The Report: Saudi Arabia 2016

The dent in hydrocarbons revenues suffered as a result of falling oil prices drew to a close the period of sustained budget surpluses that Saudi Arabia has enjoyed for the past several years. 2016 also witnessed the launch of the Kingdom’s historic Vision 2030 and the accompanying National Transformation Programme, both of which call for a major overhaul of the state’s economic apparatus and envision a more open market framework and more dynamic, private sector-led growth moving ahead.

Country Profile

Home to an estimated 15.7% of the world’s proven oil reserves and the single largest economy in the MENA region, Saudi Arabia is a key player not only in the region but also globally. Since the establishment of Saudi Arabia in September 1932, the Kingdom has poured its considerable resources into a series of large-scale economic development, diversification and modernisation initiatives. 2016 witnessed the unveiling of Vision 2030 which calls for major overhaul of the national economy and designed to pave the way for the reorientation of the Kingdom’s economy away from hydrocarbons powered, state-spurred growth, to a more diversified, private-sector led economic model.

This chapter contains viewpoints from Deputy Crown Prince Mohammed bin Salman bin Abdulaziz Al Saud, Chairman of the Council of Economic and Development Affairs; and Xi Jinping, President of the People’s Republic of China; and interviews with Prince Khalid bin Faisal Al Saud, Governor, Makkah Region; and Prince Faisal bin Bandar, Governor, Riyadh Region and Chairman of the High Commission for the Development of Arriyadh.

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Benefitting greatly from rising oil prices and production over the last decade, Saudi Arabia has used its sizeable revenues to build up strong external buffers and drive GDP growth through extensive spending programmes. The decline in oil prices that began in mid-2014, however, has significantly lowered export revenues and brought the era of fiscal surpluses to a close. The resulting altered economic landscape and growing demographic pressures have presented the recently reorganised government with a significant test, and its response has been to set in motion a series of the most wide-ranging reforms in the nation’s history. Moving forward the country’s Vision 2030 calls for a major shift in the way the Kingdom’s economy operates, moving from a system of state-led growth and centralised planning to a more open market framework where the private sector takes up a leading role in economic expansion.

This chapter contains interviews with Prince Turki bin Saud bin Mohammed Al Saud, President, King Abdulaziz City for Science and Technology; Khaled Al Araj, Minister of Civil Service; and Abdulkarim Al Nujaidi, Director-General, Human Resource Development Fund.

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Trade & Investment

Historically the Kingdom has benefitted greatly from its ability to ship its hydrocarbons resources to consumers across the world, while its strong economic growth in recent decades has made it a significant importer of goods and services. Meanwhile, the country’s transport links, large consumer market and a relatively high per capita income combine to make it an attractive destination for investment capital. However, recent years have revealed a range of challenges facing the future growth of trade and investment: levels of foreign direct investment declined for seven consecutive years until 2015, and the fall in oil prices that began in the second half of 2014 has all but erased its once-comfortable trade surplus. It is unsurprising, therefore, that trade and investment are treated as key priorities in the Vision 2030 strategy. With the government’s eye on these important facets of economic life, the coming months and years are likely to bring some interesting developments with regards to the Kingdom’s global connections.

This chapter contains interviews with Prince Saud bin Khalid Al Faisal, Acting Governor, Saudi Arabian General Investment Authority; and Abdulrahman Al Zamil, Chairman, Council of Saudi Chambers of Commerce and Industry.

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Saudi Arabia’s banking sector is one of the largest and most vibrant in the Middle East, with three of its domestically licensed institutions in the regional top 10 by net assets. Historically the sector has thrived on the rise of high-value lending derived from the government’s infrastructure programmes, but recent years have seen local lenders pursue a growing number of opportunities in the consumer and small and medium-sized enterprise segments. More recently, low oil prices have raised questions about the domestic industry’s ability to maintain its healthy margins, and the sector will likely enter 2017 facing one of the most difficult operating environments in recent times. However, a history of prudent regulation means that the industry has sufficient buffers to ride out this part of the cycle, albeit with a modest softening of performance indicators.

This chapter contains a viewpoint from Ahmed Alkholifey, Governor, Saudi Arabian Monetary Agency; and interviews with Bernd van Linder, CEO, Saudi Hollandi Bank; Abdulaziz A Al Helaissi, CEO, Gulf International Bank; and Steve Bertamini, CEO, Al Rajhi Bank.

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Capital Markets

While subdued oil prices have had a ripple effect on exchanges across the region, the Saudi Stock Exchange (Tadawul) has forged ahead with a bold strategy of reform. Having opened the door to direct foreign participation for the first time in 2015, in 2016 the exchange authorities and the market regulator are preparing for a new stage of development, which will see the Tadawul integrate further with global capital flows. The inclusion of the exchange on leading emerging market indices is not without obstacles, but the reforms made necessary by the process should leave the Kingdom’s market more transparent and investor-friendly.

This chapter contains interviews with Mohammed Al Jadaan, Former Chairman, Capital Market Authority; and Khalid Al Hussan, CEO, Saudi Stock Exchange.

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Alternative Investments

While Saudi Arabia is a regional leader in mutual fund activity and has led the recent GCC expansion of the segment in terms of both fund classes and volumes, growth has been less brisk in areas such as private equity and venture capital. Recent years, however, have seen momentum build, driven by increased private sector interest and the government’s determination to nurture alternative sources of funding for expanding businesses in the Kingdom.

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Collectively, the Saudi Arabian insurance industry has seen five years of double-digit growth in both revenue and net profit. However, the positive performance of a few of the Kingdom’s largest insurers masks more modest results from many of its smaller firms, some of which have accumulated debts over many years. Although industry experts believe the overall outlook is positive for a country with a low insurance penetration by regional standards, conditions for some companies are expected to remain challenging in a crowded marketplace dominated by medical and motor coverage. Clearly defined and supervised insurance activity is in its second decade in the Kingdom and so is relatively new to Saudi Arabia, but the government has recognised that the industry can be a cornerstone of the financial services sector by promoting long-term savings and allowing policyholder funds to be channelled into investment opportunities.

This chapter contains an interview with Raeed Al Tamimi, CEO, Tawuniya.

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Makkah & Medina

As home to the world’s most important Islamic sites – including the Masjid Al Haram, or Grand Mosque, which houses the Kaaba – the holy cities of Makkah and Medina are at the centre of religious life for the world’s 1.2bn-strong Muslim population. Located near Jeddah, in western Saudi Arabia, each year the two cities attract millions of religious visitors performing the annual pilgrimages of Hajj and Umrah. In an attempt to cope with the ever-expanding resident population as well as the rising influx of yearly visitors, the government has rolled out a series of overlapping, comprehensive strategies in recent years aimed at updating and expanding the Makkah and Medina regions’ transport networks, housing stock, utilities systems and related facilities.

This chapter contains an interview with Osama Al-Bar, Mayor of Makkah.

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Spurred by rapid population growth and mounting public and private investment, Jeddah – Saudi Arabia’s second-largest city – is on the rise. Since the early 1990s the population of its urban area has more than doubled, reaching 4.1m residents as of the end of 2015. While this growth has slowed somewhat over the past half decade, from a high of 3.4% in 2011 to 2.6% in 2015, rising economic uncertainty across much of the Gulf and wider Middle East has driven increased investment in Jeddah over the same period. Indeed, as of January 2016, more than 850 development projects worth a combined SR74bn ($19.7bn) were under way across the municipal region, including state-led initiatives aimed at upgrading and expanding transport infrastructure, power and sewage networks, and education provision.

This chapter contains interviews with Mazen Batterjee, Vice-Chairman, Jeddah Chamber of Commerce and Industry; and Hussein S Al Amoudi, Chairman, Shamayel United Development Company.

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The drop in the price of oil since mid-2014 has had a significant impact on Saudi Arabia, which relies on the stuff for the vast bulk of state revenues – 73% by some estimates – and for around 40% of its GDP. While global demand remains high, the increasing supply of oil on the international market, much of it coming from Russia, US shale oil and Iran, has continued to push prices down. The price of crude in early 2016 was about 70% below its 2014 peak, having declined steadily for a year and a half, from $114 per barrel in June 2014 to $37.30 at the start of 2016. This dropped to a low of $28.50 per barrel in late January before recovering to around $50 as of July 2016. The resulting government budget cuts was one factor that led to discussion of an initial public offering of part of Saudi Aramco, the Kingdom’s state-owned energy giant and the world’s largest crude oil exporter.

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With some analysts expecting Saudi Arabia’s population to expand by over 10m to reach 39.1m by 2030, alongside continued growth in the Kingdom’s energy-intensive industries, demand for electricity and desalinated water is set to rise considerably in the coming years. Estimates suggest that more than SR500bn ($133.3bn) will need to be invested in the power sector over the next 10 years to ensure that supply keeps pace with demand, while an ever-rising demand for water means that desalination facilities will need capital investments of SR65.4bn ($17.4bn) by 2020. Natural gas meanwhile is set to become the greatest contributor to the Kingdom’s energy mix, with a target of 70%. While the price of oil had rallied in late 2016, reaching $50 a barrel in October, its decline from $115 per barrel in June 2014 to below $30 in January 2016 threw the issue of subsidy reform into sharp relief, leading to various initiatives aimed at curbing energy demand and enhancing efficiency.

This chapter contains an interview with Mohammed Abunayyan, Chairman, ACWA Power.

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In recent years an emphasis has been placed on growing the Kingdom’s non-oil private sector by bringing in manufacturing and other industries to diversify the economy. The National Transformation Programme has replaced the Kingdom’s 10th Development Plan and establishes the means by which the country will meet the objectives set out in Vision 2030, whose main goal is to diversify the economy away from oil. With value-added industry and mining set to play substantial roles, importance has been placed on projects that will utilise the Kingdom’s raw material wealth, including petrochemicals, metals and phosphates, and develop a full chain of upstream and downstream opportunities for both local and international firms.

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Security, Aerospace & Defence

Saudi Arabia has long been a major investor in its military, with defence outlays representing a significant portion of the national budget. Despite the drop in oil prices since mid-2014, which in the short term is having a noticeable impact on the government’s military spending, defence outlays are likely to continue to grow, with multi-billion-dollar contracts still being signed. While contracts with foreign military suppliers will remain a key part of the Saudi military composition, an increased emphasis has been placed on developing a domestic defence sector, with strategic partnerships and the funding of research facilities. There is currently a growing industry of domestic defence-related firms in Saudi Arabia, many of them tied to the aeronautics segment.

This chapter contains an interview with Ghassan Al Shibl, Senior Advisor to the Board of Directors and Former CEO, Advanced Electronics Company.

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Saudi Arabia is the biggest ICT market in the Middle East, with annual sector spending expected to reach about SR140bn ($37.3bn) by 2017. At a time of shrinking oil revenues, the government has identified ICT as a key driver of smart, cost-effective solutions for government and commerce alike, and as a major pillar of the Kingdom’s long-term development strategy, Vision 2030. However, there are also significant challenges around data security, as well as the need to nurture the human capital required to serve the Kingdom’s rapidly developing digital economy.

This chapter contains interviews with Ahmed Farroukh, CEO, Mobily; and Khalid Balkheyour, President and CEO, Arabsat.

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Like many places in the world, Saudi Arabia’s media landscape is going through rapid change, primarily brought about by digital technology and the rise of social media – internet penetration rate is estimated at around 65% overall and 93% among Saudi nationals. While traditional media still has a strong footprint and is unlikely to be pushed aside any time soon, legacy media organisations are being forced to rapidly develop their digital offerings in order to maintain their market share. The regulatory environment for media in Saudi Arabia, which many consider among the strictest in the Middle East, also needs to adapt to the new digital reality. There are signs that change is happening, with a new minister of culture and information appointed in 2015 and the potential establishment of a media production city in the Kingdom, which could help to train a new generation of Saudi journalists.

This chapter contains an interview with Adel Al Toraifi, Minister of Culture and Information.

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With high levels of consumer spending in 2015 and early 2016 despite recent macroeconomic pressures, Saudi Arabia’s retail sector is widely acknowledged to be a bright spot in an otherwise challenging current economic landscape. Over the past decade the industry has posted growth of 12% on an annual basis on the back of steadily rising purchasing power among Saudi households and, concurrently, rapid investment in the Kingdom by domestic and international retailers alike. The most pressing obstacle to ongoing sector expansion is the regional macroeconomic situation, which has seen cuts in state spending and in subsidies for electricity and fuel with the effect of curbing disposable incomes.

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Since 2008 the Saudi authorities have invested heavily in transport infrastructure projects as part of efforts to expand and diversify the economy as well as reduce automotive transport for both passengers and cargo. Ports have been built, airports expanded and upgraded, and railway and metro projects initiated – and in some cases already completed. Tens of billions of dollars have already been spent, and many more billions have been earmarked over the next few years. In public transport alone, $141bn will to be spent on infrastructure and operations in the next decade, including the $22.5bn Riyadh Metro project, set for completion in 2019. Despite a scale-back of government expenditure in 2016 due to lower global oil prices, spending on transport infrastructure will likely continue to be prioritised as well-developed networks are seen as key to economic and social growth. The National Transformation Plan announced in June 2016 includes a number of strategic goals and benchmarks for transport in Saudi Arabia.

This chapter contains interviews with Suleiman Al Hamdan, Minister of Transport; Nabeel Al Amudi, President, Saudi Ports Authority; and Faysal Elhajjami, Country General Manager, DHL.

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Real Estate

Benefitting from rising incomes and a youthful, growing population, Saudi Arabia’s real estate sector has seen steady expansion in the past decade. Although this increase has been more modest than in its GCC neighbours, it is clear that strong demand for residential real estate will continue over the long term thanks to the country’s demographics. In the short term the hospitality and office segments may face a surfeit of supply and a shortage of demand with major new real estate developments in the pipeline. On the residential side rents are stabilising, but tenants face financial obstacles to home ownership. However, the central bank’s announcement that it will allow specialised mortgage companies to increase their contribution to home financing to 85% will greatly improve access to home loans.

This chapter contains interviews with Majed Al Hogail, Minister of Housing; and Bader Al Saedan, Managing Director, Al Saedan Real Estate.

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Construction & Engineering

From 2003 to 2013 Saudi Arabia’s second oil boom brought a decade of prosperity for its construction and engineering sectors, but with the brakes applied to public spending, many businesses face a more challenging landscape in 2016. Work is continuing apace on some of the most prestigious projects, such as the Riyadh Metro and King Abdullah Economic City on the Red Sea, but progress has slowed or stalled on many other schemes, and contractors, developers and suppliers face delays on new developments and payments for work they have already completed. However, there may be increased opportunities to work for a broader range of clients as the government considers ways to stimulate private sector growth in order to meet the needs of an expanding population.

This chapter contains an interview with Mounib Hammoud, CEO, Jeddah Economic Company.

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Education & Training

Saudi Arabia is a youthful country, a third of its population being under the age of 15, and in recent years the country’s leaders have invested billions of dollars to educate these young people to lead the planned transformation of the country from an oil-rich state to a diversified, knowledge-based economy. School enrolment numbers and university graduation statistics have improved, though the ultimate goal of realigning the Saudi workforce has proved more elusive. The focus of many of the recent efforts in the education and training sector are on providing young people with the soft skills and vocational qualifications that are required by the private sector job market.

This chapter contains interviews with Ahmed Aleissa, Minister of Education; Ahmed Alfahaid, Governor, Technical and Vocational Training Corporation; and Khaleel Alibrahim, Rector, University of Hail.

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Health & Life Sciences

Public and private sector investment in Saudi Arabia’s health care industry continues to be fuelled by the growing demands of a rising population and the increasing prevalence of lifestyle-related diseases. Although the 2016 health care budget was down on the historic high of 2015, industry players are confident of changes to enhance efficiency and promote better allocation of resources, as the rollout of government initiatives and projects already in the pipeline moves ahead. Moreover, what scale-backs are taking place are expected to open opportunities for more vigorous private sector involvement, as called for in the National Transformation Programme, released in June 2016. Meanwhile, a greater focus on preventive care is being encouraged to tackle the rise of chronic and lifestyle-related diseases, and an increasing number of Saudis are enrolling in courses at the Kingdom’s medical colleges, which bodes well for a sector historically reliant on foreign expertise.

This chapter contains an interview with Dr Haitham Alfalah, CEO, King Saud Medical City.

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With the holy cities of Makkah and Medina attracting millions of pilgrims every year, the bulk of Saudi Arabia’s tourism industry remains concentrated in these two areas. The seasonal nature of many pilgrim visits has historically presented a challenge to the country’s tourism authorities, and as a result various plans and initiatives have been designed in recent years to drive tourism activities across the Kingdom more broadly, by enhancing existing facilities and developing resort-style tourist centres as well as promoting awareness of the options available for domestic tourists. Under Vision 2030 there are plans to develop the sector as a major contributor the economy, with reforms to visa issuance and development of historic heritage sites integral to boosting the numbers.

This chapter contains interviews with Prince Sultan bin Salman bin Abdulaziz Al Saud, Chairman and President, Saudi Commission for Tourism and National Heritage; and Abdullah Al Dawood, CEO, Al Tayyar Travel Group.

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This chapter contains an overview of the tax framework in which local and foreign investors operate, including a rundown of the restructuring efforts currently under way at the department of tax and an outline of the set timeframe for the introduction of value-added tax.

This chapter contains a viewpoint from Riyadh Al Najjar, 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, including a breakdown of new company and investment reguations and a look at the increasing emphasis on corporate governance.

This chapter contains a viewpoint from Zeyad Khoshaim, Managing Partner, Khoshaim & Associates.

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The Guide

The guide contains listings of some of the leading hotels and resorts in Saudi Arabia and contacts for important government offices and services. It also contains useful tips and information for first-time or regular and business and leisure visitors alike.

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