Business Environment in Saudi Arabia

An Expert's View about Banking and Finance in Saudi Arabia

Posted on: 8 Apr 2010

Saudi Arabia is politically and economically stable, yet lack of transparency is a problem. Openness to trade and investment is improving, and taxes are low.

Business Environment: Saudi Arabia Euromonitor International 09 March 2010 Saudi Arabia is politically and economically stable, yet lack of transparency is a problem. The Kingdom is the easiest place to do business in the Middle East and Africa. Openness to trade and investment is improving, and taxes are low. The labour market is flexible but suffers from skills shortages. Saudi consumer markets are among the most attractive in the region and have considerable growth potential. Chart 1 Ease of Doing Business 2010: Regional overview Source: Doing Business 2010, World Bank Note: Ranking covers the period from June 2008 through to May 2009. The ease of doing business index ranks economies from 1 to 183. For each economy the index is calculated as the ranking on the simple average of its percentile rankings on each of the 10 topics covered in Doing Business 2010, i.e. exclusive of the electricity pilot data. The ranking on each topic is the simple average of the percentile rankings on its component indicators. A high ranking on the ease of doing business index means the regulatory environment is conducive to the operation of business. Rankings from 1-61 refer to easy, from 62-122 refer to moderate and from 123-183 refer to difficult. (Click here to view map in detail.) 1. ECONOMIC STABILITY Stable yet opaque Saudi Arabia has maintained high level of stability in the face of economic and political challenges between 2004 and 2009. After growing at an annual average 4.4% between 2004 and 2008, the economy contracted by 0.9% in 2009 amid the global recession. The Saudi government responded with a stimulus budget of SR475 billion (US$127 billion) in 2009, with large investments in infrastructure, hospitals and education. Saudi Arabia's oil wealth and large foreign exchange reserves allow it to maintain economic stability even in the face of adverse conditions. Chart 2 Chart 1: FDI intensity and FDI flows 2003-2008 Source: Euromonitor International from International Monetary Fund (IMF), International Financial Statistics and World Economic Outlook/UN/UNCTAD/national statistics Investor confidence is also helped by the government's strong commitment to economic openness, liberalisation and privatisation. Saudi Arabia business competitiveness is high, ranking 28th out of 133 countries in the World Economic Forum's global competitive index 2009-2010, ahead not only of most economies in the region but also of the Czech Republic (31st) and Spain (33rd). On the other hand, the country suffers from an opaque governance and business culture. Saudi Arabia is ruled as an absolute monarchy, with a low level of accountability. Press freedom is severely limited. In 2009, Saudi Arabia ranked 63rd out of 180 countries in Transparency International's corruption perceptions index, higher than most other countries in the Middle East and North Africa, yet well below other Gulf states such as the United Arab Emirates (UAE) (30th) and Qatar (22nd). Financial institutions are under-developed, business data is limited and corporate governance is poor. These problems were manifested in the stock exchange crash of February 2006, which wiped out more than half the market's capitalisation. These problems did not stop the inflow of foreign direct investments (FDI), which rose from SR2.9 billion (US$0.8 billion) in 2003 to SR143 billion (US$38.2 billion) in 2008. Over the same period, Saudi investments abroad also increased, with FDI outflows peaking at SR49.2 billion (US$13.1 billion) in 2007, making the Kingdom one of the most important sources in the region for foreign investments. The government has been able to maintain political stability despite challenges from the Islamist opposition. After the last wave of militant attacks took place in the years 2003-2004, the authorities cracked down on Islamist groups and arrested thousands of activists. However, militant groups continue to enjoy support from a sizeable minority among the population. A 2007 public opinion survey found that more than a third of the population expressed sympathy with Islamist militant movements in the Arab world. Chart 3 Chart 2: Corruption perceptions index rank in selected countries 2009 Global rank out of 180 countries Source: Transparency International Note: Transparency International?s Corruption Perception Index ranks 180 countries by their perceived levels of corruption, as determined by expert assessments and opinion surveys annually. 2. EASE OF DOING BUSINESS Easiest place to do business in the Middle East and Africa Saudi Arabia ranks 13th out of 183 economies in the World Bank's Ease of Doing Business 2010 report, a slight improvement from its 15th rank in the 2009 report. Saudi Arabia is the Middle East and North Africa's easiest place to do business in, well ahead of Bahrain (20th), Israel (29th), and the UAE (33rd). Starting a business in Saudi Arabia has become significantly easier and quicker according to the Doing Business 2010 report, with the creation of a one-stop office at the Ministry of Commerce that merged registration procedures and simplified publication requirements. Setting up a local limited liability company requires 4 procedures, costs 7.7% of gross national income per capita, and takes merely 5 days, compared to an average of 20.7 days in the Middle East and North Africa. Saudi Arabia is the world's easiest place to register property, according to the World Bank. Only 2 procedures and 2 working days are required, with no costs involved. The credit industry is still in its infancy in Saudi Arabia. There are no public credit registries, and private information only covers 17.9% of adults. While credit from the financial private sector is difficult to obtain, companies have relied on subsidised government credit which is more easily accessible. When it comes to closing a business, the procedure is easier in Saudi Arabia than elsewhere in the region. An insolvency process in Saudi Arabia takes 1.5 years to complete, compared with 5.1 years in the UAE. The process costs 22.0% of the estate with a recovery rate of 37.5 cents on the US dollar - much less than 68.6 cents on the dollar in the in the OECD, but above the 29.9 cents in the region. The country's ICT sector is well developed, with 32.1 internet users for every 100 people in 2009, and 168.4 mobile phone subscriptions per 100 people. At the same time, Saudi conservative outlook has led to attempts to ban and limit technologies such as camera-phones. Table 1 Table 1: Ranking in Doing Business 2009 ? 2010 Indicator Doing business Doing business Change in rank 2009 2010 Ease of doing business 15 13 2 Starting a business 31 13 18 Dealing with Construction Permits 39 33 6 Registering Property 1 1 0 Getting Credit 59 61 -2 Protecting Investors 15 16 -1 Enforcing Contracts 138 140 -2 Closing a Business 60 60 0 Source: Doing Business 2010, World Bank Note: (1) Rankings are based on data sets across 183 countries. Doing Business presents quantitative indicators on business regulations and the protection of property rights that can be compared across 183 economies. (2) Ranking for each year covers the period June-May of previous year. 3. GOVERNMENT REGULATIONS AND TRADING ACROSS BORDERS Growing openness Saudi Arabia has embarked in the 1990s on an economic strategy of liberalisation and openness. Reforms have been gradual and slow, yet Saudi commitment to the policy is strong, as a vehicle for economic diversification away from the reliance on hydrocarbon exports. An important milestone was the Saudi accession to the World Trade Organisation (WTO) in 2005. As part of the accession, Saudi Arabia opened many sectors for competition, streamlined procedures and cut red-tape. At the same time the government signalled that it would not stop supporting uncompetitive sectors: generous agricultural subsidies were scrapped in 2008. Great efforts are made to attract foreign investors. A ten year US$800 billion privatisation plan of state-owned assets was announced in 2008, including power and water infrastructure, the national airline and other companies. However, the process is slow, especially when it comes to strategic sectors such as the ports. Six new "economic cities", launched in 2005, are designed to attract investors in industry, science and education, and real estate. Saudi Arabia is a member of the six-country customs union of the Gulf Cooperation Council (GCC), allowing tariff free trade with the UAE, Kuwait, Bahrain, Oman and Qatar. The country ranked 23rd out of 183 globally in terms of trading across borders, in the Doing Business 2010 report. It takes 17-18 days to export or import, and the costs involved are among the lowest in the world. Importing a container cost US$678 while exporting a container cost US$681, representing about half of the parallel costs in Jordan. Chart 4 Chart 3: Trading across borders global ranking 2010 Source: Doing Business 2010, World Bank Note: (1) Data covers period June 2008 ? May 2009. (2) Rankings are based on data sets across 183 countries. 4. TAXES Low taxes Saudi Arabia is one of the easiest places globally to pay taxes. According to the Doing Business 2010 report, it took 79 hours for an enterprise to prepare, file, pay or withhold its taxes and contributions, compared with 101 hours in Jordan and 480 hours in Egypt. Chart 5 Chart 4: Total tax rate and number of hours to prepare, file returns and pay taxes 2005-2009 Source: Doing Business, World Bank Note: (1) Total tax rate measures the amount of taxes payable by the business in the second year of operation, expressed as a share of commercial profits. The taxes included are profit or corporate income tax, social security contributions and other labour taxes paid by the employer, property taxes, turnover taxes and other small taxes (such as municipal fees and vehicle and fuel taxes). (2) Data for each year covers the period June-May of previous year. Tax levels are extremely low, as oil and gas revenues generate most of the governments' income. As of 2009, there was no personal income tax, and no value added tax (VAT). Corporate income tax stands at 20.0%, although gas and oil companies can be taxed by up to 85.0%; on the other hand, investors in special industrial zones receive tax breaks. The labour tax and contributions are at a statutory rate of 13.5% compared with 24.4% in the OECD. The low tax levels reduce the incentives for tax evasion and the informal sector appears smaller than in other Arab countries. Chart 6 Chart 5: Corporate income tax rate in selected countries 2009 % Source: Doing Business 2010, World Bank and national statistics Note: (1) Data covers period June 2008 ? May 2009. (2) Tax rate refers to mandatory contributions that a medium-size company must pay or withhold in a given year in Saudi Arabia, as well as measures of administrative burden in paying taxes. 5. LABOUR AND SKILLS Flexible labour laws but low participation A large share of the Saudi workforce is made up of expatriate workers. As of 2008, 50.6% of the workforce was made up of non-Saudis. At the same time, the Saudi nationals suffer from high unemployment (9.8% in 2008) and a lack of suitable skills. The government's "Saudisation" programme requires private sector companies to employ Saudi nationals, causing resentment and frustration among businesses, as Saudis are more costly to employ, and it is often difficult to find local workers with the required skills. In light of this situation, the Saudi government is investing heavily in education. SR122 billion (US$32.1 billion) were slated for education and training in 2009 up from SR105 billion (US$30.1 billion) in 2008. A new flagship university was inaugurated in 2009, and two more universities are under construction. Yet these efforts are undermined by the low participation of women in the labour force. Women made up 59.4% of higher education students in 2009, but they rarely work due to the conservative outlook of the country and restrictions on women's freedoms. Yet Saudi Arabia offers great advantages for employers. There is no official minimum wage, and labour is relatively cheap, partially because most workers (national and foreigners) are exempt from income tax. The country's rigidity of employment index ? an index which has value between 0 and 100, with higher value indicating higher level of regulation rigidity in employing worker ? stood at 13 in the Doing Business 2010 report, compared with a regional average of 24.5 and 26.4 in the OECD. This indicates the high level of flexibility enjoyed by employers in setting employment terms. Chart 7 Chart 6: Unemployment rate, economically active and employed population 2004-2009 Source: Euromonitor International from International Labour Organisation 6. CONSUMER MARKETS AND DEMOGRAPHICS Attractive, young consumer market Saudi Arabia's consumer market is among the most attractive in the Middle East and Africa. In total terms, Saudi consumer expenditure is the fourth largest in the region, after Iran, South Africa and Egypt. The per capita spending ($US5,131 annually in 2009) is fifth in the region, lagging behind UAE (US$23,813) but much higher than in Egypt (US$1,876). Consumer spending has room for considerable growth, as the savings ratio is very high at 52.0% in 2009. The high savings propensity is due to cultural reasons and because consumer credit is underdeveloped. Consumer loans stagnated and decreased between 2005 and 2008, and despite plans to introduce household mortgage services, these were still unavailable in 2010. The development of Saudi financial institutions, and greater availability of credit, could help to unlock Saudi spending potential. Saudi Arabia presents great business opportunities. As a highly urbanised society (90.1% urban population in 2009) with developed communication and transport infrastructure, consumers are easily accessible. Saudi society is overwhelmingly young, with 32.4% of Saudis under the age of 15 in 2009. This creates a large demand for products and services for infants, children, and young adults. Consumer expenditure has risen by a robust 46.2% (in real terms) between 2004 and 2009. The share of consumption in GDP grew from 29.2% to 34.8% over the same period. Expenditure on education grew by the fastest rate (61.3% in real terms), due to the emphasis on acquiring skills and to the young demographic profile of Saudi society. Expenditure on communications registered the second fastest growth (50.8%). Spending growth has slowed down in 2008 and 2009 as a result of the global economic crisis, but is expected to recover in 2010 with a 6.7% increase in total consumer expenditure (in real terms), and a 4.6% increase in per capita terms. Per capita annual disposable income stood at SR40,940 (US$10,917) in 2009, nearly nine times the regional average, yet remains far below income levels in the smaller and richer Gulf countries such as UAE (US$32,691). Chart 8 Chart 7: Consumer expenditure by sector 2009 % of total consumer expenditure Source: Euromonitor International from National statistical offices/OECD/Eurostat
Posted: 08 April 2010

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