Saudi Arabia's reforms herald new era

Saudi Arabias reforms herald new era
Saudi Arabia has always been a market where investments can make a very good return.

Dubai - Investors need to take a closer look as the next big opportunity could be awaiting them in the kingdom

By Shailesh Dash

Published: Sun 29 Sep 2019, 9:20 PM

Last updated: Sun 29 Sep 2019, 11:22 PM

The 2014 oil price slump came as a wakeup call for Saudi Arabia. Oil revenue and public spending-led growth model was no longer sufficient and tenable, in the face of changing energy market dynamics which included oil price volatility, competition from alternative supply sources such as renewable energy and US shale oil, and emergence of disruptive technologies.
During 2014-16, the kingdom's GDP growth declined at a CAGR of 7.5 per cent and its budget swung from a surplus of 6.5 per cent of GDP in 2013 to a deficit of 2.3 per cent in 2014. The government was quick to respond with several short-term initiatives focused on fiscal consolidation through rationalised spending, subsidy cuts, and introduction of taxes. From a long-term perspective, the government realised the need to integrate sustainable development goals into the national planning process and subsequently introduced Saudi Vision 2030 and related implementation programmes, such as National Transformation Program 2020 (NTP), that aim to build a robust, open economy based on a diversified production base and increased competitiveness.
Private sector development is at the centrestage of Saudi Arabia's transformation plan, and special emphasis will be on a three pronged strategy that creates conducive business environment for SMEs and entrepreneurs, promotes public-private partnerships, and encourages foreign investment. As per government estimates, the contribution of the private sector to overall GDP is expected to rise from current levels of about 40 per cent to 65 per cent by 2030 and the government's non-oil revenues are expected to triple during 2015-20 to reach SR530 billion ($141.3 billion) by 2020. Needless to say, economic transformation at this scale will undoubtedly spawn innumerous investment opportunities for both domestic and foreign investors.
SMEs in the Kingdom are currently at the grassroots level, contributing around 20 per cent to GDP. However, its nascency suggests the vast potential that can be achieved by the development of the sector. According to NTP, Saudi Arabia's SMEs are expected to contribute SR2.1 trillion to GDP by 2030, from SR484 billion in 2016, or 35 per cent of the country's GDP, from the current 20 per cent. The recently-created SME Authority is tasked to provide necessary support to regional small businesses and entrepreneurs through measures that include business-friendly regulations, easier access to funding, international partnerships and a greater share of national procurement and government bids.
At the same time, the government plans to establish additional new business incubators, specialised training institutions, and venture capital funds to aid entrepreneurs in developing their skills and networks. In particular, sectors such as transportation and storage; information and communication; healthcare; education; housing; and energy are expected to see robust growth and generate several investment opportunities for domestic and foreign investors. This is likely to attract significant investor interest and improve liquidity in capital markets, especially in light of upgradation of the Saudi Stock Exchange to emerging market status by leading index providers such as the and FTSE. Moreover, Saudi Arabia's MSCI inclusion is expected to generate inflows of passive capital of up to $17 billion into the Tadawul between March 2019 and March 2020, as well as up to $40 billion of active capital flows.
Privatisation will be crucial for the kingdom's economic transformation plan as the government plans to raise as much as $200 billion (excluding Saudi Aramco's IPO) through privatisation of state enterprises in various sectors ranging from hospitals to airports to grain silos. Privatisation will be done in several forms, including full or partial assets sales, initial public offerings, management buyouts, PPPs and concessions/outsourcing. By 2020, the Saudi government plans to sell assets in five state-owned entities, which is expected to generate revenues of SR35-40 billion, and award more than 14 PPP contracts, worth SR24-28 billion, in various sectors including renewables, transportation, education and healthcare.
Additionally, the government is also working towards corporatising ports, privatising some services in the transportation sector, and transforming King Faisal Specialist Hospital and Research Center into a non-profit organisation.
Realising the importance of foreign investments, the kingdom recently opened most sectors to 100 per cent foreign ownership, including wholesale and retail trade, real estate, healthcare, education and media. Moreover, the government has set up the National Industrial Development and Logistics Program, which is expected to stimulate $453 billion worth of investment by 2030, with $165 billion worth of total investments already signed. As a result, foreign investment in Saudi Arabia more than doubled to reach SR13 billion during 2017-18, while foreign investor licences grew by around 96 per cent compared to 2017. In the first quarter of 2019 itself, 267 new international companies established operations in the kingdom, a 70 per cent increase over the first quarter last year, out of which 70 per cent are wholly-owned by foreign entities, while 30 per cent represent JVs with local investors. Within the new companies, education and healthcare emerged as the leading growth sectors, following the relaxation in foreign ownership restrictions in 2018.
As the kingdom presses on with its economic transformation plan, we are likely to witness a wave of investment opportunities for both domestic and foreign investors. Therefore, it is equally important to nurture and sustain these opportunities through a conducive business environment through a robust and transparent legal system and social reforms. So far, the government has delivered on its promises with pragmatic laws on bankruptcy, PPPs, etc, and landmark decisions such as easing visa and residency restrictions. Going forward, it is important to sustain the pace of reforms and economic transformation while resisting any temptation to re-expand government spending, especially in line with higher oil prices.

The writer is a Dubai-based entrepreneur and financier. Views expressed are his own and do not reflect the newspaper's policy

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