The Kingdom of Saudi Arabia is the largest country on the Arabian Peninsula. It is bordered by Jordan on the northwest, Iraq on the north and northeast, Kuwait, Qatar, Bahrain, and the United Arab Emirates on the east, Oman on the southeast, and Yemen on the south, with the Persian Gulf to its northeast and the Red Sea to its west. The Kingdom is sometimes called "The Lands of The Two Holy Mosques" in reference to Mecca and Medina, Islam's two holiest places. In English, it is most commonly referred to as Saudi Arabia, often as just Saudi by many English-speaking expatriates in the kingdom, or, less commonly as KSA or SA. Sometimes Arabia is used to refer to the nation, but the term can also refer to the entire Arabian Peninsula.
Economy
Saudi Arabia has an oil-based economy with strong government controls over major economic activities. It possesses 25% of the world's proven petroleum reserves, ranks as the largest exporter of petroleum, and plays a leading role in OPEC. The petroleum sector accounts for roughly 75% of budget revenues, 45% of GDP, and 90% of export earnings. About 40% of GDP comes from the private sector. Roughly 5.5 million foreign workers play an important role in the Saudi economy, particularly in the oil and service sectors. The government is encouraging private sector growth to lessen the kingdom's dependence on oil and to increase employment opportunities for the swelling Saudi population.
OPEC limits its members oil production based on its "proven reserves." The higher their reserves, the more OPEC allows them to produce. Over the past fifteen years, Saudi Arabia's claimed reserves have been flat, with the exception of an increase of about 100 billion barrels between 1987 and 1988. Some experts now believe that Saudi Arabia is greatly exaggerating its reserves and may soon show production declines.
To diversify the economy, Saudi Arabia launched a new city on the western coast with investments exceeding 26.6 billion dollars. The city which is named "King Abdullah Economic City" will be built near al-Rabegh industrial city north to Jeddah. The new city, where construction work started in December 2005, includes a port which is the largest port of the kingdom. Extending along a coastline of 35 km, the city will also include petrochemical, pharmaceutical, tourism, finance and education and research areas.
The government is promoting private sector and foreign participation in the power generation, telecom, natural gas, and petrochemical industries. As part of its effort to attract foreign investment and diversify the economy, Saudi Arabia acceded to the WTO in December 2005 after many years of negotiations. With high oil revenues enabling the government to post large budget surpluses, Riyadh has substantially boosted spending on job training and education, infrastructure development, and government salaries. The government has announced plans to establish six "economic cities" in different regions of the country to promote development and diversification.
Market Overview
In mid-December 2006, the Saudi Government announced the largest budget ever with expenditures projected at $101 billion, $12 billion more than in 2006. More than $37 billion will be spent on new development projects.
Saudi Arabia’s GDP is expected to grow 4.2 percent in real terms to reach $346.6 billion in 2006. The private sector will maintain a healthy growth in 2006 at 6.3 percent as opposed to 6.7 percent in 2005.
Saudi fiscal data showed another year of robust performance with a record budget surplus of $70.6 billion compared to $57.07 billion in 2005. Additional revenues helped to reduce the government debt, bringing it down to more than 28 percent of GDP in 2006 compared to 40 percent in 2005.
In 2006, GDP per capita is expected to increase by 15 percent to $15,000 compared to $13,000 in 2005.
Saudi Arabia’s imports are expected to increase by more than 30 percent reaching $68 billion in 2006, while Saudi exports will hit an all-time high of $215.5 billion, 15.1 percent more than in 2005.
As of October 2006, U.S. exports registered an 18 percent growth at $6.4 billion compared to the same period in 2005; by the same token, U.S. imports grew 20 percent from $22.5 billion to $27 billion during the same period.
Market Challenges
Saudi Arabia became the 149th member of the World Trade Organization (WTO) on December 11, 2005. Accession to the WTO will impact trade barriers and regulations as Saudi Arabia comes into compliance with WTO requirements. However, any revisions in regulations and laws affecting trade barriers will take time to enact and implement.
For the time being, only Saudi nationals are permitted to engage in trading activities and only Saudis are permitted to register as commercial agents. Restrictions on individual professions also are in force, such as who can practice law, medicine, accounting and financial services, and other similar professions.
Commercial Disputes Settlements: The enforcement of foreign arbitration awards has yet to be upheld in practice. Government agencies are not allowed to agree to international arbitration without approval from the Council of Ministers, which is rarely granted.
Business Visas: All visitors to Saudi Arabia must have a Saudi sponsor in order to obtain a business visa to enter Saudi Arabia.
Delayed Payments: Although the Saudi Government is keen to resolve any payment disputes and has reduced its arrearages in the last few years, the problem persists, and U.S. companies should check with the U.S. Embassy or Consulates for information on the current arrearage situation.
Intellectual Property Protection: Though intellectual property protection has steadily increased in the Kingdom, piracy remains a problem. The application of a new Patent Law is proving to be cumbersome and problematic to foreign patent holders. Enforcement and transparency still lack.
Counterfeiting: Although anti-counterfeiting laws exist, manufacturers of consumer products and automobile spare parts are particularly concerned about the widespread availability of counterfeit products in Saudi Arabia. There is still no clear and transparent mechanism to reduce and stop counterfeit products from entering Saudi Arabia.
Arab League Boycott: The Gulf Cooperation Council (Saudi Arabia, Kuwait, Bahrain, Oman, Qatar, and the United Arab Emirates) announced in the fall of 1994 that its members would no longer enforce the secondary and tertiary aspects of the Arab League Boycott. The primary boycott against Israeli companies and products still applies.
Government Procurement: Saudi Arabia’s government contracts on project implementation and procurement strongly favor Saudi and GCC nationals.
Banking: Although the Saudi central bank, SAMA, has granted licenses to a number of foreign financial institutions to open branches in Saudi Arabia, these banks will only be allowed to provide investment banking and brokerage services, if applicable. There are currently 11 commercial banks in Saudi Arabia.
Shipping: Saudi Arabia gives preferences to national carriers for up to 40 percent of government-related cargoes with two companies taking advantage of this situation.
Standards and labeling: A new ICCP mandates that a Certificate of Conformity must accompany all consumer goods exported to Saudi Arabia. Labeling and marking requirements are compulsory for any products exported to Saudi Arabia.
In 2006, Saudi Arabia retained its ranking as the region’s top place for doing business, according to a report published by the International Finance Corporation (IFC). In 2005, the IFC ranked KSA as the 38th best country in the world for foreign investment,
up from 67th in 2004.
Saudi Arabia scored the highest confidence mark on the MasterIndex consumer confidence survey. The Kingdom topped other countries in the region at 97.3, followed by Kuwait at 94.6, South Africa at 86.5 and the UAE at 80. MasterCard MasterIndex Consumer Confidence is based on employment, economy, regular income, stock market, and quality of life.
The 2007 Saudi Government budget focuses on enhancing human capital development, health, education, infrastructure and job creation. The new budget entails the construction of four new universities in Tabuk, Baha, Najran, and a women’s university in Riyadh, 2,000 new schools, and another 56 two-year colleges. Moreover, work is under way for the construction and furnishing of 64 hospitals adding 9,850 new beds. The new budget includes another 13 new hospitals, 380 primary care centers, and a new university hospital, among other projects.
Being the largest producer and exporter of crude oil, Saudi Aramco, the national oil company, is augmenting capacity to maintain a surplus production of 1.5 – 2.0 million barrels per day. By the end of 2009,the company will invest in five major projects worth $14 billion to enhance its production capacity. The company is also expanding its Master Gas System, building an NGL recovery plant, a new grass-roots gas plant, and enhancing capacity at an existing plant.
As an offshoot to the expansion in the oil and gas sector, the Saudi petrochemicals industry is enjoying a boom. Industry sources estimate that more than $70 billion worth of petrochemical projects are under development, mainly by the private sector. Higher revenues from oil and cheap feedstock have made Saudi Arabia one of the main hubs for investment in this sector.
Work has already started to upgrade and expand passenger capacity at King Abdul Aziz International Airport in Jeddah. The airport is getting a facelift at a total cost of more than $1 billion to upgrade the terminals and build an additional one, as well as upgrading the Hajj (Pilgrimage) terminal. Once the first phase is completed, the airport is expected to accommodate 30 million passengers annually, which will increase to 80 million passengers once the second and third phases are completed. Moreover, work is under way to build a new airport at Mada’in Saleh and upgrading the facilities at Yanbu Airport.
The Saudi Railways Organization (SRO) is also vying for building 2,900 km of railroad tracks. The SRO has already pre-qualified nine consortia groups, which will be invited in 2007 to bid on two projects, the 1,300 km North-South network, which will connects Riyadh with Al-Jalamid phosphate mine in the North, and the 1,061 km East-West line, which will link Riyadh with Jeddah and Jubail with Dammam. The SRO is currently finalizing tender documents for the 570 km Jeddah-Makkah-Yanbu-Madina network.
A third GSM license and a second fixed line operator will be awarded in 2007. The Saudi Government has extended the applications process to February 24, 2007 for the mobile license and to March 10,m 2007 for the fixed line license. Furthermore,
licenses are pending for a Global Mobile Personal Communications Satellite service, a mobile broadband satellite service, as well as an automatic vehicle locator.
Two new private airlines were licensed to begin operations flying passengers on domestic routes. The two airlines, NAS and SAMA, will eventually expand their network to include various Middle Eastern destinations and will be investing in the purchase/lease of aircraft.
The largest IWPP project in the world has been awarded to a French-Belgian utility company headed by Suez at an estimated cost of $3.36 billion. The 20-year BOT project is the second IWPP awarded, while two more IWPPs are expected to be awarded in 2007, namely, Shuqaiq2 and Ras Al-Zour. The two projects will entail investments in excess of $2 billion and will be carried out by the private sector on a build-operate-transfer basis.
In its drive to diversify the economy, the Saudi Arabian General Investment Authority (SAGIA) is taking the lead to promote foreign investments in four new Economic Cities that are expected to attract close to $80 billion in investments. The King Abdullah Economic City in Rabigh will focus on promoting energy and transportation related industries; the Prince Abdulaziz bin Mousaed Economic City in Hail will be designed around transportation and related logistical services; the Knowledge Economic City in Madinah will include a Technology and Knowledge-Based Industries zone, an advanced IT studies institute, an interactive museum on the life of Prophet Muhammad (PBUH), a center for Islamic civilization studies, a campus for medical research and
biosciences, an integrated medical services zone, a retail zone, a business district, and residential zones. The fourth economic city in the southern city of Jizan will have an industrial zone, a logistic service center, an energy/desalination plant, a residential zone and a seaport. Two more cities are being planned, one in Haqal and another in Ras Azzor.
