Saudi Arabia will be the critical growth driver for foreign companies operating in the Middle East and North Africa (MENA) in 2013. However, economic and political uncertainty in the region has led many companies to form an overreliance on the Saudi market. As a result, senior executives must ensure they are prepared to tackle major developments that could alter Saudi Arabia’s investment climate next year. FSG has identified 7 major developments across the political, economic, and business landscapes that could impact the investment climate significantly.
1) Regional stability
Saudi Arabia could become increasingly involved in neighboring conflicts in Bahrain and Yemen to prevent spill over. In addition, a longstanding rivalry with Iran could escalate in Iraq, Lebanon, and Syria. While it is unclear whether or not Iran perpetrated this year’s cyber-attack that rendered useless 30,000 computers for Saudi oil giant ARAMCO, the Shamoon virus illustrated a potent, 21st century weapon that can be used against the sensitive oil infrastructure in the kingdom.
2) Domestic stability
Underreported unrest in Saudi Arabia’s oil-rich Eastern Province could escalate as a result of increasingly harsh crackdowns in 2013. Prince Mohammad, who is credited with pushing al Qaeda out of the country during the past 10 years, has been promoted to Interior Minister in part to maintain stability in the Eastern Province. Saudi Arabia has dedicated a chunk of its social sector spending program on the underserved province, which means plenty of investment opportunities in 2013 and beyond. However, more than a dozen Saudis were killed in Eastern Province protests in 2012. High unemployment and heavy-handed responses by the police remain catalysts for unrest.
3) Leadership succession
It is unlikely that the next leader of Saudi Arabia will change King Abdullah’s path drastically. Saudi Arabia needs to maintain close trade ties with Europe, Asia, and the US, given the country’s dependence on oil resources for export revenue and longstanding foreign investment plans to diversify the economy. If Crown Prince Salman were to become the next ruler of Saudi Arabia, it would represent continuity from King Abdullah’s reign.
The major concerns lie in the process of succession, particularly due to the opaque and untested Allegiance Council that is charged with selecting new leadership. King Abdullah has already set the precedent of bypassing the Council by twice selecting a new Crown Prince without utilizing the official mechanism. Assuming the Allegiance Council is activated, the process could still accentuate rifts between rival factions within the royal family. Behind-the-scenes infighting could spill out into the public eye, which would be a destabilizing factor in the kingdom. If the leadership role is passed to the third generation, it may ruffle the feathers of remaining princes in the second generation. Yet a dearth of qualified second generation princes means this generational leap is imminent.
4) Global economic volatility
Saudi Arabia is uniquely positioned to withstand global economic instability in the medium term due to currency reserves that surpass US$600 billion. Higher-than-expected oil prices this year will lead to a budget surplus for another year in a row. As a result, government spending priorities are unlikely to be altered by economic stagnation in Asia, Europe, and the US. Those spending priorities include: education, healthcare, housing, and transportation infrastructure.
On the other hand, a weaker global environment would dampen FDI flows into Saudi Arabia, particularly if the eurozone and US economies contribute to a slowdown in Asia. Economies in Asia are also important customers for Saudi exports such as oil, petrochemicals, and plastics. If global economic stagnation undermines oil prices, companies should expect more pressure on contractors to keep costs down to maintain their own profitability and keep government clients happy.
5) Consumer prices
Many Saudi consumers are insulated from the most severe swings in global commodity prices due to generous government subsidies. While Saudi Arabia was able to insulate its citizens from price spikes following international droughts in 2012, climate change will likely make food shortages a more common occurrence globally. Regional instability has the potential to disrupt transportation of goods across borders, which places upward pressure on food prices as well. Food costs account for 25% of Saudi household expenses so it will be difficult for the country to remain insulated to sustained global price swings.
It is unclear when Saudi Arabia will start to implement its new mortgage law, which should lead to an explosion in housing demand across the country. The current housing shortage places upward pressure on housing costs, but a significant increase in housing demand will be another factor to push up prices in the short term.
6) Labor regulations
Private sector firms are being fined if the majority of their workforce is non-Saudi with a penalty of US$640 for each excess foreign worker. While this is a negligible cost for foreign companies without a significant presence in the country, the fine could hit harder for local Saudi companies, many of which are foreign company partners and customers. The construction industry’s reliance on foreign labor, which comprises up to 95% of the workforce, could lead to project delays. All companies should diversify their workforce to include more GCC nationals, who are not counted as foreigners under the new labor regulations.
Saudi Arabia is committed to rebalancing the local labor market due to demographic trends that cannot be ignored. More than 60% of Saudi Arabia’s population is under the age of 24, and youth unemployment rates are up to 25% or higher. The economy must create an estimated 400,000 new jobs every year to bring down the unemployment rate. Currently, 90% of the private sector’s workforce is comprised of expatriates. This must change for the long-term viability of Saudi Arabia’s economy.
7) Rising competition
Volatility in the rest of MENA is leading to rising competition in Saudi Arabia where companies are focusing on market opportunities. Next year’s FDI inflows are expected to reach US$20 billion in Saudi Arabia, which significantly outpaces other regional investment destinations. Even among relatively stable and well-capitalized Gulf Cooperation Council countries, Saudi Arabia is rapidly growing its share of foreign investment from 54% in 2011 to a forecast of 60% by 2014.
Competition from GCC neighbors, especially Qatar, will push Saudi Arabia to increase its attractiveness for foreign businesses. For example, Saudi Arabia plans to invest more than US$200 billion in port infrastructure amid upgrades in Qatar as it prepares for the 2022 FIFA World Cup and in the UAE, which is upgrading Jebel Ali in Dubai and continuing to build out Khalifa Port in Abu Dhabi.
