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Saudi Arabia Economy’s Unrivaled Strength
The economy of Saudi Arabia is one of “unrivaled strength”, according to a new in-depth report.
Prudent managing of the economy has given the Kingdom a surplus from years of high oil prices that is allowing it to push ahead with its investment agenda amid the global economic downturn, concludes Oxford Business Group in its Country Report Saudi Arabia 2010.
The government in Riyadh is focusing on maximising hydrocarbons revenues which are being used to finance economic diversification and development programmes across a range of sectors and regions.
The impact of all this activity is considerable and beginning to significantly transform the Saudi economic landscape.
Saudi Arabia’s determination to improve the competitiveness of its economy has achieved some notable successes as recorded in influential international rankings. For example, the Kingdom was ranked 13th out of 183 countries in the World Bank’s Doing Business report for 2010.
The Kingdom aspires to become a leading international player in the fields of research and development and to achieve this laudable objective it is investing strongly in key scientific industries and education to equip future generations of Saudi nationals to play a full and productive part in their country’s economic development.
Flagship projects such as the King Abdulaziz University of Science and Technology (KAUST) show how determined Saudi Arabia is to build a competitive education sector, to which it is investing some 25% of its budget.
The economy can be characterised as one that is dynamic with an increasing pace of diversification and where the private sector is playing an increasingly key role. In the 1980s, the private sectors accounted for less than 10% of GDP, whereas it expanded to 47% in 2008, OBG says.
Citizens of the country generally have rising living standards and are increasingly well educated as they reap the benefits of their stable political system and a steady economic expansion based on careful use of the vast reserves of natural resources, the report says.
In the country’s energy sector, projects to increase capacity are moving ahead despite the fact that production has been reduced in line with OPEC agreements. Furthermore, several large power and water projects are under way in the Kingdom to help satisfy rising domestic demand. International firms are offering important help to Saudi Arabia in building capacity.
Turning to the real estate sector; demand remained buoyant throughout the recent international real estate slump, according to the report, due to the Kingdom’s strong economy and young population. Forecasters expect that construction sector growth with average between 5% and 6%. Estimates from the Riyad Bank cited in the report point to a huge increase in spending in construction projects at $195 billion in 2009 and a further $90bn in 2010. A new mortgage law is expected to give a further boost to the country’s real estate sector.
Meanwhile, government spending continues to drive construction, with the building and expansion of ambitious economic cities as the centrepiece of the infrastructure building programme.
As OBG says, explaining the logic of the strategy, the cities will aim to utilise the Kingdom’s comparative advantage in low-cost fuel to develop the petrochemicals, aluminium, steel and fertiliser sectors. The output from these industries, including plastics, metals and chemicals, will then encourage the development of smaller industries. This will require the support of the services sector. Therefore, while the initial industries will be capital-intensive, it is expected that more labour-intensive industries will be built around them.
In the Kingdom’s thriving industrial sector, meanwhile, petrochemicals and fertilisers continue to be the pillars, but Saudi exports are increasingly diversified and now include aluminium, steel and paper products.
SMEs are viewed in Saudi Arabia as vital to employment generation and the ongoing diversification of the economy. As a result the growth and expansion of SMEs is receiving substantial support and attention.
Reform of the health sector is taking place with compulsory health insurance, additional facilities, reorganisation and changes in management all having an impact on the provision of healthcare in the Kingdom, the report says.
Increasing research, human resources and domestic pharmaceuticals production are specific areas that are receiving extra government attention.
Services industries are becoming more important driven by increased domestic demand and the growing sophisticated of consumers. Consumer confidence in Saudi Arabia has been steadily increasing in recent months according to regional consumer confidence surveys.
Financial services and leisure facilities are seen as the strongest areas in the country’s burgeoning services sector, OBG says. The liberalisation of the banking and financial services industry has given a stimulus to growth which has enabled a number of Saudi banks to expand their operations overseas.
Saudi Arabia possesses numerous sites of natural beauty and historic interest, but as yet the enormous potential of the country for tourism has not been tapped. Both religious tourism and domestic tourism have great potential for development.
There are some major developments taking place in the transport sector, the report says. Saudi Arabia’s road, rail, air and sea networks, both domestic and international services, are receiving billions of dollars in investment to improve transport links and improve accessibility.
Meanwhile, logistics processes are being streamlined to make the country more competitive. High demand, liberalisation and public-private partnerships are driving forward the important changes taking place across the spectrum in the transport sector.
A separate report from Banque Saudi Fransi, affiliate of Credit Agricole, predicts that the Kingdom’s private sector is poised for a strong recovery this year in the aftermath of the global financial crisis.
Private sector growth will be driven mainly by state spending and bank lending, Banque Saudi Fransi said.
Saudi Arabia has set spending at SR540 billion ($144bn) this year, up 13.7% from projected expenditures last year. The private sector accounts for about 46% of the gross domestic product.
“The largest budget in Saudi history is designed to encourage private sector businesses to loosen their purse strings and urge banks, awash with liquidity, to jumpstart lending following a slow 2009,” the bank says.
“The expansion of the private sector is set to take a turn for the better along with credit expansion at banks. Our view is that improvements in business activity will be gradual and cautious,” Fransi said. The bank expects the GDP to grow 3.9% this year.
“This year, banks will have little choice than to lend more as they emerge from a period of challenging revenues and an unfavourable low-interest rate environment,” Fransi said.
“The private sector’s eagerness to invest and grow is intact, albeit at more cautious levels than 2008.”
Saudi banks do not face a shortage of liquidity, said Fransi, echoing comments by government officials. “Banks have been parking their cash in large quantities at the central bank and investing in foreign assets,” it said.
According to a news report in Saudi Gazette on 13 January, Saudi manufacturers are intending to increase their exports to European markets amid growing demand for high quality Saudi products across the European Union.
A boost in exports would help maintain the Kingdom’s status as one of EU’s top 15 international trading partners.
In particular, firms in the Kingdom are monitoring Europe’s construction sector which is forecast to achieve market stability this year and open up various opportunities in related-businesses such as flooring and carpeting, the report said.
Saudi Arabia’s water sector is undergoing reform and the Ministry of Water & Electricity is privatising the provision of wastewater treatment services within particular regions of the country, and, for example, some water supply management contracts have been awarded for Riyadh and Jeddah. The cities of Dammam-Alkhobar, Madinah and other regions will be privatised within a year.
A British water and environment trade mission, touring the Kingdom in January, found Saudi Arabia’s water sector “promising and full of prospects for joint ventures.”
“We are impressed with the Kingdom’s water and environment sector and are looking forward to finding distributors, forging partnerships and even consider setting up assembly plants,” said Steve Kingdom-Saxby, managing director at Devon-based SCL Water.
The Kingdom held bright prospects for establishing assembly plants for the specialised systems that treat and reuse wastewater, the UK business executive stated.
The new 260-page Saudi Arabia Country Report 2010 can be obtained from Oxford Business Group.