Saudi maintains economic stability despite challenges

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Investor confidence
Investor confidence is also helped by the government's strong commitment to economic openness, liberalization and privatization. Saudi Arabia business competitiveness is high, ranking 28th out of 133 countries in the World Economic Forum's global competitive index 2009-2010, ahead not only of most economies in the region but also of the Czech Republic (31st) and Spain (33rd).

In 2009, Saudi Arabia ranked 63rd out of 180 countries in Transparency International's corruption perceptions index, higher than most other countries in the Middle East and North Africa, yet well below other Gulf states such as the United Arab Emirates (UAE) (30th) and Qatar (22nd). Financial institutions are under-developed, business data is limited and corporate governance is poor. These problems were manifested in the stock exchange crash of February 2006, which wiped out more than half the market's capitalization, the report said.

Foreign direct investments
These problems did not stop the inflow of foreign direct investments (FDI), which rose from SR2.9 billion in 2003 to SR143 billion in 2008. Over the same period, Saudi investments abroad also increased, with FDI outflows peaking at SR49.2 billion in 2007, making the Kingdom one of the most important sources in the region for foreign investments.

Starting a business in Saudi Arabia has become significantly easier and quicker according to the Doing Business 2010 report, with the creation of a one-stop office at the Ministry of Commerce that merged registration procedures and simplified publication requirements. Setting up a local limited liability company requires 4 procedures, costs 7.7 percent of gross national income per capita, and takes merely 5 days, compared to an average of 20.7 days in the Middle East and North Africa. Saudi Arabia is the world's easiest place to register property, according to the World Bank. Only 2 procedures and 2 working days are required, with no costs involved.

When it comes to closing a business, the procedure is easier in Saudi Arabia than elsewhere in the region. An insolvency process in Saudi Arabia takes 1.5 years to complete, compared with 5.1 years in the UAE. The process costs 22.0 percent of the estate with a recovery rate of 37.5 cents on the US dollar - much less than 68.6 cents on the dollar in the in the OECD, but above the 29.9 cents in the region.

The country's ICT sector is well developed, with 32.1 Internet users for every 100 people in 2009, and 168.4 mobile phone subscriptions per 100 people.

Government regulations
Saudi Arabia has embarked in the 1990s on an economic strategy of liberalization and openness. Reforms have been gradual and slow, yet Saudi commitment to the policy is strong, as a vehicle for economic diversification away from the reliance on hydrocarbon exports. An important milestone was the Saudi accession to the World Trade Organization (WTO) in 2005. As part of the accession, Saudi Arabia opened many sectors for competition, streamlined procedures and cut red-tape. At the same time the government signaled that it would not stop supporting uncompetitive sectors: Generous agricultural subsidies were scrapped in 2008.

Saudi Arabia is a member of the six-country customs union of the Gulf Cooperation Council (GCC), allowing tariff free trade with the UAE, Kuwait, Bahrain, Oman and Qatar. The country ranked 23rd out of 183 globally in terms of trading across borders, in the Doing Business 2010 report. It takes 17-18 days to export or import, and the costs involved are among the lowest in the world. Importing a container cost $678 while exporting a container cost $681, representing about half of the parallel costs in Jordan.

Low taxes
Saudi Arabia is one of the easiest places globally to pay taxes. According to the Doing Business 2010 report, it took 79 hours for an enterprise to prepare, file, pay or withhold its taxes and contributions, compared with 101 hours in Jordan and 480 hours in Egypt.

Tax levels are extremely low, as oil and gas revenues generate most of the governments' income. As of 2009, there was no personal income tax, and no value added tax (VAT). Corporate income tax stands at 20.0 percent, although gas and oil companies can be taxed by up to 85.0 percent; on the other hand, investors in special industrial zones receive tax breaks. The labor tax and contributions are at a statutory rate of 13.5 percent compared with 24.4 percent in the OECD. The low tax levels reduce the incentives for tax evasion and the informal sector appears smaller than in other Arab countries.

Flexible labor laws
A large share of the Saudi work force is made up of expatriate workers. As of 2008, 50.6 percent of the work force was made up of non-Saudis. At the same time, the Saudi nationals suffer from high unemployment (9.8 percent in 2008) and a lack of suitable skills. The government's "Saudization" program requires private sector companies to employ Saudi nationals, causing resentment and frustration among businesses, as Saudis are more costly to employ, and it is often difficult to find local workers with the required skills.

In light of this situation, the Saudi government is investing heavily in education. About SR122 billion were slated for education and training in 2009 up from SR105 billion ($30.1 billion) in 2008. A new flagship university was inaugurated in 2009, and two more universities are under construction.

Consumer market
Saudi Arabia's consumer market is among the most attractive in the Middle East and Africa. In total terms, Saudi consumer expenditure is the fourth largest in the region, after Iran, South Africa and Egypt. The per capita spending ($5,131 annually in 2009) is fifth in the region, lagging behind UAE ($23,813) but much higher than in Egypt ($1,876). Consumer spending has room for considerable growth, as the savings ratio is very high at 52.0 percent in 2009. The high savings propensity is due to cultural reasons and because consumer credit is underdeveloped. Consumer loans stagnated and decreased between 2005 and 2008, and despite plans to introduce household mortgage services, these were still unavailable in 2010. The development of Saudi financial institutions, and greater availability of credit, could help to unlock Saudi spending potential.

Saudi Arabia presents great business opportunities. As a highly urbanized society (90.1 percent urban population in 2009) with developed communication and transport infrastructure, consumers are easily accessible. Saudi society is overwhelmingly young, with 32.4 percent of Saudis under the age of 15 in 2009. This creates a large demand for products and services for infants, children, and young adults.

Consumer expenditure has risen by a robust 46.2 percent (in real terms) between 2004 and 2009. The share of consumption in GDP grew from 29.2 percent to 34.8 percent over the same period. Expenditure on education grew by the fastest rate (61.3 percent in real terms), due to the emphasis on acquiring skills and to the young demographic profile of Saudi society. Expenditure on communications registered the second fastest growth (50.8 percent). Spending growth has slowed down in 2008 and 2009 as a result of the global economic crisis, but is expected to recover in 2010 with a 6.7 percent increase in total consumer expenditure (in real terms), and a 4.6 percent increase in per capita terms.

Per capita annual disposable income stood at SR40,940 ($10,917) in 2009, nearly nine times the regional average, yet remains far below income levels in the smaller and richer Gulf countries such as UAE ($32,691).

© Arab News 2010