Overseas Market Profiles - Saudi Arabia

An Expert's View about Business Environment in Saudi Arabia

Posted on: 30 Jun 2012

Recent Developments
•With oil prices staying firm, along with rising government capital expenditure and new investment in infrastructure, the Saudi economy is expected to maintain an annual average growth rate of around 5% in 2012-2016.
•In response to the supply interruptions resulting from the decline in Libyan oil exports due to the Arab Spring, Saudi Arabia has raised oil production to partially compensate the export loss, with Saudi production expected to remain at high levels, particularly in light of the US-led import boycotts on Iranian oil.
•Saudi Arabia is Hong Kong's third largest export market in the Middle East (after the UAE and Israel). In the first four months of 2012, Hong Kong's total exports to Saudi Arabia grew 33.9% year-on-year (YoY) to US$229 million and its imports from the country fell 20.3% YoY to US$226 million.

Current Economic Situation

Oil plays an important role in Saudi Arabia’s economy, accounting for about 90% of exports and 80% of government revenue. Production and refinery of oil are the pillars of the Saudi economy, which account for about 45% of the country’s GDP. While Saudi Arabia continues to be a leader in crude oil exports, it is also stepping up natural gas production. It is expected that gas output of the country will rise by 40% by 2014. The Saudi government is keen to develop alternative energy sources such as nuclear energy and solar energy to reduce its oil use in future. 16 nuclear reactors are planned to be built over the next 20 years. Apart from that, the Kingdom aims to generate one-third of its electricity with solar energy by 2032.

In the beginning of 2011, the Jasmine Revolt originated in Tunisia swept through the Middle East and North Africa (MENA) region in what is known as the Arab Spring, leading to changes of government in Tunisia and Egypt. This was followed by a Libyan civil war which badly affected its oil production and exports (pushing it down from the pre-war level of around 1.6 million barrels per day (bpd) to almost a halt at certain points). With the Gaddafi regime removed, Libyan oil production has resumed, yet slowly. To compensate for the supply interruptions in Africa, and to an extent, the import boycott on Iranian crudes led by the US, Saudi Arabia has increased its oil production rapidly. The increase in Saudi oil export and firm international oil prices are expected to help the Kingdom retain a trade surplus.

With oil prices staying firm, along with rising government capital expenditure and new investment in infrastructure, the Saudi economy is expected to maintain an annual average growth rate of around 5% in 2012-2016. However, Saudi Arabia's medium-to-long-term prospects will hinge on the government's success in economic reforms. Economic reforms stress the need for promoting economic diversification and an active role of the private sector in the Saudi economy. To this end, the Saudi government encourages the development of industrial sectors such as production of chemicals, petrochemicals, aluminium and plastics. Prince Sultan bin Salman also underscores the role of tourism in economic reforms for job creation, with 670,000 people hired in the sector in 2011. In order to gain easier access to the Saudi market, foreign investors invariably partner with Saudi companies. According to the World Bank’s Doing Business 2012 Survey, Saudi Arabia ranked 10th out of 183 countries, the best performer in MENA.

Saudi economic growth received a substantial boost in the wake of the two massive fiscal spending packages announced by King Abdullah in 2011 amid the MENA unrest. Amounting to US$130 billion, the fiscal packages account for about 30% of the 2010 GDP of the country and are aimed at raising social spending, including salary rises and unemployment benefits, which should help stimulate private consumption. Furthermore, King Abdullah decreed in September 2011 to allow women vote and run in local elections in 2015. Since May 2012, Saudi women no longer require male consent to work, marking a big leap forward for the country.

The consumer price rose 5% in 2011, down slightly from 5.4% in 2010. The surge in international food prices had a relatively small impact on Saudi Arabia, partly due to the government’s food subsidy. On the other hand, rents are expected to ease after more new housings come on stream in coming years.

Attracting foreign investment forms a vital part of Saudi Arabia's economic policy. With effect from June 2000, Saudi investment law allows 100% ownership of projects by foreigners, and relaxes rules for sponsoring foreign employees. The law also permits foreign ownership of property, and lowers corporate taxes.

Similar to the UAE, Saudi Arabia has ambitious plans of infrastructure expansion. The main difference between the two countries of the six-member GCC (consisting of the UAE, Saudi Arabia, Kuwait, Qatar, Bahrain and Oman) is that the UAE puts more emphasis on commercial development, while Saudi Arabia focuses on a wider range of infrastructure and building projects: oil and gas facilities, water and electricity plants, residential and commercial buildings, and roads and railways. The country’s mega projects include the construction of six economic cities in Medine, Hail, Tabuk, Jizan, Ras Al-Khair and Rabigh.

Trade Policy

In December 2005, Saudi Arabia became the 149th member of the WTO after over 12 years of negotiations. Saudi Arabia’s tariff commitments will be introduced in six phases until 2015. In 1993, when Saudi Arabia first applied for membership of the General Agreement on Tariff and Trade (GATT), the predecessor of the WTO, 75% of Saudi's tariffs on imports were at 12%.

In April 2008, Saudi Arabia started to decrease or exempt voluntarily import duties over six years on 180 goods, which had attracted import duties ranging from 12% to 25%. In 2009, Saudi Arabia's average MFN applied import tariff rate was 4.8%, with average rates of 5.6% for agricultural products and 4.7% for non-agricultural products respectively. In 2010, the number of tariff-free goods reached 763 and constituted 23% of import value in 2010.

Saudi Arabia has not imposed tariff quotas, applied seasonal tariffs, and other duties and charges on imports. There are no VAT, excise duties or any other internal tax or charges on domestically produced or imported products as well.

Saudi Arabia's WTO commitments provide for foreign participation in its wholesale and retail trade. Upon accession, Saudi Arabia allowed foreign companies to hold up to 51% of the equity in a wholesale or retail business. The limit has been increased to 75% since January 2009.

However, some products remain restricted from entering Saudi Arabia for religious, health or security reasons. Prohibited items include alcoholic beverages, pork, non-medical drugs, non-Islamic religious materials, weapons and weapon-related electronic equipment. In addition, foreign companies that are deemed to support Israel in one way or another are blacklisted because of the Arab League boycott of Israel, to which Saudi Arabia is a participant. 98.6% of Saudi tariff lines are applied on an ad valorem basis.

The tie between Saudi Arabia and its fellow members of the GCC is strong. In November 1999, the GCC agreed to form a customs union. The customs union took effect from 1 January 2003. The accord establishes a single tariff of 5% on 1,500 imported items from non-member countries. It also provides a list of other essential items that can be imported duty-free. Under the accord, goods imported into the GCC area can be freely transported subsequently throughout the region without paying additional tariffs. Saudi Arabia is a member of the Pan-Arab Free Trade Area too, with almost all trade barriers among its members eliminated from January 2005.

There are health and sanitation regulations for all imported foods. Saudi Arabia has however agreed to take on the obligations of the WTO Agreement on Sanitary and Phytosanitory Measures. Under the agreement, Saudi Arabia has to apply science-based safety standards to all agricultural goods.

Saudi Arabia maintains regulations on product labelling and country of origin marking. In addition, there are safety regulations on toys, and product standards regulations for electrical and electronic goods.

Imports for exhibition purposes have to be accompanied by an invoice with the value of the goods endorsed by the local chamber of commerce, and a certificate of origin. The invoice should show clearly that the goods are imported for exhibition purposes, and will be re-exported. Saudi Customs requires a deposit, which is refundable, for these goods.

While the Saudi Riyal is pegged to the US dollar, Saudi Arabia is committed to the planned Gulf Monetary Union, along with three other members of the GCC, to work towards a single currency. Nonetheless, Oman withdrew from the monetary union in 2006, followed by the UAE in May 2009. Although a joint monetary council has been set up since December 2009 with a view to setting up a single GCC currency in the future, the Eurozone sovereign debt problem is seen as deterring GCC members from proceeding.

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Posted: 30 June 2012

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