With crude prices plunging to a 12-year low, oil exporting Gulf countries are facing a new economic reality as they look to shore up their finances. The International Monetary Fund estimates that oil exporting countries in the Middle East and North Africa lost about $340 billion in revenues last year, roughly equivalent to 20% of their GDP.
In order to cope with this difficult period, Saudi Arabia, the world’s top oil exporter, has introduced some notable reforms, including slashing subsidies on fuel and utilities, taxing unused land and even mulling a partial listing of its state oil company Saudi Aramco. Under the leadership of the Deputy Crown Prince Mohammed bin Salman, the Kingdom is also looking to relax foreign ownership rules to encourage more inbound investments while the government is studying a proposal to impose value-added tax to boost earnings in a tough economic climate. Abdul Rahman Halak, Head of Investment at Saudi-based Naif Alrajhi Investment says that such steps from the government could fuel economic growth and boost employment in the local economy as it grapples with the low oil prices.
With oil prices plummeting to as low as $30 per barrel, how is the investment climate looking to be shaping up in Saudi Arabia this year?
Over the last eight months, many investors have focused on sectors such as real estate development and retail. real estate development is now gaining traction due to the Ministry of Housing and its role in creating a clear roadmap for developers so that they could achieve the housing plan set by the government. The returns on investments in the real estate sector could range between 7% to 12%, making the industry more reliable in the current economic condition. Many will continue to invest in stock markets and make use of oil prices to earn profits in the future when the market resurges. Lastly, we are also seeing an increased investor interest in SMEs that have promising returns on investment.
Reports have emerged of SAGIA looking to relax foreign ownership rules in the kingdom. If that comes into effect, how will it impact the flow of foreign direct investments to the country?
Saudi Arabia will be more attractive than ever to foreign investors with this rule. The relaxation of foreign ownership will have a positive impact on the economy and the retail sector will be the biggest beneficiary of this step. It will help increase competitiveness in the retail sector and will lead to a growth in savings. This will in turn be reflected in the economy.
What additional steps could the government and the regulators take to mitigate the effects of the low oil prices and spur investments and economic growth?
The government has already taken a few steps, including the removal of fuel and power subsidies to boost economic growth. This will have a positive impact on Saudi Arabia. In addition, the government has directed the Ministry of Economy to provide land and housing to citizens. Officials have also been supporting SMEs in the kingdom by providing them with finance that will help them to start operations as soon as possible. The government is looking to remove a number of barriers that are obstructing the growth of SMEs. These firms will play an important role in the national economy by generating more jobs for Saudi nationals.
Saudi Arabia recently opened its bourse to foreign investors. How has that step affected the economy?
Allowing foreign investments to come into the market will increase the Saudi market’s sentimentality. However, the rule was aimed to let foreign financial institutions and investment funds into the market and not individuals. The foreign companies entering the Saudi market will focus on attractive opportunities in various sectors. But we do not expect this move to lead to high volumes in the market and the impact of this step will only be better reflected on the economy by the end of 2016. It is important to note that the companies have been performing well despite a drop in oil prices. We expect the economy to improve in 2016 and 2017.
The kingdom is currently at the 82nd position in World Bank’s Ease of Doing Business rankings. What are some of the steps that could be taken by the government to help improve these rankings and subsequently attract businesses?
The government, together with SAGIA, have reviewed and implemented corrective measures and policies, which have had a positive impact on the economy. Many medium-sized foreign firms had a negative impact, which affected the kingdom’s rankings. But the government has encouraged more new firms to enter the market and arranged for an advanced legal and operational system to help set up these companies. Such a step will help fulfill the national development goals by creating more job opportunities and help in saudization, as well as adding value to the industry and the sector they are participating in. These will in turn boost economic growth.