Saudi Arabia - Economic Outlook

An Expert's View about Business Environment in Saudi Arabia

Posted on: 31 Oct 2011

Recent Developments
•With the surge in oil exports, the Saudi economy is expected to show a strong overall growth at 6.7% in 2011, up significantly from 4.1% in 2010.
•Saudi economic growth is expected to receive a substantial boost in the wake of the two massive fiscal spending packages announced by King Abdullah in early 2011.
•Saudi Arabia is Hong Kong's third largest export market in the Middle East (after the UAE and Israel). During the first eight months of 2011, Hong Kong's total exports to Saudi Arabia fell 1% year-on-year (YoY) to US$418 million and its imports from the country rose 37% YoY to US$510 million.

Current Economic Situation

Oil plays an important role in Saudi Arabia’s economy, accounting for over 70% of exports and 85% of government revenue. Production and refinery of oil are the pillars of the Saudi economy, which account for more than 50% of the country’s GDP. While Saudi Arabia continues to be a leader in crude oil exports, it is stepping up natural gas production. It is expected that gas output of the country will rise by 40% by 2014.

In the beginning of 2011, Jasmine Revolt originated in Tunisia swept through the Middle East and North Africa (MENA) region. After the changes of government in Tunisia and Egypt, Libya was dragged into a civil war, affecting the Libyan oil production and exports (before the civil war, Libyan production was around 1.6 million barrels per day (bpd), but it has since fallen to less than 50,000 bpd). International oil prices surged rapidly in the first quarter of 2011, with Brent crude futures surpassing US$120. To compensate for the supply interruptions in Libya, Saudi Arabia increased its oil production rapidly, leading to a surge in oil export. It is expected that the increase in oil export volume and international oil prices would help boost the country’s economic growth to over 6% in 2011.

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 these ends, the Saudi government encourages the development of industrial sectors such as production of chemicals, petrochemicals and plastics. To gain easier access to the Saudi market, foreign investors have partnered with Saudi companies.

Saudi economic growth is expected to receive a substantial boost in the wake of the two massive fiscal spending packages announced by King Abdullah in early 2011, introduced in the midst of the MENA unrest. Amounting to US$130 billion, the fiscal packages account for about 30% of the country’s GDP in 2010 and will be targeted at raising social spending, including salary rises and unemployment benefits, which should help stimulate private consumption. In September 2011, King Abdullah decreed that women will for the first time have the right to vote and run in local elections due in 2015, which marked a big leap forward for the country.

The consumer price posted an average YoY growth of 4.8% in the first six months of 2011. The surge in international food prices had relatively small impact in Saudi Arabia, partly due to the government subsidies on foodstuffs.

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 and tourism 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 five economic cities: the Economic Cities of King Abdullah, Rabigh, Medine, Hail and Jizan.

Trade Policy

In December 2005, Saudi Arabia became the 149th member of the WTO after over 12 years of negotiations. 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%. Since 2003, 85% of tariffs have been lowered to 5% or less. In December 2009, Saudi Arabia announced the reduction and exemption of customs tariffs on 692 commodities, including perfumes, pesticides and plastic products, to comply with its WTO commitments.

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.

Tariffs are mostly ad valorem. 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.

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.

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Posted: 31 October 2011

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