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| 19 August, 2018

Saudi Arabia on 'RECHARGE'

Nishit is the Head of Research in SICO where he has been a part of sell-side research since January 2009. He has over thirteen years diversified investment experience in the fields of investment research, hedge funds, private equity and risk management. Prior to SICO, he worked for an Iceland-based private equity firm with a focus on the Indian infrastructure sector. Nishit is a Chartered Financial Analyst, a Chartered Alternative Investment Analyst, and a Financial Risk Manager from the Global Association of Risk Professionals. He holds an MBA (specialising in Finance) from the Narsee Monjee Institute of Management Studies, Mumbai, India.

Website: www.sicobank.com

Transformation programme in the kingdom offers plenty of opportunities for investors

There are eight, equally important reasons for investors to now be bullish about Saudi Arabia. RECHARGE is an acronym that I believe adequately sums up the key initiatives and current dynamics which are reshaping the largest economy across the Middle East and North Africa.

The kingdom has surprised those who were skeptical about the pace at which the country is transforming itself. As with any major transformation, Saudi Arabia offers multiple opportunities for both domestic and foreign investors to capitalise, albeit with some challenges and risks.

(R) - Reforms
Under the leadership of the Crown Prince Mohammed bin Salman, Saudi Arabia has been undertaking major reforms to rejuvenate and diversify its economy away from oil. As far as the economy is concerned, reforms relating to opening up the entertainment sector, allowing women to drive and implementing measures to boost both religious and non-religious tourism will likely have an immediate impact. Additionally, the pace at which capital market reforms have been undertaken, and which eventually led to the inclusion of benchmark emerging market indices both by FTSE and MSCI, have boosted investors’ confidence over the seriousness and ability of the kingdom in carrying out structural reforms.

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(E) - Embrace
Running in parallel to the national reforms above, there has been a focus on embracing investors and encouraging them to invest in the kingdom with a long view, through both foreign direct investment (FDI) and Foreign Institutional Investment (FII) route. While actual FDI inflow usually takes a while to accelerate as opportunities, for example, in significant projects such as NEOM or in entertainment such as cinemas materialise, we have already seen a significant jump in the number of Qualified Foreign Investors (QFIs) obtaining licenses to invest directly in the kingdom’s capital markets. Further, the government is also incentivising domestic private investors through favourable regulations and creating specialised funds to allow them to become more involved in the economic opportunities in the kingdom.

(C) - Corruption clampdown
The current regime has made it clear that no one is above the law, and there is zero tolerance towards corruption and leakages within the system. This effectively implies a more efficient and transparent way of functioning and should improve the ease of doing business.

(H) - Higher disposable income for citizens
Contrary to popular belief, citizens in Saudi Arabia (particularly in lower income households) are actually better off financially now than they were previously. The creation of the ‘Citizen’s Account’ will enable 32bn Saudi riyals ($8.5 billion) to be credited to households in 2018 through monthly instalments based on income levels. Alongside this, a one–off payment of 50bn riyals has been provided to public sector employees in 2018 to cover the cost of a living allowance. During the first half of 2018, compensation to employees and social benefits jumped by 68bn riyals year-on-year, while government income from VAT, excise duties and gasoline (borne by both citizens and expatriates), was only 39bn riyals higher year-on-year.

Accordingly, the focus has been on ensuring that the disposable income of citizens is not affected due to rising inflation from taxes and lower subsidies. Social benefit distribution, through the Citizen’s Account, is an excellent way of compensating the most vulnerable people in society. However, expats will be hit hard by new levies, with many of them leaving the country for good or sending their families back, but the government’s near-term priority will understandably be towards its own citizens.

(A) - Accelerated capex
The kingdom has embarked on an expansionary budget in 2018 to kick-start the economy. Proposed capex spending, including contributions from the Public Investment Fund and The National Development Fund to support key infrastructure projects and the private sector, is 88 percent higher year-on-year, at 338bn riyals. Despite a slow start to spending in 1H18, capex is likely to pick up considerably in the second half of this year with the focus being on current expenditure in the first half.


(R) - Road map
Having launched Vision 2030 and a more focused National Transformation Program (NTP) 2020, the Saudi government has provided a clear road map for its ministries, citizens and investors on where it wants to be and how it intends to get there. Several sweeping reforms are being undertaken as part of this, resulting in many structural changes. Although there will be challenges and setbacks, continuous guidance and leadership will ensure that the economic and socio-cultural transformation of Saudi Arabia maintains pace and progress, with the ultimate aim of benefiting it in the medium to long term.


(G) - GDP growth
Oil remains the single largest enabler and driver of Saudi Arabia’s GDP, contributing around 45 percent of economic output, as well as the bulk of government revenues. While non-oil revenues will also show strong year-on-year growth led by income from taxes and lower subsidies, the current oil price above $70 per barrel will significantly boost government revenues, which can provide the government more flexibility to boost consumption and capital expenditure. The International Monetary Fund has already revised Saudi Arabia’s GDP growth forecast for 2018 upwards from 1.1 percent in October 2017 to 1.9 percent now, while the Saudi government’s own forecast is 2.7 percent. This marks significant progress from the 0.8 percent GDP decline experienced in 2017.


(E) - Employment opportunities
With unemployment levels close to 13 percent, one of the top priorities for the government is to create employment opportunities for its citizens. Measures such as ‘Saudisation’, the regulatory push under the revamped Nitaqat system, and incentives under the Human Resource Development Fund are all being taken to address this issue. Accordingly, more jobs for citizens will ensure economic prosperity is inclusive and empowering.

However, as with every economy in the middle of structural changes of such magnitude and executing reforms swiftly, there will be challenges for the government to address and overcome. For instance, the Saudi government’s stringent Saudisation ratio of 100 percent in specific sectors has affected small and medium enterprise (SME) operations and it now seems to be considering lowering this ratio to 70 percent. Yet as unemployment levels continue to remain at around 13 percent, the challenge will be to find a practical solution to employing nationals without a major impact on companies, especially the SME segment. Further, foreign direct investment took a hit in 2017. According to the latest UN Conference on Trade and Development (UNCTAD) World Investment Report, foreign direct investment (FDI) into Saudi Arabia last year amounted to only $1.4bn, down from $7.5bn in 2016 and $12.2bn back in 2012.

Accordingly, although, the country is in a sweet spot to grow, reform and deliver results to its stakeholders, there is no denying the real, practical challenges on the ground. A lot also depends on the government’s willingness to listen to feedback from stakeholders and revisit measures, wherever required, which it seems to be doing.

Any opinions expressed here are the author’s own.


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