GTTV: Saudi Arabia 2
The emerging powerhouse – episode 2
The kingdom of Saudi Arabia. The largest economy in the Middle East. Located at the heart of 3 continents. Ideally positioned along major international shipping routes passing through the Red Sea. A market size of over 250 million customers within a 3-hour flying radius.Saudi Arabia surprises most foreign visitors. It is a closed country, but a wealthy one, and has a mix of modern buildings and ancient architecture. The kingdom has much to offer by way of culture, a diverse climate and topography, as well as historical sites.
Already accounting for the world’s largest proven reserves of oil, the kingdom is thinking big when it comes to planning for the future. With the revenues generated from high oil prices, the boom in the country is just beginning, with the government investing heavily in the kingdom’s infrastructure.
Huge investment schemes are already underway. New landmarks are being created, and futuristic skyscrapers will soon be part of the country’s skyline. New cities and economic hubs are being created to meet the foreseen demands. Across the economy, investment projects have been planned to increase growth, develop new sources of revenue and create jobs. The establishment of a knowledge-based economy is part of the development plans. These plans are designed to accelerate growth in both the oil and non-oil sectors of the economy, and act as a further stimulus to private and foreign investment.
The private sector is being encouraged to take part in national development plans, and the groundwork has been laid for the kingdom to be even more investor-friendly.
One company that indeed believes Saudi Arabia is a good place to base itself is the highly-successful Astra. With several subsidies throughout the Gulf region, this fast-expanding industrial conglomerate started its operations about 50 years ago. Today, it is a well-known brand name throughout the Kingdom Saudi Arabia. With varied interests ranging from agriculture to trading, and from pharmaceuticals to steel, Astra is now the second-largest privately-owned group in the country. Astra also plays an active role in supporting the communities within which it operates, for example by building universities and hospitals. The company boasts an excellent reputation based on its mission plan, objectives and strategic direction, and would make a solid partner for any venture in the region.
Saudi Arabia is fast transforming itself into one of the world’s most competitive economies, and one of the most lucrative markets for strategic investment. Market reports show that investment in Saudi Arabia realises high profit ratios with low risk exposures.
In addition to the kingdom’s strong economic climate for investment, one of Saudi Arabia’s strongest advantages and incentives for foreign investment is its people. The majority of the country’s population is young, with 45% of the country under 15 years of age. Recognising this as a potential asset of the country, the government has invested heavily in education and human resource training.
Real Estate
Historically, the real estate sector has played a key role in the Saudi Arabian economy. Its many links with a number of other sectors in the economy has made it crucial to the development of the economy. Playing a major role in the economic diversification plan of the country, the real estate market is undergoing a period of increased demand as well as unprecedented construction activity.
The rapid pace of growth of the real estate sector has prompted the government to take measures in organizing, regulating and systemising activity within the sector. Also, the introduction of the new mortgage law in Saudi would also boost the market further along.
Economic expansion and increased investment opportunities in the country will continue to encourage the influx of expatriates who will require housing. In addition, the local population is forecasted to continue growing at an average annual rate of 2.5%, resulting in nearly 27 million people by the end of 2009.
The new foreign investment law allows investors the right to buy land, which has played a vital role in taking the real estate sector forward. Private sector developers are now rushing to attain a piece of the growing market by erecting multi-billion dollar properties all across the kingdom.
One company which has been participating actively in the real estate sector expansion in Saudi Arabia is Akwaan Properties. Established as a closed stock company in 2007, with an initial capital of US$200 million, it is already developing mega-projects backed by strong partners. The company aims to be involved in future residential, commercial and industrial projects in Saudi Arabia, as well as the larger Middle East and North Africa.
Riyadh, the capital of Saudi Arabia, has an annual growth rate of more than 8%, the city’s population is anticipated to surmount the 10 million mark by 2020A and has been projected to become the first mega-city in the Gulf region within a decade. In the short to medium-term, there is an expected 40% shortage of housing in the city.
Already, the rental prices have sky-rocketed due to this lack of available housing.
The country has already long been one of the world’s most frequented destinations for Muslims taking a pilgrimage to Islam’s holy cities of Mecca and Medina. Given their location, the 2 holy cities of Mecca and Medina are prime real estate areas. Hajj pilgrims demand high quality buildings and multi-billion dollar towers are popping up everywhere. This has led to the price of rent going up tremendously in both cities.
Agriculture
Beginning in the early 1970s, Saudi Arabia adopted a policy aimed towards developing an agricultural sector capable of achieving food self-sufficiency. While still importing some food and feed products, the sector has made great strides over the last 40 years. Today, the country is nearly self-sufficient in wheat production. The government has also established agricultural research stations to help farmers figure out how to adapt their farming methods to the harsh desert climate.
The government has heavily subsidised the sector by providing up to 1,000 acres of free land, as well as machinery and equipment discounts of up to 50%.
Projects to maximise the use of available water resources have also been set up. More than 200 dams, with an estimated capacity of 700 million cubic meters, have been built in order to preserve rainwater. With an increasing population, the load on the available water supply has increased and the government has set in place recycling and conservation initiatives.
Driven by the massive population growth and the increasing demand for food and related products, the industry continues to grow at 8% a year. This makes Saudi Arabia the Middle East’s largest market for agricultural products and technologies.
Telecom & IT
The telecommunications sector in Saudi Arabia is growing rapidly. Telecom service revenues have been steadily increasing at an average of 15% annually.
At the end of 2006, there were nearly 4 million fixed telephone lines, of which 75% were residential lines.
The mobile phone sector is expected to continue to grow at a good pace, with forecasts indicating a penetration of nearly 130% by the end of 2012. The introduction of competition in 2005 has resulted in major developments in service offerings, quality of service as well as reduced prices.
Internet penetration in the country is still relatively low at about 20%. Broadband subscribers grew at about 85% annually, but the penetration rate remains at a low 1%. As a result, there is still a huge growth potential for broadband service in the kingdom.
Overall, with the considerable progress towards the liberalisation of the telecom market and the establishment of regulatory independence, the telecommunications sector in the country is widely believed to have more growth potential and investment opportunity than its smaller GCC neighbours.
Aviation
The Air transport industry in Saudi Arabia is over 60 years old. Saudi Arabian airlines was a pioneer, not only in Saudi Arabia, but across the whole region. It is one of the more successful airlines. Only three years ago, the Saudi Arabian government decided to liberalize and privatise the air transport industry. Since then, many investors saw an opportunity to invest.
Two privately owned airlines are now on the Saudi market and a third one is on the horizon.
With the further liberalization of the air transport sector in Saudi Arabia, the outlook for the future is very optimistic.
Investment Opportunities
There are various investment opportunities available in the Saudi Arabian economy. Of these, the energy, information and communication technology, and life science sectors stand out.
The outlook for the energy sector in Saudi Arabia has never been brighter, nor more secure, as global demand for refined oil products is expected to remain strong. In the last 5 years, the sector has seen a 10% annual increase in contribution to the country’s GDP.
The refining sector in the kingdom will continue to offer excellent opportunities and high returns for its investors. Its strategic location, as well as already existing access to export infrastructure for crude oil and oil products will allow Saudi Arabia a leg-up over its competitors. Further, there are plans to develop 2 new export refineries in the country, as well as upgrades to existing refineries.
The petrochemicals sector is the largest and most important non-oil sector in the kingdom. The country is now one of the leading producers in the industry, and is one of the world’s strategic hubs for petrochemical expansion. It is key to note that Saudi Arabia is the only country in the GCC that has opened up its petrochemical sector for private investment.
The kingdom’s unprecedented population growth has also resulted in severe power and water shortages in many regions. As such, there are excellent opportunities for investors who wish to build long-term assets in the country.
Saudi Arabia aims to transform itself into an information society and a regional leader in the ICT field. It is already the largest telecommunications market in the Middle East in terms of revenue. The government has already initiated several public-private partnerships to boost ICT usage and development. With a young population, the Saudi ICT market holds high potential for interested investors.
Life science is one of the sectors that has been highlighted as being able to provide sustainable growth and prosperity for Saudi Arabia in the long run. To achieve its goals, the kingdom has unveiled a Life Sciences National Plan, under which the government has made available research grants. World-class life science and biotech parks are being built to further develop the biotechnology sector. There will be opportunities for the creation of a huge number of jobs in the sector, as well as focus on research and technology development.
In view of the new efforts supported by the government, the country’s tourism industry now holds considerable promise for potential investors. For Western tourists the kingdom has long been one of the hardest countries to travel in. In 2006, the number of non-religious foreign tourists was at only 7%.
However, lately, the country is slowly trying to loosen its stance on foreign tourism into the country. In April 2007, the government passed a law allowing domestic travel agencies to bring in foreign tours. Part of the government’s new plans for the tourism sector is not just to lure more international visitors to the country, but also, to increase the number of locals who travel within the country for leisure.
The estimate is that Saudis who might take holidays within the country are an untapped $15 billion market.
The economy in Saudi Arabia is ripe for investment now. By streamlining the decision-making process, strengthening the role of the private sector and diversifying the economic base, the government has created a favourable investment climate. Together with the positive ratings received by the country and her recent accession to global trade groupings, the potential investor can be assured that his foray into this market will be a lucrative one.
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