September 2016 Credit Management magazine

COUNTRY FOCUS
SHIFTING
SANDS
In the first of a two-part article, Adam Bernstein looks at
the subtle nuances of doing business in Saudi Arabia.
WHEN thoughts turn to Saudi Arabia it’s
easy to think of sand, oil and Lawrence
of Arabia. However, while the Kingdom
of Saudi Arabia is an oil based nation – it
possesses more than 25 percent of the world’s reserves
– it is also the largest economy in the Arab world (and
one of the world’s 25 largest) and makes up more than a
quarter of the gross domestic product of the region.
With such a strong oil bias to the economy comes
a need to diversify as clearly, one day, oil will cease to
be the backbone of the country. As a result, the Saudi
Government is massively investing in areas such as
transport, energy, education, defence, healthcare and
infrastructure. The Wall Street Journal reported that the
Saudi government had drawn up new plans, announced
in June 2016, called the National Transformation
Program, that aims “to more than triple its nonoil
revenue by 2020 while cutting state handouts.” The plan
wants nonoil revenue to reach $141.33 billion by 2020.
STATISTICS
Statistically speaking, oil means a number of things to
the Saudi economy not least of which is that is makes up
80 percent of budget revenues, 45 percent of GDP and
90 percent of export income – all of which means that
when the price of oil drops, so the Saudis sneeze with
a strong hint of a cold. Indeed, the CIA reckons that in
2015, the Kingdom incurred a budget deficit estimated
at 13 percent of GDP, and it faces a deficit of $87 billion
in 2016, which is being financed by bond sales and
drawing down reserves.
But it’s the dependence on what is
a diminishing resource – oil – that is driving
the Government’s plans for diversification
and the derestricting of certain industries
to encourage greater foreign investment.
What makes Saudi Arabia particularly interesting is
that it’s a very ‘young’ nation in that some 50 percent of
the population is under 25 years old and the population
is growing rapidly. A small nation in terms of its
population – 28 million presently, it’s expected to reach
29 million by 2020. However, its people are gaining in
wealth too - suffering as the economy struggles. The
World Bank reckons that per capita income was $25,000
in 2012 but had fallen to around $20,500 by the end of
2015.
The young of the country need greater levels of
education and technical skills to better serve commerce.
This is, no doubt, a prime driver behind what the Saudis
term Nitaqat, meaning Saudisation, where foreign firms
need to meet a quota for employing Saudi nationals – the
aim being to enhance local employment levels while
reducing dependence on foreign labour. Meeting this
quota can affect the winning of Government contracts.
For those wanting to export to the country – and the
region life is made easier through the common use
of English, the proximity of other Gulf states, Saudi’s
membership of the Gulf Cooperation Council, and a very
low tax rate (there is no income tax levied).
A NEW OPENING
However, there are a number of large barriers to
entry that primarily revolve around the need to have
appropriate sponsors in place for entry into the Saudi
market, the need for a suitable partner for joint ventures,
and the level of bureaucracy that means obtaining
licences and creating legal entities with which to do
business can take some time. Indeed, the World Bank
places Saudi Arabia 49th in its ease of doing business
rankings.
But it’s the dependence on what is a diminishing
resource – oil – that is driving the Government’s plans
for diversification and the derestricting of certain
industries to encourage greater foreign investment.
In particular, moves are being made to liberalise
petrochemicals, vehicle assembly, knowledge-based
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September 2016 www.cicm.com
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