Market of the Month: Saudi Arabia
Watch a U.S. Commercial Service Market Brief about Saudi Arabia
Introduction
The Saudi economy is growing rapidly. Since 2002, Saudi Arabia has enjoyed budget surplus every year and the country carries large cash reserves. Saudi Arabia is the largest free market economy in the region and is expected to produce more than two-fifths of the GCC (Gulf Cooperation Council) GDPs in 2006. Saudi Arabia nominal GDP was expected at $346.6 in 2006, 4.2 percent more than in 2005. Likewise, per capita GDP was expected at $15,000 in 2006, up 15 percent from 2005. The current population of Saudi Arabia is 23 million people.
The Saudi government has announced large infrastructure projects entailing total investments of $283 billion over the next three years. These projects will offer tremendous opportunities for U.S. companies to tap into this large market. Saudi Arabia remains the U.S. largest trading partner in the ANESA and the 16th largest worldwide, while the U.S. tops other country investors in Saudi Arabia. Total bilateral trade between the United States and Saudi Arabia in 2006 was estimated at $38.4 billion.
U.S.- Saudi Relationship
The foundation of the U.S.-Saudi Arabian commercial relationship remains sound. Close to twenty thousand Americans reside and work in Saudi Arabia, employed by hundreds of Saudi companies and joint venture companies. Thousands more derive their livelihood from making the U.S. goods exported to the Saudi market. The United States and Saudi Arabia share common concerns about regional security and stability, oil exports and imports, and sustainable development. Close consultations between the United States and Saudi Arabia routinely take place on international, economic, security and development issues. Both nations share important strategic interests in the Gulf.
The Political System
The central institution of the Saudi Arabian Government is the monarchy. The Basic Law adopted in 1992 declared that Saudi Arabia is a monarchy ruled by the sons and grandsons of King Abd Al-Aziz Al Saud, and that the Holy Qur'an is the constitution of the country, which is governed on the basis of Islamic law (Shari'a). There are no political parties or national elections. The King's powers are limited because he must observe the Shari'a and other Saudi traditions. He also must retain a consensus of the Saudi royal family, religious scholars (ulama), and other important elements in Saudi society. The Basic Law stipulates that the King alone chooses his successor, the Crown Prince. However, his choice must meet with the approval of a royal family council comprised of leading members of the royal family.
Saudi Arabia and Gulf Cooperation Council (GCC)
On January 1, 2003, the GCC formally instituted its Customs Union. A five percent common external tariff now applies to imported products while goods of local origin may freely move within the GCC. Some exceptions apply and the member states are still in the process of coordinating their Customs services, thus resulting in a few bumps in the implementation process. Nonetheless, the GCC is moving forward with its plan for greater economic integration and with ambitious plans to establish a monetary union, a common market, and a unified currency.
Saudi Arabia is also a member party in the following regional organizations and agreements: African Development Bank, Arab Bank for Economic Development in Africa, Arab Fund for Economic and Social Development, Arab Gulf Program for United Nations Development Organization, Arab Monetary Fund, Gulf Cooperation Council, League of Arab States, Organization of Arab Petroleum Exporting Countries, Economic and Social Commission for Western Asia, Islamic Development Bank.
Business Outlook
American firms are expected to make significant inroads into the areas of education and training and financial services, which have been opened up to foreign companies. Desalination plant construction, power generation, public transportation, and mining represent other major growth areas for U.S. companies.
The Saudi Government has initiated several new policies and laws that have enhanced the business climate for American companies in the Kingdom. Transparency in public procurement has improved as bids for contracts and contract awards are publicized. Saudi Arabia continues to make progress in integrating international standards. Strengthening standards in Saudi Arabia will positively affect American firms in many sectors including food, electrical goods, construction, chemicals, pharmaceuticals, and telecommunications.
The Saudi Government is pursuing individuals and companies that violate intellectual property rights. The Capital Market Law is expected to stimulate and expand Saudi Arabia’s nascent stock exchange. The law will provide a legal and regulatory framework for capital-related activity and increase transparency and accountability in the market.
Best Prospects 2007
 | Oil and Gas |
| Petrochemical |
| Power |
| Security |
| Telecom/Information Technology |
| Medical equipment |
| Architecture/Engineering |
| Railroad |
| Franchising |
| Automotive |
| Aviation |
| Pollution Control |
| Mining services |
| Financial Services |
| Water resources and equipment |
The Oil and Gas Sector
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 $18 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. Saudi Arabia is one of the top oil exporting countries, and Saudi oil export revenues were expected to reach $194 billion in 2006.
Petrochemicals
Industry sources believe that more than $70 billion in petrochemical projects are under development. The development of downstream, value added industry is a cornerstone of the government’s efforts to diversify the economy away from oil and gas. The Saudi Government aims at consolidating the country’s position as the leading bulk petrochemicals commodities producer of the 21st century; as such, a new wave of specialty petrochemical products is being developed, including polycarbonates, phenols, engineering plastics and thermoplastic olefins. Recent projects to produce specialty chemicals include the Saudi Kayan Petrochemical Company complex, which will produce the region’s first polycarbonates and phenols; the mega Ras Tanura refinery upgrade and integrated petrochemicals complex, which will produce more than 300 different products, and the third-phase Saudi International Petrochemical Company (Sipchem) complex, which will produce synthetic fibers. Saudi Arabian Basic Industries Corp. (SABIC) is planning to increase its annual production volume of petrochemicals and steel to 64 million metric tons by the year 2008. The planned expansion at Jubail Industrial City II with around 20 petrochemical and infrastructure projects worth more than $21.6 billion dollars will also bring various opportunities for U.S. petrochemical and engineering companies, as well as to American U.S. manufacturers/suppliers of equipment, parts, supplies, and services related to the petrochemical industry.
Construction
All trends point to massive investments in the construction sector, with billions of dollars of investment still to come in real estate, industry and the hydrocarbons sector. Oil revenue surpluses are boosting the government budget and overall spending. In 2007, the Saudi Government allocated more than $42 billion for various projects and programs in its 2007 budget. In the private sector, investments in the industrial sector, especially in petrochemicals, will require construction investments reaching more than $500 billion over the next 10 years depending on the project and construction time frame. Like the rest of the Gulf, the kingdom’s construction boom has reached unprecedented levels in 2006 and expected to gain more momentum in 2007 and beyond. Work is available for most companies, but many contractors are already fully booked. Contractors are unlikely to see the boom calm down any time soon, and international contractors are returning to the market. Total banks lending to the construction sector went up more than 36 percent during the third quarter of 2006, from $7.1 billion to $9.7 billion.
Financial Services
The Saudi banking system remains one of the strongest and most profitable in the region. By the end of the third quarter of 2006, total assets of the Saudi banking sector went up 13.5 percent, from $195.4 billion to $221.8 billion. Net income surged by more than 41 percent to $7.3 billion during the third quarter of 2006. Eleven majority Saudi-owned banks and five GCC banks are licensed to operate in Saudi Arabia. In addition, licenses were also granted to Deutsche Bank, BNP-Paribas, State Bank of India, National Bank of Pakistan, and J.P. Morgan Chase. So far, only Deutsche Bank and BNP-Paribas are operational. As of January 2007, the Capital Market Authority has licensed 45 foreign and local companies to provide financial services and brokerage services from dealing and managing portfolios to arranging and advisory services. The kingdom’s stock market continued its 2006 losing run into 2007. The Tadawul All-Share Index (TASI) ended 2006 at 7,933, down by more than half the 2005 record. Trading volumes continue to be extremely high in relation to the number of stocks. At the end of 2006, the total value of traded shares went up by more than 27 percent to $1,403 billion in 2006, while overall market capitalization dropped almost 50 percent in 2006, from $650 billion in 2005 to $327 billion in 2006.
Water & Power
Ample opportunities for Independent Water and Power Projects (IWPP). The first of four IWPP contracts was signed in 2005 for the Shuaiba-3 Desalination plant with a Saudi-Malaysian group of companies at a total cost of $2.43 billion. Saudi Arabia plans to launch ten independent water and power projects (IWPPs) by 2016 at a total investment of $16 billion. The first phase of this plan, to be completed by 2009 at an approximate cost of US$7.3 billion, will consist of three IWPPs:
| Shuqaiq, Phase II - $2.5 billion BOO project to produce 850 MW of electricity and 212 million cubic meters of desalinated water per day. Shuqaiq II will be modeled after the Shuaiba III IWPP project, with similar guarantees and a 20-year power and water purchase agreement (PWPA). |
| Ras Azzour - $2.4 billion project to produce 2,500 MW of power and 176 million gallons of desalinated water per day. |
| Jubail, Phase III – The project will produce 1,100 MW of electricity and 25,000 gallons of desalinated water per day. |
Private investment in this sector is also a key component of the development plan of the two major industrial cities of Jubail and Yanbu. In the summer of 1999, the Saudi government officially approved the creation of the join-stock Water & Electricity Utility Company named (MARAFEQ). On December 20, 2006, MARAFEQ signed a contact with Suez Energy International to develop a Combined cycle gas turbine plant on a BOOT (build, own, operate, transfer) basis in Jubail. MARAFIQ IWPP plant’s capacity is estimated at 2,750MW, and 800,000 cubic meters of water per day. The first phase of the project will deliver 660 MW and 300,000 cubic meters per day starting in summer 2009, with full capacity being achieved in March 2010.
Saudi Arabia will need close to $93 billion in investments in the water and sewage treatment sector and another $91 billion for power projects over the next 20 years.
Telecommunications
The telecommunications sector continues to be among the most active sectors in Saudi Arabia. Since its privatization in 1998, the Saudi Telecommunications Company (STC) has been carrying out major telecommunication projects kingdom-wide, gradually taking over this role from the Ministry of Post, Telephone and Telegraph (PTT).
In line with its liberalization process, the Saudi Government will be inviting more foreign companies to invest in the information and communications sector, especially in the field of fixed and mobile telecommunications services. Revenues from the kingdom’s GSM market will soar to $2.37 billion in 2007, due to the partial privatization of Saudi telecom and increased competition. A new study projected that the demand for landlines will drop an average of 7.6 percent annually over the next five years, largely due to the migration to mobile service.
ADSL and other broadband technologies will open the door to voice over broadband services in the country, and that will help mitigate the effects of the contracting circuit-switched telephony market. The Communications and Information Technology Commission is finalizing plans to issue a third GSM license and a 3G license, two additional licenses to qualified firms to provide data services, a license to provide bulk SMS services, a license for Global Mobile Personal Communications by Satellite, a license to provide automatic vehicle locator, and a license for a mobile broadband satellite service.
Railroad Equipment and Services
The Saudi Railway Organization is prepared for a radical change in its services after a 50- year absence of new railway construction in the country. The SRO has initiated a large expansion of the rail network all over the Kingdom of Saudi Arabia. It is planned to upgrade and significantly expand the existing railway network by implementing separate, but interconnected, new railway projects.
Saudi Arabia is bound for ambitious and mega plans for its railroad network:
The North-South Railway Project
This will link Riyadh-Buraydah-Hail-Qurayyat as well as the mines at Al Jalamid and Az Zabirah to Ras AzZawr on the Arabian Gulf for a total distance of 2,400 km. The estimated cost of the project is $ 3 to 4 billion, and the client is the Public Investment Fund (PIF). This line is primarily intended to transport bauxite and phosphate ores from the north and northeast of Saudi Arabia to processing facilities on the Arabian Gulf coast. The project will also provide passenger and general freight services to various towns and cities in the region.
Saudi Landbridge Project
This project includes the construction of an overland bridge linking Dammam and Jeddah through the industrial cities of Jubail and Riyadh. This line will link the Red Sea with the Arabian Gulf. The overland bridge is the cornerstone of the Railway Expansion Program, to be implemented on the basis of a Build Operate Transfer (BOT) concession. A consortium comprising UBS Investment Bank, The National Commercial Bank and SNCF International has been selected by Saudi Railways Organization ("SRO") to provide Financial and Technical Advisory Services for the project.
Makkah-Madinah Rail Link Project (MMRL)
The purpose of the MMRL project is to cater to the requirements of passengers, predominantly religious pilgrims and commuters wishing to travel between Makkah, Jeddah and Madinah. The project will consist of a high-speed line linking the three cities with six new stations. The Saudi Government will grant concessions to the private sector for the construction and operation of the MMRL via a Design, Build, Operate and Transfer ("DBOT") contract. The estimated cost of the project is $4 billion.
Riyadh Metro
The project is still in the planning phase and will entail investments of up to $2 billion. The Supreme Commission for the Development of Riyadh City (ARD) proposed this project to reduce traffic congestion in the capital and handles the future public transportation needs of the city. The proposed metro system will include two primary routes: the first route will link Northern and the Southern parts of the city, while the second route will link the East of the capital with the West.
Madinah Monorail Project
Plans have been set to establish an elevated electric train project in Medina to facilitate mass transit of pilgrims and visitors between the Prophet’s Mosque, the Quba Mosque and the Shuhada area. The project is designed to transport 20,000 passengers an hour.
Marketing U.S. Products and Services
There are three major marketing regions in Saudi Arabia: The Western Region, with the commercial center of Jeddah; the Central Region, where the capital city Riyadh is located; and the Eastern Province, where the oil and gas industry is most heavily concentrated. Each has a distinct business community and cultural flavor, and there are only a few truly "national" companies dominant in more than one region.
U.S. exporters may find it advantageous to appoint different agents or distributors for each region having significant market potential. Multiple agencies and distributorships may also be appointed to handle diverse product lines or services. Multiple agencies and distributors can present logistical and management difficulties, so often U.S. firms, particularly in the franchise sector, choose to appoint a master franchiser or distributor for the Gulf region. However, finding a master regional distributor can be just as problematic as dealing with half a dozen or more for some very small countries and markets as the Gulf States often compete in commercial sectors.
Many Saudi companies handle numerous product lines (sometimes even competing product lines), making it difficult to promote all products effectively. Saudi agents typically expect the foreign supplier to assume some of the market development costs, such as hiring of dedicated sales staff (especially for high-tech or engineered products), setting up workshops and repair facilities, and funding local advertising. Foreign suppliers often detail a sales person to the Saudi distributor to provide marketing, training, and technical support. Absent such an arrangement, U.S. firms should expect to make frequent, periodic visits.
Contacts
For additional information please e-mail us at any of the three U.S. Commercial Service offices in Riyadh, Jeddah, or Dharan or visit our CS Saudi Arabia site.
Our staff will be happy to respond to any inquiry, provide you with information and direct you to opportunities in the Saudi market.