Little option but to open up

Saudi Arabia’s investment needs are so great that it looks as if economic reform – however halting – will win out over statist, introverted policies.

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Saudi Arabia is about to enter a critical period. In question is whether the modernizers will be able to sustain the drive towards a market-oriented, private-sector-driven economy favourable to foreign investment or whether the kingdom will remain inward-looking and government-dominated.
The evidence at present is finely balanced but the consensus among western and Saudi bankers is that ultimately the government has little choice. It needs foreign investment to provide a significant proportion of the $175 billion required in the next 20 years to meet the country's power and water needs and it needs the private sector to provide jobs for young Saudis. With 73% of the population aged under 29, including 38% born since the Gulf War, that requirement will become even greater in the next decade.
However, many initiatives, which bankers had expected to be well advanced by now, remain either blocked by social conservatives, mired in the Saudi bureaucracy or delayed by complex negotiations as the government's focus remains on the political fallout from the terrorist attacks on New York in September 2001.
Gas project runs out of steam

In particular, the gas initiative, under which western oil companies were set to invest $20 billion to $25 billion to explore and gain access to natural gas to be used in downstream petrochemicals projects, appears to have stalled.







Al-Assaf

Saudi and western bankers are also still waiting for long-expected legislation on capital markets, insurance and taxation. At least here there is growing confidence that the capital markets legislation, including the creation of an independent regulator, will be published later this year and that the government will go ahead with its plans to privatize part of Saudi Telecommunications. "The pace of reform was slow in the first half of the year but the signs are that it is picking up in the second half," says Brad Bourland, chief economist at Saudi American Bank (Samba).
The case for reform does have powerful supporters, headed by crown prince Abdullah bin Faisal bin Turki Al-Abdullah Al-Saud and including the Saudi Arabian Monetary Agency (SAMA), the finance ministry and most leading Saudi bankers and businessmen.
David Hodgkinson, managing director of Saudi British Bank, argues that the commitment to reform is genuine. "Three years ago there was a great scepticism about the prospects of liberalization," he says. "We can now see tangible evidence that this policy is becoming a reality and there is an absolute commitment to this process from the top. Saudi Telecommunications (STC) has been corporatized. There will be an independent public offering and then the government will have to give some idea when the market will be opened to competition."
Slowing the pace of change have been political developments, particularly strains in relations with the US, which, since the terrorist attacks on New York have inevitably become a much more important issue for the Saudi government. As a result, other matters, such as economic reform, have received a lower priority. "Everything is now taking a back seat to politics," says a Saudi financier.
There is no doubting the strength of anti-American feeling in Saudi Arabia. This sentiment has gathered momentum following the recent legal action in the US demanding that Saudi institutions pay compensation to the victims of the New York attacks. Feelings were exacerbated still further by the report of Washington think-tank the Rand Corporation, which branded Saudi Arabia as the "kernel of evil".
One of the Rand Corporation's executives briefed the Pentagon, arguing that "the Saudis are active at every level of the terror chain" and suggested that Saudi oilfields and financial assets should be seized if the Saudis did not "stop backing terrorism".
Even though the Rand Corporation's assessment was rejected by the Bush administration, it has had a considerable impact in Saudi Arabia, which until four months ago had been regarded as the closest ally of the US in the region.
During a visit to Washington earlier in the year, president George W Bush and crown prince Abdullah struck a deal under which the Americans would pressure the Israelis while Riyadh would bring the Arabs to the peace table.
Analysts believed that this deal would allow the focus to shift back to the domestic agenda for the second half of the year. Current thinking is that this is unlikely to happen.
Saudi bankers believe that this, perversely, will benefit the House of Saud. They say that the criticism from Washington will help unite the country behind the ruling family instead of demonizing them through association with the US at a time when anti-American sentiment is growing.
There is no doubt that hostility towards the US and to a lesser extent the UK is running high. There is anecdotal evidence to suggest that Saudis are boycotting American goods and services such as fast-food outlets.
Companies have also been removing the word "American" from their names or making clear that they had nothing to do with the US. Bankers, though, from both local and international joint ventures say that they do not believe reports that Saudi British Bank and Samba have lost business or that customers have moved their accounts to other banks.
The Saudi government believes that US exports to Saudi Arabia, which dropped by 43% in the first half of the year, are now starting to grow again. "Statistics from the US census show a drop in US exports to Saudi Arabia due to the decline in machinery and transport equipment and chemicals categories, both of which occupy a large share of US exports to Saudi Arabia.
"It is not clear that the drop is a reflection of the events of September 11 or is due to some other factor. Nevertheless, by May 2002 US exports to Saudi Arabia approximated to the level before September 11," says Ibrahim Al-Assaf, the minister of finance and national economy.
Saudis, along with many other Gulf Arabs, have been reluctant to visit the US. The number of Saudis travelling to the US for family holidays has fallen by 40%, a figure that Saudi travel agents say underestimates the scale of the downturn - last year 52,000 Saudis visited the US, spending $400 million. These figures are confirmed by the significant growth of tourism within Saudi Arabia and reports from Gulf states, such as Dubai and Bahrain, that visitor numbers from the kingdom have increased.
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Abigail Hofman:

Little option but to open up

Saudi Arabia’s investment needs are so great that it looks as if economic reform – however halting – will win out over statist, introverted policies.

Email a Friend

Add Your Comment

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