JEDDAH: The Saudi government's effort to diversify its oil-based economy has so far not made significant progress. Private enterprises do exist, but they lack the guidance necessary for these businesses to grow, said a noted Saudi economist in an exclusive interview with Arab News.
Ammar Ahmad Saleh Shatta, managing director of Al-Khair Financial Company, said much more needs to be done to boost the private sector which has been adversely affected by the global financial crisis.
"Lack of confidence in the market, especially following the recent financial crisis, also played a role in decreased spending by the private sector. Following the crisis, private investors are shying away from long-term equity-type investment opportunities and moving toward short-term, fixed income type opportunities," he said.
Shatta is an international arbitrator in Afro-Asian financial transactions and the Shariah and economic products of banks. He predicted an increase in lending activities by banks in 2010 because of their "burgeoning balance sheets, clearing of bad debts and a stable economic situation."
Shatta said nonoil manufacturing contributed only 10 percent of GDP in 2007 and less than 6 percent of total employment. "Though industry and agriculture are showing promise as significant contributors in the private sectors, yet a major problem in achieving this development is the lack of qualified workers versus the job requirements in this sector."
Following the financial crisis, he said, the small and medium sized enterprises were adversely affected. "This caused many companies in the early stages of their lifecycles to move into and depend on public funding as opposed to private sector funding. I can imagine a chance of growth coming in the next five years but not in the near future."
He called on the Saudi government to invest more in the King Abdullah Economic City (KAEC) being developed in Rabigh near Jeddah. "The government should extend further financial support (of up to SR30-SR50 billion) for building and linking KAEC through highways and high speed trains to make the city economically feasible. Once the government demonstrates its total commitment toward such initiatives, then this will automatically attract the private sector."
He said the KAEC, being the first project of its kind, initially drew much attention owing to its magnitude and uniqueness. "But, I believe, a city cannot and should not be developed by the private sector alone. Building cities is the prime responsibility of the government because of the colossal infrastructure costs involved including design and developmental complexities. In cases where private investments participated in building cities early on in the development stage, the high costs, long-term investment horizon and payback make the private sector investment less attractive."
He said Jazan Economic City appears to be a good investment opportunity due to its prime location, which is close to a highly populated country - Yemen - and the Red Sea. "This will help provide cheap labor and lower labor immigration to the major cities."
Commenting on the Saudi government's measures to stimulate the economy, Shatta said in times of crisis it was normal for a government to step in and inject cash to sustain growth. "But no economy can exist on government stimulus alone when it comes to long-term economic stability because it gives rise to inefficiencies, lack of productivity and over dependence on governmental bailouts. In the short run, however, these fund injections can help avert major economic disasters."
As far as banks' reluctance to extend credit is concerned, this is linked to a lack of readily available statistical data on borrowers. "The evaluation of prospective borrowers became difficult, which led to banks shying away from extending credit."
Noting the private sector's lack of enthusiasm in investing in the construction sector which is booming on the back of government spending, Shatta identified three factors: Lack of credit; lack of confidence; and over-dependence on government contracts.
In general, banks do not like to be heavily exposed to the real estate and construction sectors because of liquidity issues, he said, adding this led to a limited amount of bank credit being available to finance construction projects.
Foreign investors confidence in Saudi banking system was shaken following Saad and Al-Gosaibi groups' failure to repay their debts of SR58.88 billion ($15.7 billion) involving more than 80 regional and international banks. Shatta felt that this issue should have been dealt with more carefully as SR5 billion debt was owed to local banks. But the way it was handled, it gave the impression of ignoring the interest of foreign banks.
"One of the measures by the government should be to provide unconditional support to these foreign banks in collecting their debt and ensuring unbiased treatment of all banking concerns lending to Saudis, irrespective of their origin. Secondly, the government should focus on starting up another 10-15 banks and having them spread out to small cities instead of only Riyadh. This will increase regional liquidity, and as a result, improve the efficiency of capital all over Saudi Arabia."
He wondered why the Saudi riyal continues to be pegged to the US dollar when it is losing out to other currencies. "We export only 8 percent of our daily oil production to the US. It would make sense for China to do so given the majority of their exports are to the US, but it seems that the decision for dollar to riyal pegging is more political than income focused."
He said "It is undoubtedly dangerous to invest our oil income in US government bonds which could end up having only 60 percent of their purchasing power in the coming years.
He disagreed with the demand to replace dollar with the World Bank's Special Drawing Rights (SDRs). Instead, it would be wiser to link the riyal with a basket of currencies, he maintained.
He was skeptical about the call for a Gulf monetary union saying it was a product for economically advanced countries. "We are not as advanced as the euro zone and we need to calculate in advance the risks and costs associated with the potential non-entry of certain countries in the union and the unplanned exit of certain countries from the union."
Commenting on the recent debt crisis in Dubai, he said the burgeoning city went out of its way to borrow (easy money) for the self interest of executives, which promoted unethical referrals and commissioning fees.
He felt the crisis was avoidable with lower debt financing and a stronger corporate governance. "It is imperative for countries to build their economies based on their own resources and capabilities versus external support."
If rectified correctly, Dubai will need 5-7 years to rebuild its stability and reputation in the market, he added.
He did not agree with the view that the Dubai crisis was the first test of Islamic financial institutions. "The institution of Islamic finance is built on the principles of Musharaka or equity participation and bases its structure on asset-based investments, not on leveraging beyond reasonable logic. That is why we cannot link Dubai's performance to Islamic financing."
But he agreed with the suggestion that the Dubai experience hurt prospects for new bond issuance in the Gulf.
"Even sukuk (the Islamic bond) was used as a utility to grab as much capital from ethical-based investor. However, in my opinion, Dubai will need to restructure its debt and show the world that it is able to operate according to certain disciplines if it is to regain investor confidence."
By MUHAMMAD HUMAIDAN
© Arab News 2010
