currently under way include moves towards more fuel-efficient cogeneration plants, carbon capture and storage, and investment in various renewable energy sources. In urban areas, major population growth has prompted several sustainable rehabilitation projects, with the most high-profile scheme set to transform one of Riyadh’s main water courses from a sewer into a clean, green ribbon of riverside parkland. Meanwhile in Damman, on Saudi Arabia’s east coast, urban wastewater is being treated and used for irrigation purposes, in the hope that the initiative’s success will encourage similar undertakings across Saudi Arabia by both state authorities and the private sector.

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Real Estate

A young population and rising disposable incomes signal an optimistic future for the Saudi Arabian real estate sector. With the population growing at a rate of 2.6% per year, the need for housing is expanding rapidly, especially given that 67% of Saudis are under the age of 30. The retail segment also offers significant opportunities for developers, with vacancy rates at shopping centres in the capital standing at 8% in the second quarter of 2015 and rents growing by 7% to $773 per sq metre. The hospitality segment is meanwhile experiencing strong growth in line with the government’s aim to boost tourism. In Makkah, for example, 500 hotels are in the pipeline, adding significant capacity to the city’s current inventory of 125,000 rooms in 650 hotels.

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Construction & Engineering

Despite the recent fall in oil prices, Saudi Arabia’s government is pushing ahead with its ambitious development agenda. The outlook is thus bright for the Kingdom’s construction firms, with projects planned under government’s 10th Development Plan including investments worth $258.2bn in real estate; $151.5bn in petrochemicals; and $126.7bn in electricity, gas and water. Indeed, in the short term, costs for contractors and the wider construction industry are improving as a result of the fall in oil prices. Meanwhile, foreign firms are becoming increasingly active in the market thanks to recent measures to help smooth the process of market entry for foreign contractors, an illustration of the government’s commitment to engaging foreign firms in the construction industry.

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Education & Training

Education continues to be a major focus for Saudi Arabia, with an estimated $399.75bn spent on education between 2005 and 2015. This trend is set to continue, as the creation of a knowledge economy forms the third objective of the Kingdom’s 10th Development Plan. Private instruction continues to gain in popularity – the number of pupils at private schools grew by about 9% a year between 2008 and 2011 and currently makes up around 14% of the K-12 sector. Under the Kingdom’s Colleges of Excellence programme, meanwhile, international training providers run a range of vocational courses and build their own curricula to be taught at purpose-built facilities supplied free of charge by the Saudi government. Regionally, the e-learning market in the broader Middle East is set to expand by 8.2% annually as governments invest to support the segment.

This chapter contains interviews with Azzam Al Dakhil, Minister of Education; Ali Al Ghafis, Governor, Technical and Vocational Training Corporation (TVTC); Abdullah Al Mosa, CEO, Saudi Electronic University (SEU); and Badran Al Omar, Rector, King Saud University.

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Health & Life Sciences

The government represents the biggest provider of health care services in Saudi Arabia, accounting for about 75% of the country’s health spending. In 2015 the government increased its budget for health and social affairs by 48% to $42.64bn. Indeed the Kingdom’s health sector has witnessed rapid growth in recent times as the government looks to meet its 2020 targets of 264 hospitals, 70,694 beds, 2750 primary health care centres and 27 specialist medical centres. Central to realising these ambitions are five new medical cities that are set to spring up across the country. The e-health programme is also gaining traction and now includes more than 70 projects ranging from quick wins to major multi-year endeavours, such as the roll-out of automated systems at primary care centres.

This chapter contains an interview with Saleh Al Tamimi, CEO, King Saud Medical City.

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Tourism is estimated to have directly contributed $12.7bn to the Saudi economy in 2013, equivalent to 1.7% of GDP, and this was forecast to rise by 5.2% to $13.3bn in 2014. Although religious tourism still dominates the industry, government efforts are under way to expand the sector’s offering, with opportunities available in various segments, including heritage and business tourism. Domestic tourism has surged in recent years with spending seeing a compound annual growth rate of 15% between 2010 and 2014. Indeed, current ambitions for non-religious tourism are directed towards serving the domestic market – both Saudi and expatriate – for whom spending almost doubled between 2010 and 2014, from $15.7bn to $27.4bn.

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This chapter contains an overview of the tax framework in which local and foreign investors operate in Saudi Arabia, including an outline of the various tax systems in place for different ownership structures and a look at the June 2014 updates to the regulations for zakat, a religious tax based on sharia.

This chapter contains a viewpoint from Jacques Fakhoury, KSA Country Leader, PwC

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Legal Framework

This chapter contains an overview of the legal framework in which local and foreign investors operate in Saudi Arabia. It includes a run-down of dispute resolution and bankruptcy rules, an outline of the regulations affecting foreign investors in Saudi Arabia, and an examination of the evolving regulatory framework in place across the Kingdom.

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The Guide contains listings of some of the leading hotels and resorts in Saudi Arabia, contacts for important government offices and services, and useful information for first-time visitors.

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