Finance minister of the year 2003: Taking stock of a volatile situation

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By:
Nigel Dudley
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Ibrahim bin Abdulaziz Al-Assaf, Saudi Arabia's minister of finance and national economy since 1996, has steered the economy through a difficult period. He has played a leading role in the modernization, diversification and liberalization of the Saudi economy and managed its finances prudently in a period in which oil prices have swung between $10 and $30 a barrel. Al-Assaf, a 54-year old economist who has served as the country's executive director at the World Bank for six years and as vice-governor of the Saudi Arabian Monetary Agency (Sama) and wins Euromoney's finance minister of the year award for 2003, spoke to Nigel Dudley in his office in Riyadh.

What is the impact of the announcement of Saudi Arabia's higher rating from Standard & Poor's?

This rating is very important for Saudi Arabia. It is becoming necessary for all countries to have a rating and it is a crucial building block in the financial system we are creating.
The first element of the financial sector is the banking sector, which is well organized, professionally supervised and offers excellent services to customers.

The next element is the establishment of the formal stock exchange, which has been made possible by the capital market law, which was passed this year and is now being implemented. We already have an electronic trading system and there is a company for registering stocks. I hope the Securities & Exchange Commission chairman and members will be announced very soon.

This capital market law is one of the most advanced in the world and reflects our desire to choose from the best international experiences. We have one of the most advanced electronic shares trading systems, with same-day settlement.

Another key part of our evolving financial sector is the passing of the insurance law, which will allow the introduction of more locally established insurance companies.

The rating is another step towards creating a dynamic, open financial sector as it sets a benchmark for all companies that want to issue securities in the market.

Does the sovereign rating mean that you are considering raising money through a sovereign Eurobond?

With the creation of the formal capital market, we will be looking at the way we issue our bonds in the local market. We will be examining both our primary and secondary market activities to ensure they are beneficial for us. It will be an important mechanism for us. We do not have any plans for a sovereign Eurobond; there is sufficient liquidity in the local market.

How quickly do you expect the stock exchange to reap the benefits of the reforms through the creation of a broader and deeper market?

We now have the main ingredients in place that make it easier for the market to grow more quickly. The creation of the market will also encourage companies to develop their investments by raising their funds through equities and bonds. Family companies are now looking seriously at turning their private companies into publicly quoted ones.

How do you intend to give new momentum to privatization?

We need to speed things up. We have a number of initiatives; we have been working on Saudi Arabian Airlines (Saudia) for some time. The sale of the government stake in National Commercial Bank could also happen soon.

We hope to move quickly in other sectors. When petrochemicals giant SABIC, in which the government has a 70% stake, was the only petrochemicals company, there was a reason for state ownership, but now the sector has opened up for other investors.

However the presence of the government might be a comfort factor. We do not interfere with the management of companies and you must remember that they are a source of income for the government.

As an investor, the government would like to sell its stakes in a number of companies immediately. But, as a government we have to be aware of the impact of this sale on the market.

Do you favour foreign ownership of shares?

We have opened up the market through the creation of managed funds. One of the first tasks of the new Securities & Exchange Commission will be to look into this area. My hope is that it will come in the near future. It will be healthy to allow foreign participation in the secondary market.

Have you done enough to encourage foreign investment?

No country can say it has done enough to encourage foreign investment. We need to have more transparency and to improve our bureaucracy. Yet we have come a long way in that process. The investment law allows foreign investors to own 100% of companies and to be treated like Saudi companies.

The setting up of different agencies like the Saudi Arabian General Investment Authority (SAGIA), the creation of regulators for the power and telecoms sectors and the passing of capital market legislation are all also important components of this approach. I also hope that in the near future the new tax law will be approved. The proposed lower tax rate, when approved, should be well received by investors.

How is the balance changing between an oil-driven economy and one that will be dominated by the private sector?

The oil sector was more dominant in the past and it still affects everything in the economy. But it is now down to 30% of the economy. While we need to recognize that oil will continue to be a major factor, we need to keep diversifying the economy. The results are seen in the growth of non-oil exports, which are expanding at a healthy rate.

The other area we are focusing on is services. There is a great potential to develop services such as tourism; we would like for example to see people who come to visit the holy sites to look at other parts of the country. We also want to expand financial services. The location and the size of our country provide us the opportunity to be a major regional commercial centre, therefore expanding trade activities.

What measures of tax reform are being proposed?

First, we want to improve the institutional structure so that the system works more efficiently and ensures there is compliance from taxpayers.

Second, there is a corporate tax law in front of the Supreme Economic Council. This envisages a reduction in corporate tax from 30% to 25%. Even more important, it will be a clear and transparent tax law. Third, we are studying the introduction of VAT and will submit ideas for excise taxes on luxuries.

What will be the impact of the new insurance law?

There will be reduced risk for the business community as well as individuals. The law will also introduce a new type of business to this country on a much wider basis than currently exists. It is also important in being another vehicle to attract savings and as mentioned before, a well-functioning and regulated insurance industry is a must in a complete financial system.

What are the main challenges now facing Saudi Arabia?
We are taking a number of important decisions. The capital market, the insurance and foreign investment laws and other policy measures prove to those who doubt our resolve that we are serious about reform of our economy. However, we realize that we need to do more to ensure that the environment we have created is conducive to investment and growth, and we are doing so.

The challenges lie in these areas: on the fiscal front, we need to continue working to have a more stable fiscal stance, particularly on the revenue side. We need to do this by widening the revenue base.

Secondly, we need to find jobs for our Saudi citizens. By creating the right environment for the private sector, we should see jobs growing at a healthy rate. In addition we are moving ahead on the Saudiization process.

Although we have already introduced a good number of measures, we will continue to reform and modernize the Saudi economy.