MAY 17, 2010, 3:57 A.M. ET.
A Kingdom Connects
Casting a light on one of the world's most secretive and interesting economies.
By MOHAMMED SERGIE
Saudi Arabia is a country that is practically defined by contradictions: The kingdom is ruled by a monarchy with modernizing inclinations but also a powerful cadre of ultra-conservative clerics; it has vast oil wealth but a low per capita income; a huge land mass but little arable land with which to feed a fast-growing population. No wonder then that it is also one of the most misunderstood corners of the globe with its fair share of both apologists and critics taking turns to overstate the country's virtues and vices.
The kingdom came under close international scrutiny following the Sept. 11, 2001, attacks on New York but has since stepped up efforts to combat terrorism and what it labels as the "deviant" Islamic preaching of militants. Now it wants to convert greater openness into greater influence on the diplomatic stage.
The oil boom of the last decade has given Saudi Arabia the financial means to cut sovereign debt and tackle a host of domestic issues – including high unemployment rates, which have been blamed for a rise in extremism – and to modernize the economy.
Although the reform is slow and the benefits of the boom have yet to trickle down to the lower echelons of the population, many claim that the country is moving in the right direction.
"There's a lot of change happening in Saudi and a lot of development. The story will unfold before the rest of the world catches on," says Bruce Fenton, managing director of Atlantic Financial Inc., a globally-focused boutique investment firm based in Massachusetts.
Long-term Strategies
The kingdom came under close international scrutiny following the Sept. 11, 2001, attacks on New York but has since stepped up efforts to combat terrorism and what it labels as the "deviant" Islamic preaching of militants. Now it wants to convert greater openness into greater influence on the diplomatic stage.
The oil boom of the last decade has given Saudi Arabia the financial means to cut sovereign debt and tackle a host of domestic issues – including high unemployment rates, which have been blamed for a rise in extremism – and to modernize the economy.
Although the reform is slow and the benefits of the boom have yet to trickle down to the lower echelons of the population, many claim that the country is moving in the right direction.
"There's a lot of change happening in Saudi and a lot of development. The story will unfold before the rest of the world catches on," says Bruce Fenton, managing director of Atlantic Financial Inc., a globally-focused boutique investment firm based in Massachusetts.
Long-term Strategies
For years analysts believed that the country was idly watching as its smaller neighbors in the Gulf implemented bold plans to diversify their economies – including Dubai's bid to be the region's top financial center and transportation hub. But the kingdom's long-term strategies and prudent budgeting helped it to weather the global recession better than the rest of the region.
The kingdom is now embarking on an investment drive intended to cement its position as the Middle East's largest economy and enhance its influence overseas. "The Saudi economy is booming," says Mutlaq Al-Morished, the vice president for corporate finance at the petrochemicals giant Saudi Basic Industries Corp., or Sabic. "Even during the financial crisis the Saudi Arabian economy had improved and therefore people came to invest."
But that is not to say that the country has been unaffected by the global recession. Last year Saudi Arabia overshot its record budget by 15.8%, spending 550 billion Saudi riyals ($146.6 billion) and is now dipping into its coffers to keep its economy and development plans on track. The kingdom's net foreign assets declined by $32.5 billion in 2009 from a year earlier, according to central bank data, but had bounced back to $414.4 billion by February.
Reuters
The kingdom is now embarking on an investment drive intended to cement its position as the Middle East's largest economy and enhance its influence overseas. "The Saudi economy is booming," says Mutlaq Al-Morished, the vice president for corporate finance at the petrochemicals giant Saudi Basic Industries Corp., or Sabic. "Even during the financial crisis the Saudi Arabian economy had improved and therefore people came to invest."
But that is not to say that the country has been unaffected by the global recession. Last year Saudi Arabia overshot its record budget by 15.8%, spending 550 billion Saudi riyals ($146.6 billion) and is now dipping into its coffers to keep its economy and development plans on track. The kingdom's net foreign assets declined by $32.5 billion in 2009 from a year earlier, according to central bank data, but had bounced back to $414.4 billion by February.
Reuters
King Abdullah bin Abdul AzizHigher oil prices have contributed to a renewed optimism for the economic outlook in 2010. Crude is now "testing new highs and could see another short-term bubble", according to Jarmo T. Kotilaine, the chief economist at NCB Capital, the investment banking arm of the Saudi government-owned National Commercial Bank. "Government spending isn't showing any signs of slowing down. It's actually accelerating," he says. Saudi Arabia is paying down its national debt and plans to spend $400 billion on new infrastructure by 2013.
In 2009, Saudi Arabia posted its first deficit in eight years, as revenue fell by more than half to 505 billion riyals compared with a year earlier. The actual deficit in 2009 was 20 billion riyals less than projected despite the increase in spending, thanks to a rebound in crude oil prices. U.S. benchmark crude prices have to average $50 a barrel in 2010 to cover the budgeted revenue projection. Crude is currently trading at around $80 a barrel in New York.
Despite the kingdom's comfortable position, the tightening of the global and domestic credit markets has weighed on the local economy. Real GDP grew marginally at 0.15% in 2009, and the private sector, the linchpin of the kingdom's future economic growth, has struggled as funding dried up.
Mr. Kotilaine says: "There is no clear sign that lending is going to pick up anytime soon."
He believes the credit markets in Saudi might actually be slower to bounce back than in the rest of the world because local banks don't pay interest on customer deposits and can earn a few percentage points of return by investing in safe securities.
Tight credit and uncertainty about the property and construction sectors could reduce NCB Capital's projection for GDP growth in 2010, from 4% to 3.7%. But a strong showing from the petrochemical and consumer sectors this year is a boon to the economy and will help the kingdom grow at similar rate in 2011, according to Mr. Kotilaine.
Happy Hunting
Last year, Saudi Arabia was one of the few countries to which large international firms could look for multi-billion dollar projects in the petrochemicals, oil, power and water sectors. Some deals had to be scrapped after financing fell through. These included the $6 billion Ras Al Zour power and water plant, which was to be built by Sumitomo Corp. But, more often than not, the government stepped in with funding to keep key projects alive.
The deeper involvement of the Saudi Arabian government in its economy is raising concerns for some that public spending is being spread too far at the expense of the private sector.
A quarter of the 2010 budget will be spent on education. Saudi Arabia, with a population of 25 million, will start building 1,200 schools next year. It is already funding the construction of over 3,000 schools. Healthcare and defense are also earmarked for sizable portions of the budget.
Four new cities are being developed, at a cost of more than $60 billion, under the guidance of the Saudi Arabian General Investment Authority. The scheme is expected to add $150 billion to the kingdom's GDP by 2020 by creating a million jobs and homes for five million residents.
Jazan Economic City, on Saudi Arabia's southern coast, is probably the most ambitious of these projects because the province is poorest in the kingdom.
The authorities realize that modern buildings alone will not be enough to attract business to the new cities. Too much of the available labor force is ill equipped to work in the industries the kingdom is seeking to promote.
By improving education standards, the authorities hope to instigate a virtuous circle in which a higher skilled workforce attracts more jobs to the region, thus lifting the population out of poverty. In a country filled with palaces, many Saudis there earn less than $400 a month.
The government, in partnership with the private sector, has therefore recently launched a pilot project in one of the country's poorest provinces where high school graduates will be taught the basic skills needed for better jobs.
Hisham Attar, a partner in a newly formed education company, is looking to fill demand for these services. Students at his firm's colleges will be trained in English and computer studies. The program is intended to improve the potential labor force and lure industries to the new city.
Mr. Attar, who is also eyeing opportunities in the healthcare and mining sectors, exudes the optimism Saudi Arabia must harness to realize its plans to transform the economy.
"Everything that has to do with Saudi now is hot," he says. "You've got to grab every opportunity."
Copyright 2009 Dow Jones & Company, Inc. All Rights Reserved
The deeper involvement of the Saudi Arabian government in its economy is raising concerns for some that public spending is being spread too far at the expense of the private sector.
A quarter of the 2010 budget will be spent on education. Saudi Arabia, with a population of 25 million, will start building 1,200 schools next year. It is already funding the construction of over 3,000 schools. Healthcare and defense are also earmarked for sizable portions of the budget.
Four new cities are being developed, at a cost of more than $60 billion, under the guidance of the Saudi Arabian General Investment Authority. The scheme is expected to add $150 billion to the kingdom's GDP by 2020 by creating a million jobs and homes for five million residents.
Jazan Economic City, on Saudi Arabia's southern coast, is probably the most ambitious of these projects because the province is poorest in the kingdom.
The authorities realize that modern buildings alone will not be enough to attract business to the new cities. Too much of the available labor force is ill equipped to work in the industries the kingdom is seeking to promote.
By improving education standards, the authorities hope to instigate a virtuous circle in which a higher skilled workforce attracts more jobs to the region, thus lifting the population out of poverty. In a country filled with palaces, many Saudis there earn less than $400 a month.
The government, in partnership with the private sector, has therefore recently launched a pilot project in one of the country's poorest provinces where high school graduates will be taught the basic skills needed for better jobs.
Hisham Attar, a partner in a newly formed education company, is looking to fill demand for these services. Students at his firm's colleges will be trained in English and computer studies. The program is intended to improve the potential labor force and lure industries to the new city.
Mr. Attar, who is also eyeing opportunities in the healthcare and mining sectors, exudes the optimism Saudi Arabia must harness to realize its plans to transform the economy.
"Everything that has to do with Saudi now is hot," he says. "You've got to grab every opportunity."
Copyright 2009 Dow Jones & Company, Inc. All Rights Reserved
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