Investment and Trade Opportunities in Saudi Arabia

 Development Strategies and Regulatory Environment to

Stimulate Growth and Diversification of the Economic Base

 
Session Points

by

Hamad Al-Sayari

Governor, Saudi Arabian Monetary Agency

In

The 2003 Seminar

On

"The Road to Regional & Global Prosperity: Challenges & Opportunities"

At

The 58th Annual Meeting of the IMF and the WBG

 Dubai Finance

September 20-22, 2003

Dubai, UAE

Investment and Trade Opportunities in Saudi Arabia

 
Development Strategies and Regulatory Environment to

Stimulate Growth and Diversification of the Economic Base

Overview of the Saudi Economy:

• In the course of the past few decades, the massive government investments in physical and social infrastructure in the context of successive five-year development plans have transformed the Saudi economy into a modern state with a well diversified economy.
  
• The economic progress has been enhanced by significant growth of domestic income, continued rise in the growth of non-oil private sector, remarkably stable inflation and exchange rate, and more efficient performance of the banking sector.
  
• Over the past three decades economic indicators suggest significant progress towards diversification of the Saudi economy.  Records of real Gross Domestic Product show:
  
• an average annual growth rate of 4%;
  
• the non-oil GDP average annual growth rate of 6.9%;
  
• and 9.2% for the private sector;
  
• Furthermore, the share of Non-oil GDP in the total GDP has gone up from 33% in 1972 to 69.1% in 2002;
  
• while the private sector  share in non-oil GDP has risen by about 49.1% during the same period.

Development Strategies:

• The Government's privatization plans include identification of a host of economic sectors to be opened for privatization, such as telecommunications, electricity, airlines, postal services, railways, port services and water utility.

Regulatory Environment:

• To cope with challenges poised by the dynamic state of the world economy, reduce dependence on oil and diversify production base, attract domestic and foreign investment.
  
•  To stimulate private sector growth, the Saudi government has established a number of institutions including:
  
• the Supreme Economic Council,
  
• the Supreme Council for Petroleum and Mineral Resources,
  
• the Saudi Arabian General Investment Authority,
  
• the Supreme Commission for Tourism,
  
• Human Resources Development Fund,
• the Supreme Council for Human Resources.
  
•  Furthermore, a number of new laws and regulatory guidelines have been enacted to speed up economic liberalization aimed at further opening of Saudi markets and ensuring stability for investors. 
  
• The Foreign Investment Law (2000) allows foreigners to invest in most sectors of the economy.  It also allows foreign investors and their non-Saudi staff to be sponsored by the licensed facility, and entitles foreign investors to up to 100% ownership.
  
• A  Real Estate Law allows foreigners and foreign companies to own real estate.
  
• This year, the Saudi Capital Market Law was promulgated to provide legislative, institutional and regulatory framework for the capital market in Saudi Arabia. It envisages the establishment of a Securities Exchange to be managed by the private sector and to be supervised by an independent Securities Exchange Commission.
  
• More recently, the Saudi Cabinet has approved a law to regulate the insurance sector in the Kingdom, and to open it to foreign investors.
  
• These substantial legislative changes have been made with the aim of pushing forward the process of economic liberalization, increasing transparency and strengthening the country�s global competitiveness. In addition, currently some laws are under revision; including the Company Law, the Agency Law, the Mining Law, and the Labor Law.

 
Investment Facilities:

• The Saudi Government has also provided many incentives to potential investors. These include industrial estates, for setting up factories that are made available throughout the Kingdom in several industrial cities.
  
• There are a number of other incentives for investors. For example:
  
• Commodities entering the Kingdom as input for industrial production and some basic foods are exempted from custom duties.
  
• Duties on most of the other products are 5%.
  
• The Saudi Industrial Development Fund (SIDF) gives medium and long-term loans to industrial establishments (foreign as well) up to 50% of the total cost of a project with a payback period of 15 years and a two-year grace period on paybacks from the start of the production.
  
• There are no restrictions on foreign exchange remittances and capital transfers. Foreign companies are allowed 100% repatriation of profits.
  
• Moreover, the Kingdom is among a few countries in the world that allows companies to carry forward losses indefinitely relieving businesses of the tax burden until they become profitable.
  
• Recently, the tax rate for foreign investors was reduced from 45% to 30% 
• The Kingdom does not impose personal income tax.
  
• Saudi Arabia is signing bilateral agreements with an increasing number of countries to provide relief from double-taxation. 
  
• Early this year, the government has reduced tariffs from 12% to 5% in the direction of implementing GCC tariff harmonization.. 
  
• As for the financial infrastructure, Saudi Arabia has established a sound financial system based on international standards that rival those in major industrial countries. This has resulted in a strong banking sector that benefit from international expertise and sophisticated technologies.
  
• Saudi Arabia�s banking system is well integrated with international banking, as eight out of eleven banks operating in the kingdom have foreign shareholders, including branch or joint venture set-ups.
  
• As part of GCC economic integration, Saudi Arabia has recently allowed three more GCC banks to operate in the Kingdom, while other applications are being assessed.
  
• Saudi Arabian banks are among the top-rated banks in the industry, based on capital adequacy, liquidity, provisioning norms and profitability. For the last decade, there has been an organic growth in domestic bank balance sheets.  As at the end of 2002, the risk-weighted capital to assets ratio of banks stood at 20.3% compared to the Basel Standard of 8.0%.
  
• The Saudi stock market is the largest in the region; and with the advent of the new Capital Market Law, the way is paved for a full-fledged securities market. The Securities Exchange will expand the present system of share trading to include debt instruments and investment funds.
  
• Non-bank financial intermediaries are to be licensed to provide a range of financial services that were so far limited to the banks only. The move is expected to increase share and securities trading and encourage more public flotation.
  
• The sophistication of the trading infrastructure and the size of the Saudi market make the Kingdom an extremely attractive investment environment.

 
Investment Opportunities:

• Saudi Arabia's huge oil reserves and mineral resources, expanding domestic market, liberal labor policies, increasing number of privatization targets, and generous package of investment incentives make it one of the best investment locations in the Middle East.
  
• The investment environment in the Kingdom reflects traditions of liberal and open-markets and private-enterprise friendly policies. In addition, the Kingdom has a good track record of political and economic stability, and can boast of a modern world-class infrastructure.
  
• This was recognized by Standard & Poor�s (S&P) Ratings Services, which in July 2003 assigned its �A+� long-term local currency and its �A� long-term foreign currency sovereign credit ratings to Saudi Arabia. It also assigned its �A-1� short-term foreign and local currency credit ratings to the Kingdom. Among the major reasons cited by S&P for its favorable ratings for Saudi Arabia was macroeconomic stability.
  
• Steady growth rates and the restructuring of the Saudi economy have opened new horizons. As a result, hundreds of investment opportunities are being generated every year. 
  
• While all sectors are open for new investment, the greatest opportunities lie in the gas, mining, water, electricity, tourism, transportation and financial sectors.
  
• Research, studies and reports from internal and external sources estimate that basic sectors of the economy require huge investments worth hundreds of billion dollars in the next decade.
  
• Saudi Arabia has a rapidly expanding domestic market fuelled by a growing young consuming population with a reasonably strong buying power. 
  
• Demographic reality of educated and trained youth coupled with the government�s emphasis on developing human resources offer distinct possibilities for foreign investors.
  
• Saudi Arabia ensures equal treatment, protection and incentives accorded to all investors.
  
• Saudi Arabia is a founding member of the Convention on Arbitration; and is in the process of full accession to World Trade Organization (WTO). The Kingdom is also a signatory to various regional agencies guaranteeing level playing field to foreign investors.  And it is a member of the Multilateral Investment Guarantee Agency (MIGA).
  
• The pre-investment assistance provided by SAGIA and other government agencies include helping foreign investors prepare feasibility studies for industrial projects. They also provide information and statistics for investment projects within the scope of Saudi Arabia�s development plans.
  
• Saudi Arabia is fully committed to playing an important role toward promoting regional and global economic prosperity. To this end, Saudi Arabia will continue with efforts and initiatives to achieve its dual goals of economic stability and liberalization.