saudi arabia - The Worldfolio

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SAUDI
ARABIA
$600bn bourse opens to foreign investors
#SaudiArabiaTheWorldfolio
#TheWorldfolio
MONDAy, june 15, 2015
Opening the stock market to foreign
investment forms part of a broader,
long-term evolution focused on
modernising and diversifying the
economy away from hydrocarbons
L
ong anticipated since it was established in 1994,
the Saudi Stock Exchange has finally opened its
doors to international investors. Valued at some
$600 billion (£394 billion), the Saudi bourse dominates
the region; its value exceeding the exchanges of Qatar,
UAE, Jordan and Egypt combined. The Saudi Stock
Exchange had remained one of the world’s largest to
prevent foreign direct investment (FDI) before now.
On top of headline value, the Saudi market also
offers great opportunities in diversity. Whilst regional
markets tend to be dominated by a handful of sectors
such as finance or real estate, the Saudi Stock Exchange
– known as the Tadawul – is home to more than 165
companies across 15 economic sectors ranging from
retail and telecommunications through to petrochemicals and cement.
Since 2011, the market has grown by some 50 per
cent, outstripping most stock exchanges worldwide
and well outperforming the region. Last year the index
peaked at over 11,000 points, however it subsequently
dropped sharply in line with oil prices and uncertainty
surrounding the passing of the kingdom’s previous
leader, King Abdullah bin Abdulaziz. Since oil price
stabilisation and widespread confidence in King Salman
bin Abdulaziz’s leadership as monarch, the Tadawul All
Share Index’s (TASI) upward trajectory has resumed.
Whilst some investors associate Saudi Arabia solely
with oil, energy firms are conspicuous by their absence
on the Saudi Stock Exchange – there are no oil companies listed. Despite the oil price having a significant
influence on the market’s performance, the top five
companies come from banking, petrochemicals, telecommunications and power.
Exceptional fundamentals
Traditionally Saudi Arabia’s companies have been
in the hands of wealthy, entrepreneurial families or
sole ownership of the Saudi government. Increasingly
however, the trend is for such organisations to go public
and open their companies up for outside investment.
As well as boasting record-breaking initial public offerings (IPOs) such as the $6 billion listing of National
Commercial Bank last year, the kingdom also has the
most active IPO market in the Middle East.
Whilst the opportunity for international investors to
participate in Saudi IPOs remains distant, the prospect
of an increasing number of firms listing provides an
exciting chance to gain further exposure to the extraordinary fundamentals found within the Saudi economy.
Well known for its enormous hydrocarbon reserves,
Saudi Arabia’s macro-economic position is enviable.
Emboldened by reserves in excess of $700 billion, the
Saudi government has embarked upon a hugely ambitious program of infrastructure development – the multiplier effects of which have reverberated throughout
much of the economy. Government spending combined
with hydrocarbons exports delivered gross domestic
product (GDP) growth of 4.6 per cent for 2014 – impressive given Saudi’s starting base of $752 billion.
With GDP per capita at $25,400 and a youthful population – some 50 per cent of which are under the age
The Saudi Stock Exchange is the largest in the region
of 25 – the kingdom benefits from a strong consumer
culture. Demand for services often outstrips supply
in sectors such as retail, transportation and tourism.
Demand for investment, as well as strategic, logistic
and operational expertise is often palpable.
Synonymous with oil and gas, few are familiar
with Saudi Arabia’s wealth of other mineral resources
such as potash, gold, iron ore, copper and bauxite. The
kingdom is actively engaged in further expanding its
portfolio of resources in operation, with numerous tier
one assets being developed by the state-owned mining
giant – Ma’aden.
On top of this, the country’s transport infrastructure
and service economy are all benefiting from billions
of dollars worth of investment, contributing to the
development of robust sectors in themselves, as well
as facilitating further growth in a relatively untouched,
but high potential international tourism sector. Social
media penetration in the kingdom is the highest in
the world, yet software developers and international
marketers have yet to take a serious look at this highly
prospective sub-sector.
Whilst Saudi Arabia’s economy stands impressively
amongst regional and international counterparts, the
key message is that huge potential remains for further
investment and growth across a vast range of sectors.
It is hoped that opening up the Saudi Stock Exchange
will help marry imaginative new ideas and established
expertise with the kingdom’s strong economic base, thus
sustaining long-term growth for the non-oil economy.
At the same time, further integrating the Middle East’s
star economy with the global investment community.
Why now?
The issue of when and why this change would happen
has long rattled throughout the international investment
community. CEO of the Saudi Stock Exchange Adel
Al Ghamdi offers some context on the matter: “Our
market has been open to [indirect] foreign investors for
a long time,” he says. “Non-Saudi’s currently own 7.74
per cent of stock market capitalisation, as at the end of
the first quarter of 2015. Our mutual funds market has
been open to non-resident foreign investors since 2007,
and the exchange traded funds (ETF) market since its
inception in 2010.”
Opening up the stock exchange to FDI on June 15 is
part of a broader, long-term evolution in Saudi Arabia
focused on modernising and diversifying the economy
away from hydrocarbons.
Qualified Foreign Investors (QFI)
Given the legacy of indirect foreign investment in the
Saudi Stock Exchange for several years, it is important
to offer some insight on exactly what this change entails. The initial approach is one of caution, with access
to the market limited to “Qualified Foreign Investors
(QFIs)”. As defined by the Capital Markets Authority
(CMA) – the lead regulator in this change – QFIs are
particular institutions that meet specific criteria in terms
of investment experience, capacity and skill who need
to convince the Saudi authorities that they will be beneficial for the market.
Much speculation surrounded exactly what criteria
QFIs would have to meet before the CMA clarified the
situation on May 4 when it released its final regulatory
framework.
Continues on page 2
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and Leandro Cabanillas,
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02
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Continued from page 1
QFIs by definition can only come from a select group
of financial organisations such as banks, insurance
companies, brokerages and pension funds and must
have a minimum of $5 billion under management, but
this can be reduced to $3 billion with the permission
of the CMA.
QFIs must have a demonstrated track record as
investors, with a minimum of five years experience
being the defined marker for new entrants to the Saudi
market, while an overall limit has also been set for each
individual QFI in terms of ownership of the market (a
maximum of 10 per cent).
At the same time, there are clear limits placed
upon the levels of ownership permitted for QFIs in
each company they invest with. As per the CMA
regulatory framework, QFIs are permitted to own no
more than 5 per cent of each company they invest in.
Equally, a QFI and their clients/affiliates combined
are restricted from owning no more than 20 per cent
of a single listed company. Foreign ownership of any
single listed company, including ETFs and swaps is
restricted to 49 per cent.
A series of steps have been taken by both the Saudi
Stock Exchange and the CMA to ensure that investors
are kept informed about their relative holdings. According to Mr Al Ghamdi, “We have taken several steps to
ensure that we can provide our foreign stakeholders
with the tools they need to safely invest in our stock
market. Indeed, our platform has been programmed to
systematically enforce several of the relevant foreign
ownership limits to help our stakeholders comply with
the applicable rules. We will also be bolstering the
awareness of our new stakeholders, and the capital
market at large, by reporting foreign ownership headroom on our website on a daily basis.”
The key evolutionary step forward for the Saudi
market that comes with this change is that investors
will now be permitted to invest directly in listed Saudi
firms. Although this comes with restrictions, international investors will have the opportunity to influence
the way in which listed companies operate. In turn, it
is hoped that this will have a marked change on how
Saudi firms do business – particularly from a governance, compliance and disclosure perspective.
Chairman of the CMA Mohammed Al Jadaan summarises this package of tacit profits, saying: “There are
“We have taken several
steps to ensure that we
can provide our foreign
stakeholders with the tools
they need to safely invest in
our stock market”
Adel Al Ghamdi,
CEO of Tadawul
“Saudi Arabia’s investment
environment is well
regulated and aims to
apply international best
practices to maintain
fairness, efficiency and
transparency so as to
protect investors”
Mohammed Al Jadaan,
Chairman of the CMA
various benefits that listed companies are likely to gain
from the opening of the market. Foreign institutional
investors will demand an improved level of transparency, financial information disclosure and governance
practices that will positively reflect on listed companies’
practices and on the efficiency of the market in general.”
Mr Al Jadaan’s thoughts are echoed by Mr Al Ghamdi: “Further foreign fund inflows are needed, not for
the purposes of liquidity, we have plenty of that, but
rather for the positive behavioural influences we believe
foreign investors will bring to our market in terms of
shareholder activism. This helps to promote enhanced
reporting, investor relations and corporate governance
practices amongst our issuers.”
Moving beyond the improvements for Saudi-listed
companies, it is widely acknowledged that the stock
exchange’s opening will pave the way for broader
benefits to the Saudi economy as a whole – in particular
the country’s dream of moving away from its reliance
on hydrocarbons.
Saudi Arabia has long worked hard to diversify the
economy away from the petroleum sector with limited
success; oil still accounts for 45 per cent of GDP, 90 per
cent of export earnings and 80 per cent of budget revenues.
The kingdom’s core diversification strategy resides
in growth of the private sector, with a particular focus
on industries such as retail, telecommunications and
petrochemicals. Opening the stock market internationally will reduce market volatility, enhance long-term
strategy and planning, raise the level and quality of
market research, transfer knowledge between local and
international firms and enable local firms to tap into
specific skills and technical know-how so as to better
equip them to succeed within the overall Saudi paradigm of economic diversification and modernisation.
Mr Al Jadaan goes on to explain how the CMA
is ensuring the highest standards for the kingdom’s
business environment. “Saudi Arabia’s investment
environment is well regulated and aims to apply international best practices to maintain fairness, efficiency
and transparency so as to protect investors, boost confidence, reinforce transparency and protect the capital
market at large.”
Although Mr Al Ghamdi shares this perspective,
the stock exchange is also keen to use the opening as
a means to reduce volatility in trading. “Individual investors make up around 90 per cent of monthly trading
activity and 34 per cent of stock market ownership,”
he says. “Whilst this dynamic has brought significant
benefits to the exchange in terms of liquidity, it has
also served to produce moments of perverse market
volatility. Ultimately this is at the heart of why the
QFI framework was specifically customised to attract
sophisticated longer-term value investors, who are more
inclined to see through the fog of short-term volatility
and react to opportunities as they arise.”
A logical progression
While some would loosely connect the recent decline in
oil prices with a sudden demand for external liquidity
from the Saudi market, this story goes back way further
than that. The 2005 World Trade Organisation accession
is just one of many indicators to the country’s form
vis-a-vis international financial integration.
Nevertheless, the kingdom remains an enigma for
most, and with that always comes uncertainty. As
the Saudi market opens up, it appears that a sleeping
giant is finally awakening. Saudi Arabia dominates
regionally and is one of the world’s most exciting
emerging markets. The fundamentals are clear;
the world is again being welcomed to join in the
kingdom’s success.
03
This is an independent publication by Upper Reach
Saudi market opening offers
attractive opportunities
Following on from last year’s declaration of intent, the Saudi Capital Market Authority (CMA) has now formally announced that the
$560 billion Saudi Arabian stock market will open its doors to qualified foreign institutions in June. The stock market (Tadawul) is one of
the largest Emerging Markets with strong technicals and valuations that are likely to re-rate higher over several stages, particularly when
the market is included in the main benchmark indices, writes John Sfakianakis, Managing Director of Ashmore Group, Saudi Arabia
S
audi Arabia is a very large, liquid market. It will
potentially be the seventh largest Emerging Markets (EM) equity market by market capitalisation,
just behind South Africa ($543 billion), and ahead of
Russia, Malaysia, Mexico and Indonesia. The Saudi
Tadawul Exchange trades on average $2.4 billion per
day across more than 165 listed companies and offers
a rich selection of opportunities ranging from banks to
consumer-driven businesses.
The opening of the Saudi market will widen the foreign
investor base, which is currently around 1.6 per cent of
total holdings. Given the size and depth of the market,
we expect Saudi Arabia to be included in the main EM
equity benchmark indices by 2017, though this requires
the authorities to further lift restrictions on access to the
market. Should this happen, more than $20 billion could
flow into Saudi Arabia over the next few years.
Judging by other precedents in the region, such as
Morocco, Egypt, UAE and Qatar, Saudi Arabia’s market is likely to re-rate when it becomes included in EM
indices. Indeed, we see analogies to the opening of the
Indian market for foreign equity investors and the ongoing opening of the onshore Chinese stock markets. Saudi
Arabia’s decision to open its markets now is highly intelligent – global financial conditions are bound to become
tighter in the coming years and the winners among EM
countries will be those that are able to maintain or increase
their share of a shrinking global ‘financial pie’.
From a fundamental perspective, the opportunity in
Saudi Arabia is exciting. Contrary to popular perceptions, Saudi Arabia’s stock market is not just about oil.
In fact, not a single oil company is listed on the Tadawul
Exchange. Petrochemical businesses have some correlation with oil, but they are exceptionally profitable given
their access to low feedstock costs and offer less volatile
earnings streams than other chemical businesses in other
markets. Banks are also attractive with the country’s peg
to the US dollar making them beneficiaries of rising rates.
Large parts of the stock market consist of consumer
businesses, whose earnings are determined by domestic
conditions.
King Salman’s affirmation of the country’s commitment to domestic spending, development and job creation creates favourable tailwinds for consumer-focused
sectors, aided by the announcement recently of two extra
months of salaries and bonuses. We see opportunities for
consumer stocks similar to those found in some African
or Asian markets, but at much more attractive multiples,
because of Saudi Arabia’s very favourable demographics.
Another attractive feature of Saudi Arabia that stands to
support consumption in the medium to long term is its
population demographic. According to UN data, nearly
50 per cent of Saudis are less than 30 years old, with just
over 3 per cent above the age of 65. While Saudi Arabia’s
population is ageing, the repercussions will not be felt for
several decades. The OECD projects the size of a ‘middle
Tadawul All Share Index (TASI) since 2000
16,712.64
9,688.69
(May 31)
11,175.96
8,206.23
8,535.60
7,933.29
6,417.73
6,121.76
4,802.99
4,437.58
8,333.30
6,801.22
6,620.75
2,518.08
2,258.29
2,430.11
*End of Year Values
2000
2001
2002
2003
2004
class’ segment to rise from 20 million today to 40 million by 2020. This should provide strong tailwinds for
most forms of consumer spending, as well as justifying
the enormous infrastructure roll-out that is under way.
One of the key policies announced in Saudi Arabia
is the labour reform introduced since the Arab Spring.
This policy is designed to encourage employment of
local rather than cheaper foreign workers. While in the
near term this may mean higher wage costs and resultant slower growth, this policy also creates a catalyst for
growth in domestic consumption. The government has
also increased minimum wages, opened doors to allow
a greater number of women to enter the workforce and
introduced unemployment benefits. Together these mean
higher discretionary income, which is driving Saudi consumer spending growth to be amongst the highest in EM.
One of the key benefits of including Saudi Arabia in an
Emerging or Frontier Markets portfolio is diversification.
It is difficult to say how index providers will include this
new market in their indices once it opens, nevertheless
their inclusion alone will finally enable investors to have
an ‘on-benchmark’ exposure to a market that has been
overlooked for too long.
The market is opening at a time of unprecedented
2005
2006
2007
2008
2009
2010
change in Saudi Arabia. King Salman, who acceded to
the throne this January, has begun the shift of power to
a new generation of Al-Sauds with the appointment of
Prince Mohammad bin Nayef as Crown Prince and the
appointment of his son Mohammad bin Salman as Deputy
Crown Prince. The new King has also reshuffled the
cabinet and restructured and streamlined official bodies
into two committees, which are directly linked to the
cabinet. These are the Council of Political and Security
Affairs and the Council of Economic and Development
Affairs. Efficiency, better citizen services and corporatisation of government institutions are the motivating
Fundamentally, the market
offers attractive exposure to
petrochemicals and consumer
stocks with the latter strongly
supported by counter-cyclical
policies recently announced
by the government
2011
2012
2013
2014
2015
forces. More changes have been implemented within the
past few months than Saudi Arabia has seen for decades.
Indecision and inertia have been replaced by steadfastness and dynamism.
Saudi Arabia’s gross domestic product (in current prices) stood at $752 billion in 2014. It is the largest economy
in the MENA region and the only MENA economy to be
represented in the Group of Twenty (G20). The central
driver for the domestically focussed part of the stock
market relates to the budget much more than the oil price.
Robust real economic growth averaged 6 per cent during
2004-14; non-oil growth averaged 8 per cent during the
same period – which compares favourably with other high
growth Emerging Markets in Asia. Saudi Arabia has the
ability to withstand counter cyclical fiscal policies as the
country’s substantial fiscal reserves – reserves to GDP are
at 90 per cent – support the economy. Moreover, Saudi
Arabia’s debt to GDP is less than 3 per cent and one of
the world’s lowest. A combination of debt and reserve
assets can help Saudi Arabia sustain high spending in an
environment of lower oil revenues. As global EM growth
continues its recovery path, we believe that oil prices are
likely to continue their upward path, which should be
fiscally supportive for Saudi Arabia.
04
This is an independent publication by Upper Reach
Financial sector on firm footing
to weather oil-price storm
The kingdom’s economy has faced recent turmoil with volatile shifts in the global oil price but the country’s banking sector
remains a lucrative and increasingly attractive investment opportunity
F
ew countries have been as affected by the recent
oil price fluctuations as Saudi Arabia yet the
country’s banking industry remains a vibrant
sector that continues to receive international interest.
Demand for Saudi-based investments became clear
following the IPO of National Commercial Bank (NCB)
in 2014, not just the biggest floatation in the Middle
East’s history but the second largest in the world last year.
There is little doubt that the country’s banking sector
has been hit by the volatile oil market, yet government
reforms aimed at engineering wider industrial growth and
a cautious, sustainable approach from its banks is paying
dividends for investors both locally and around the world.
Certainly there are huge opportunities being presented by Saudi’s banking sector and firms such as
NCB Capital are providing not just an improved array
of products to make the most of this but also extending
their research facilities to deal with increased demand.
Elsewhere Saudi Arabia British Bank (SABB),
established in 1977, is aiming to become the leading
international bank for both retail and corporate customers and David Dew, Managing Director at SABB, says
international attention has been increasing over recent
years. “When I first came here in 2001, investment at
that time was a few hundred million dollars, it was very
low,” he says. “Fast forward 10 years and it peaked to
over $30 billion.”
He admits that the figure has dropped since its $30
billion peak but the underlying trend has seen Saudi
Arabia engaging with the global economy more every
year. “Its capital markets are evolving and developing.
This country does not do big bangs; it is a steady, cautious approach,” he says. “ In the hare and the tortoise,
the tortoise in the end wins the race. That is the general
concept and idea.”
As Mr Dew alludes, economic expansion has dropped
from double-digit growth to between 7-8 per cent more
recently and there is acceptance that such an environment
is likely to be the norm going forward. Saudi financial
firms are also adjusting their projections, admitting the
link between non-performing loans and oil price shocks
despite no inherent deterioration in the assets of the
country’s banks.
“We are still talking about a growth economy,” adds
Mr Dew. “The general consensus is the growth over
the next couple of years is likely to be a little slower
than the last couple of years, but it is still growth. It is
still positive. It is still good by almost every developed
market standard, and it is good by quite a number of
emerging market standards as per current performance,
including Latin America, which is struggling a bit for
growth right now.”
At the centre of steady growth have been longrunning reform programs, which followed the passing
of the Foreign Investment Act in 2000. The country
subsequently joined the World Trade Organisation in
2005 and clearly regulated its banking sector.
“The regulatory environment is very well laid out,
especially in the financial sector,” says Dr Yahya A.
Alyahya, Chief Executive Officer of Gulf International
Bank. “The reserves and the financial strengths in the
country – as well as the government – support growth.
Opening up the market in a measured way for foreign
investment, and especially institutional qualified investors, is going to create opportunities for both the
domestic market as well as for international investors.”
One way that Saudi Arabia is doing just that is by
opening up the stock exchange to foreign investors,
which is set to provide opportunities for both internal
growth and global investment. “There will be side
benefits, such as deepening the markets, creating more
balance in the market and by bringing in more institutional investors because the domestic market here is
dominated by retail,” adds Dr Alyahya.
Until the opening up of the exchange, international
investors had only been able to invest in local companies
via exchange traded funds (ETFs) and swaps, meaning
they could not take seats on boards nor have any influence on the way companies had developed. However
greater financial integration, part of Saudi’s 10th national
development plan, is allowing not just financial input
but foreign expertise as well.
Sarah Jammaz Al Suhaimi, Chief Executive Officer
of NCB Capital, says the introduction of direct foreign
“The capital markets are
evolving and developing.
This country does not do big
bangs; it is a steady, cautious
approach. In the hare and
the tortoise, the tortoise in
the end wins the race”
David Dew, Managing Director of SABB
investment into the country’s banking sector is a logical
step in Saudi Arabia’s continued financial development,
and part of a “long-term strategy”.
“In regards to the stock market, regulators have been
opening the door for foreign investors since the late
1990s through mutual funds, followed by allowing
non-citizen residents to own stocks,” she explains.
“More recently, the regulator introduced a swap regime
to allow international investors to directly access the
market. This current step of allowing QFIs (qualified
foreign investors) to invest comes as a natural progression to what have started many years ago. Opening
the market is something that is necessary to introduce
increased competition, which will make people more
focused on clients, service and quality as they have to
compete with more markets.”
The target is not necessarily to create more liquidity
in the system but, as Ms Al Suhaimi puts it, become
“more competitive as an investment destination.”
“This will make the environment much better in
terms of transparency, investor relations, governance,
the way we are dealing with the market context and the
regulator,” she adds.
There is also a widespread belief that the introduction
of international investors on boards could smooth out
some of the volatility of the market, and help develop
an environment where longer term investment strategies
result in better returns, a so-called “virtuous cycle” as
Ms Al Suhaimi explains.
“Longer term investing attitudes are rewarded with
higher returns, and higher commitments to transparency
by market players are rewarded with higher valuations
(due to lower discounting). Every positive step in that
direction is important and welcome, but we should
expect to see the cumulative impact of these steps over
decades, not months.
“We have had hedge funds and active managers
investing, and there will be more once it is through
direct investment and not through swaps. However, I do
not see that they will take seats on boards overnight, as
you need to build towards this, so it will coincide with
the normal maturity cycle of the market. Nevertheless,
being open to the world and other international investors who can compare us with others can only result
in improving transparency, governance and the general
market environment.”
There are huge opportunities being presented to the private sector by Saudi’s banking industry
Saudi Arabia’s government has also embarked on a
plan to diversify its economy away from the traditional
mainstays of fossil fuels, and the opening up of the stock
exchange is being seen as a key attribute to this plan.
“There are certain sectors that have not really developed well enough to contribute to the diversification
effort such as the mining industry and the transportation sector,” adds Mr Alyahya. “A lot of opportunities
will be created for investors and this is going to help
contribute to diversification as well.”
Such developments will also inevitably create further
opportunities for the Saudi banking system to expand
and improve its array of services, and increase potential
revenue streams.
“Anything related to infrastructure creates multiple
opportunities, both for investors on the operational
side and investors on the financial side,” continues
Mr Alyahya. “In the debt capital market, because of
the volume of the infrastructure agenda, there will be
a requirement for financing. That also provides opportunities for investors who are seeking or interested
in fixed income instruments both in local currency as
well as in foreign currencies.”
Lending to small and medium-sized enterprises is
expected by most analysts to become a growing element of Saudi banks’ operations, while the increasing
demand for institutions that operate partially or wholly
within Islamic banking practices is also providing
opportunities for groups such as NCB Capital, which
has become a global leader in Islamic Mutual Funds.
Saudi’s financial industry has also been investing in
its human resources as it seeks to bolster its position as
the leading banking player in the Middle East region.
Gulf International Bank has created a graduate scheme
that takes 40 people on each year while NCB Capital
has been part of initiatives designed to increase the
number of women employed as part of its workforce.
Such activities, and the wider attempts by the Saudi
government to embrace the international arena, are providing global investors with an array of opportunities.
There is little doubt that increasing growth in both Saudi’s
financial sector and its economy as a whole, will depend
on the ability of the country’s regulators to continue
creating an environment that appeals to foreign investors.
“The private sector will continue to play an important role, both because of opportunity and necessity,”
says Ms Al Suhaimi. “Many of the opportunities of
globalisation are best captured by private companies,
and most job creation – which is strategically important
for our country – will come from the private sector.
The banks in general have an important role to play,
by directing capital to growth opportunities.” Achieving that will be the key to developing the country’s
financial industries and will, in turn, provide Saudi
Arabia’s population with the means to enjoy sustainable prosperity.
05
This is an independent publication by Upper Reach
Islamic banking
assets in the
kingdom to hit
$683 billion by 2019
As the global Islamic finance industry continues to experience doubledigit growth in the coming years, Saudi Arabia will lead the way. The
kingdom is home to the world’s largest Islamic banking market, which
doubled in size between 2009 and 2013
S
audi Arabia’s banking sector has enjoyed considerable growth over recent years and the expansion
of companies observing Islamic principles looks
set to power continued prosperity for its financial sector.
The principles behind the practice set out how banks
can operate and revolve around the notion that returns
from financing are determined by ownership and shared
profit and loss.
It is a considerable difference compared to many of
the financial practices of Western institutions, with the
overarching principle meaning that interest cannot be
applied to loans. Excessive financial speculation is also
avoided as is investing in sectors that are forbidden by
Islam, and the principles have provided a framework
that has proven remarkably successful during the global
banking crises over the past eight years.
Although the practice of banking according to Sharia principles is many centuries old, it has risen to
prominence over the past decade and Saudi banks have
become leaders in the industry. The sector is booming
and while only around 1 per cent of global assets are
estimated to be represented by companies adhering to
such principles, it is the rate of growth in this sector
that is catching the attention of both Islamic and secular
investors.
Between 2009 and 2013, global investment analysts
Ernst & Young said the Islamic banking sector had
grown by nearly 18 per cent on an annual basis, with
that rising to nearly 20 per cent by 2018. Given such
predictions and the fact that around $2 trillion worth of
assets were estimated to be Sharia compliant in 2014,
it’s unsurprising that Saudi-based banks are leaders
in the field.
The kingdom is home to the world’s largest Islamic
banking market, which doubled in size between 2009
and 2013. Ernst & Young predicts that by 2019 total
Sharia-compliant assets in Saudi will reach $683 billion, which will account for more than one third of the
total Islamic banking assets of the six core markets of
Qatar, Indonesia, Saudi, Malaysia, UAE, and Turkey
(QISMUT).
Companies practicing within the field include the
likes of Al Rajhi Bank, Bank Albilad and Bank Aljazira
and its investment arm Aljazira Capital, as well as the
country’s oldest financial institution the National Commercial Bank (NCB), which recorded the largest listing
in the Arab world’s history last year.
NCB offers an array of Sharia-compliant financial
services and the company’s investment arm, NCB Capital, is also one of Saudi Arabia’s leading Islamic banking
specialists and a global leader in Islamic Mutual Funds.
“Our mutual funds business was built slowly over
many years,” explains Sarah Jammaz Al Suhaimi, Chief
Executive Officer at NCB Capital. “We continued to
invest in our people and our systems and processes,
through bull markets and bear ones.”
Such experience is now proving hugely beneficial not
just to NCB but also to Saudi Arabia’s wider financial
$285bn
value of Sharia-
compliant assets in
SA in 2013
$1.8trn
total value of Shariacompliant assets of
QISMUT* by 2019
31.7%
SA’s share
of global Islamic
finance market
A key aspect of Saudi
Arabia’s Islamic banking
sector is the lack of highly
leveraged products, which
delivers not just reduced
risk but also a more stable
environment for competing
firms in the region
of global Islamic
banking assets
(2009-2013)
54%
percentage of total
assets that are Shariacompliant in SA
*Qatar, Indonesia, Saudi Arabia, Malaysia, UAE, Turkey
sector. The growth in Islamic banking is expected to
drive wider expansion in the industry and the ethical
notions that underpin the approach are being seen as
an increasingly attractive proposition for both those
wishing to bank according to Islamic teachings but also
investors seeking more sustainable returns.
A key aspect of Saudi Arabia’s Islamic banking sector
is the lack of highly leveraged products, which delivers
not just reduced risk but also a more stable environment
for competing firms in the region. Once profitability has
been established, volatility can be lower and it is this
that has helped power a widespread surge in demand for
products and services from the sector. Such factors have
also insulated Saudi Arabia, and the region in general,
against the excesses that were apparent in many Western
financial institutions over the past decade and enabled
17.6%
growth of
Source: Ernst & Young
it to gain a foothold in the financial world as markets
in other regions of the world suffered.
Calls for further deregulation of Saudi Arabia’s
banking sector is also likely to enable increased growth
as new markets open up. Sharia-compliant financial
institutions are well placed to offer opportunities to
both personal investors and international firms by
providing services that would traditionally have been
closed off. The interest amongst Saudi Arabia’s public,
and the currently idle funds that could be called upon,
is expected to add liquidity to the market and provide
a wealth of benefits to both customers and the institutions themselves.
Mortgage lending is expected to ratchet up and
competition in the market is already increasing, with
new entrants and banks such as Al Rajhi making the
most of their Islamic banking expertise to position
themselves in the high growth market. Companies
such as NCB Capital have already made progress in
increasing the possibilities for customers but Ms Al
Suhaimi says the trend reflects the new demands from
the country’s public.
“Our global leadership is not a tribute to us but a
statement about the appetite of Saudi clients to invest
in Sharia-compliant products, and the relatively shallow
offering available for them,” she explains. “I believe
NCB Capital can do even more than we do today, and
am committed to continuously improving our product
performance and client service levels.”
NCB takes stock following $6 billion IPO,
the largest ever in the Arab world
The record-breaking IPO in November last year serves as a clear testament to the confidence and interest in Saudi Arabia’s banking sector.
CEO of NCB Capital Sarah Jammaz Al Suhaimi says she expects NCB to become “a major financier” in future private sector growth
S
audi Arabia claimed one of the biggest floatations of 2014 as National Commercial Bank
(NCB) presented its IPO, marking a new high
for investment in the region’s banking sector and a
massive vote in confidence for the company itself.
The $6 billion IPO came at a time when interest in
investment banking was still struggling to return following the global financial crisis that began in earnest
in 2008. Yet it was those very events that caught the
eye of investors, who were keen for a sustainable
approach after the volatility swirling around Western
banking institutions.
Part of that steady outlook is down to the region’s
Islamic banking principles; something that Sarah
Jammaz Al Suhaimi, Chief Executive Officer of NCB
Capital, admits has cemented the reputation of Saudi
banks as dependable investments.
“The crisis was in part the result of insufficient
regulation and a lack of transparency,” she explains.
“The global focus on addressing these shortcomings
has been helpful to our region, with enhanced regulation on reporting and disclosures by listed companies,
new requirements on the composition and quality of
boards, and more independence for control functions
and their board counterparts.
“There has been a dual impact on the investment
banks: we have benefited from these enhancements
as corporates, and we also play an important role in
educating our clients and implementing regulations
on behalf of our regulators. Having said all this, the
Saudi investment banking sector did not and will likely
never represent the type of systemic risk that we saw
in the West. It has never offered the types of products
that were at the heart of the financial crisis, there is
negligible leverage in the system, and investment banks
are subject to high capital requirements relative to their
proprietary trading activities.”
NCB Capital is one of a number of players within
the Saudi banking sector that is watching local developments carefully for opportunities, not least the opening
of the Saudi Stock Exchange, which is set to develop
financial economic integration.
Ms Al Suhaimi says the development is the “continuation of a long-term strategy” and will provide more
opportunities for foreign investors who will benefit as
firms ensure they are “more focused on clients, service
and quality as they have to compete with more markets.”
However wholesale changes, such as investors taking
places on boards, are not likely on a widespread basis
in the near-term but the changes are expected to deliver
improved transparency and governance, she adds, and
a better general market environment.
NCB Capital is also well placed to offer services
to investors eyeing up the region, after the company
launched its research division in 2007, giving the firm a
head start as more multinationals look to enter the market.
Part of that local knowledge is gained from NCB’s
initiative that focuses on employing talented young
Saudis and training them up within the organisation
so they gain from the company’s long experience of
offering mutual funds and products such as the world’s
largest Sharia-compliant fund.
“The more we focus on people and providing them
with the environment and the tools to excel, the better
the quality of products and services for our clients.
That is what keeps us going and makes us successful,” she says.
Saudi Arabia’s increasingly active private sector is
also providing opportunities to banks such as NCB, with
job creation and investment helping to develop a more
diversified economy that is less reliant on oil revenues.
“The banks in general have an important role to play,
by directing capital to growth opportunities,” Ms Al
Suhaimi says, who expects NCB to become “a major
financier” of the future private sector growth.
There is also considerable opportunity for the likes
of NCB to expand the banking options available to the
Saudi population, which Ms Al Suhaimi states is best
achieved through increasing education around financial
products and services.
“We believe that everyone can benefit from better
decision making with their assets,” she says. “Saudi
families and businesses have a trillion riyals sitting
in current accounts earning nothing. While the banks
may benefit from this, the opportunity cost for the
average Saudi family is high. We want to help them
make better decisions, and our internal research suggests that education is the key.”
Given NCB’s successful float last year, both local
investors and international firms already seem aware
of the potential that Saudi Arabia’s financial services
industry offers.
“The level of demand shows the depth and liquidity
of the Saudi capital markets,” she adds. “Our market
has strong regulation, deep investor interest, large and
established brokers, and increasing research coverage.”
Such a combination of factors should ensure a sustainable future for Saudi’s banking sector and increasingly attractive services for global investors and the
kingdom’s local population.
06
This is an independent publication by Upper Reach
Downstream industry holds key
to economic diversification efforts
Huge investments look to maintain
the country’s position as a leading
petrochemical producer and lessen
its dependence on oil and gas
“W
ith a wealth of experience and skills
accumulated over the past 40 years
in oil and petrochemicals and an
abundance of resources, Saudi Arabia has an edge
over its peers regarding product quality and production efficiency. It is very well positioned in
the global petrochemicals market,” says Khalid
Al Rabiah, CEO of one of the kingdom’s leading
petrochemical companies, Chemanol.
“Both geographically and strategically, we have
easy access to our largest markets – India and China
– and are also centrally positioned with respect to
Europe and the US. The industrial cities in Jubail
and Yanbu, along with the expected railway network,
have created an excellent hub for petrochemicals
industries.”
This hub, Mr Al Rabiah adds, provides ample facilities to produce and transport products to markets
in an efficient manner, giving the kingdom a tactical
advantage compared to other regions.
His comments echo the position of Saudi authorities, which consider the petrochemical sector as key
in their bid to diversify the economy. Although the
country sits on huge reserves of crude, its dependency on oil is a cause for concern: it accounts for
45 per cent of the GDP and 80 per cent of government revenues.
The slump in oil prices since mid-2014 and its
impact on the nation’s economy have spurred the
acceleration of efforts to develop the industrial sec-
tor as a long-lasting solution against the volatility of
the oil market and for providing much needed jobs
for the growing, young population. And indeed the
industry that attracts most interest and investment
is petrochemicals, which along with the plastics
sectors is already robust.
Saudi Arabia is one of the leading petrochemical producers in the world, accounting for around
8 per cent of total output, most notably through
the public company Sabic (Saudi Arabian Basic
Industries Corporation).
Now the kingdom is determined to maintain its
leading position and has earmarked $91 billion to
be spent over the next 10 years to build new plants,
expand existing ones and integrate refineries with
new or existing petrochemical units. For example
one of the major projects under way is led by Saudi
Aramco, the national oil company, which is building a $19.3 billion petrochemical plant in a joint
venture with American specialty chemicals giant,
Dow Chemical.
As for Chemanol, whose main manufacturing site
is located in Jubail Industrial City, it announced two
years ago a plan to build a new production plant for
specialty chemicals in the Western Region, and a
new 60,000 tonnes-per-year sulphonated naphtalene formaldehyde plant at Jubail, with a budget of
SAR75 million (£13 million). However, given the
recent evolution in the market and in oil prices, Chemanol announced in February that it would repeat
a feasibility study on the planned Jubail facility.
Chemanol currently manufactures 13 premium
grade methanol derivatives which have diverse
applications including agricultural fertilisers, pharmaceuticals, solvents, intermediates, laminates,
wood products, plastics, paper and the production of
various types of concrete mixtures. The company is
also exploring new investments in specialty chemi-
“Geographically and
strategically, we have
easy access to our largest
markets. We have created
an excellent hub for
petrochemicals industries”
Khalid Al Rabiah, CEO of Chemanol
cals and petrochemicals, including the acquisition
of advanced technologies inside and outside Saudi
Arabia, according to documents filed in the stock
exchange (Tadawul).
Tasnee (Saudi Arabia’s National Industrialisation
Co) is a diversified industrial firm with interests in
petrochemicals, metals and chemicals. It is one of
the world’s largest producers of titanium dioxide
through its Cristal subsidiary, in which it increased
its stake at the end of last year.
In the first quarter of 2015, net profit of the listed
Saudi petrochemical firms dropped by 34 per cent
to SAR6.43 billion, compared to SAR9.81 billion in
Q1 2014, according to a financial report published
in the local press late April. Similarly, revenues
of the petrochemical sector fell by 20 per cent to
SAR57.49 billion in Q1 2015, compared to SAR72
billion in the same period last year on the back of
oil price fall.
Results of the petrochemical industry are indeed
closely tied to oil prices and global economic
growth because its products – plastics, fertilisers
and metals – are used extensively in construction,
agriculture, industry and in the manufacturing of
consumer goods.
“The most important thing as you go down the
chain is profitability, and sometimes it drops,”
comments Mutlaq Al Morished, CEO of Tasnee,
which was established in 1985 as the first jointstock industrial company fully privately owned in
the kingdom. “My priority is not only to diversify
the economy, but also to generate dividends for
shareholders. That is how the game is played.”
Like other petrochemical companies, Tasnee
posted losses for the first quarter of 2015: net loss
was SAR332.5 million compared with a profit of
SAR320.8 million in the same period in 2014, according to documents filed at the stock exchange. In
07
This is an independent publication by Upper Reach
a separate statement, Tasnee commented that while
sales volumes rose, the value of sales dropped 10.6
per cent year on year to SAR3.94 billion.
Petrochemical companies were hit by the sharp
drop in oil prices, but they are confident this is only
a temporary trend and indeed, prices have begun
to rise again.
Structurally, Saudi’s efforts to develop the sector
make sense. For one, the demand is there. According
to an April 2014 report by the international con-
The kingdom is determined
to maintain its leading
position and has earmarked
$91 billion to be spent over
the next 10 years to build
new plants, expand existing
ones and integrate refineries
with new or existing
petrochemical units
sultancy firm McKinsey, total worldwide ethylene
demand is projected to increase by more than 40
million tonnes per year to around 175 million tonnes
by 2020, and to almost 210 million tonnes by 2025,
with most of the end-user demand growth coming
from China and other emerging economies. New
North American capacity and other advantaged
feedstock-based producers will cover only around
half of new demand, leaving extensive scope for
companies in other regions.
Another important factor for Saudi Arabia is
that it needs to provide jobs for its growing, young
population, and the petrochemical sector is very
labour intensive. Indeed, around half of the nation’s
population of almost 29 million is under 25, and
some 1.9 million Saudis will enter the workforce
over the next decade.
This leads to another key challenge for Saudi
authorities, which is to raise the level of education
in order to match the skills required by employers.
In this respect, Mr Al Morished says that, “Our advantages are first our attractive location and our oil
and gas. But the other component is the workforce
and it definitely is not as productive or efficient as
in Europe or in China.
“Our challenge as a country is to change the
education system so that it produces the engineers
and technicians that the economy needs. This is
why we in the private sector are investing heavily
to train youngsters.”
Saudi authorities consider petrochemicals as a key
industry that needs to be further developed through
private capital. In fact, it is the only state in the
Gulf Cooperation Council (GCC) to allow private
investment in the petrochemical sector with several
incentives such as affordable energy, low-cost raw
materials, and advanced industrial infrastructure,
especially in Yanbu.
This has led to the rapid expansion of Saudi’s
plastics and petrochemicals sector, which has grown
from less than $0.5 billion in 1985 to $22 billion in
2011. Furthermore, the sector’s net income increased
at a compounded annual growth rate (CAGR) of
about 35.2 per cent between 2001 and 2011, benefiting from capacity expansion and low production
costs amid high petrochemical prices and demand,
according to a 2012 report by Saudi Hollandi Capital.
The kingdom also made considerable investments over the past decade to build world-class
petrochemical facilities. Capturing the gas flows
associated with oil production that were previously
flared and instead channelling those flows into very
low-priced feedstock for chemical production has
made it possible to build an immense and highly
profitable industry.
With the execution of more than $28 billion
worth of projects to manufacture more complex
petrochemical products, Saudi Arabia has led the
way in the Gulf region, which has contributed 11
per cent to global petrochemical-capacity growth
and is now a leading global producer of ethylene,
ethylene derivatives and methanol.
However, with the fluctuations in oil prices and
the relatively slower growth of emerging economies,
the kingdom, like other Gulf countries, is faced with
a paradigm shift.
According to a report last year by McKinsey,
the availability of low-price gas feedstocks has
led to the spectacular growth of the Middle East’s
petrochemical industry over the past 30 years. “But
Saudi Arabia accounts for 8 per cent of the world’s total petrochemical output
“The most important thing
as you go down the chain is
profitability, and sometimes
it drops. My priority is
not only to diversify the
economy, but also to
generate dividends for
shareholders. That is
how the game is played”
Mutlaq Al Morished, CEO of Tasnee
with advantaged new gas supply expected to end
in most countries in the region over the next few
years, petrochemical producers that want to expand
domestically face major challenges.
“They can continue to build up their export industry using naphtha feedstock instead, but companies
will have to find new ways to offset the handicap of
their geographical location far from major growth
markets. While obtaining naphtha at advantaged
prices would help their position, the region’s petrochemical producers should become leaders in
operating and functional efficiency. This will in turn
require a broad mobilisation to build the managerial
and technical capabilities needed to develop and
further grow their businesses.”
Private investments in petrochemicals to quadruple
Historically dominated by the stateowned giant Sabic, Saudi Arabia is
now actively encouraging private
investment in the petrochemicals
sector, with contribution set to
quadruple over the next decade
S
audi Arabia will open its $570 billion stock
market to foreign investors on June 15 in what
the Wall Street Journal qualifies as a “keenly
awaited move” that will give the international investment community direct access to the Middle East’s
biggest economy and the fastest-growing bourse in
the region.
Among the stocks that will undoubtedly interest
investors is Sabic (Saudi Basic Industries Corporation), one of the world’s largest petrochemical
companies. But investors will be well advised to
look at other petrochemical stocks because there
are several interesting opportunities whilst the
timing is right.
The Saudi Arabia General Investment Authority
(SAGIA) stresses that even though the petrochemical sector has been historically dominated by the
70 per cent state-owned giant Sabic, it is gaining
momentum from private sector participation.
According to SAGIA: “In a paradigm shift, [Saudi
Arabia] is now actively encouraging private investment in the sector in order to bolster its status as
a global petrochemical leader and to diversify towards value-added specialty chemicals, formulated
products, and performance polymers. As a result,
private-sector contribution to the sector is expected
to quadruple in the next 10 years.”
The kingdom’s petrochemicals sector is responsible for about 7-8 per cent of total world supply
and is the 11th largest in the world. While Saudi’s
current strengths lie in the production of basic
The petrochemical sector looks to diversify towards value-added chemicals and
formulated products
petrochemical building blocks such as ethylene and
methanol, there are plans to diversify its petrochemical portfolio into more complex, distinctive products
such as specialty chemicals and engineering thermoplastics. “The petrochemicals market enjoys very
encouraging regional and global demand trends.
With global growth driven by industrial activity
in emerging markets, the petrochemicals sector
has enjoyed strong utilisation rates and firm pricing trends. Local end markets such as automobile,
construction, plastics and appliances are showing
strong growth,” states SAGIA.
Asked about his views on the opening of Tadawul
to foreign investors, Abdulrahman Al Ismail, General
Manager of one of the country’s leading petrochemical companies, the National Petrochemical Company
(Petrochem), says that, “It is going to be a positive
step, but it’s going to take time. A lot of things in this
country do take time and people have to get confident,
especially foreigners considering investing in it.
“Investing in the Saudi Arabian stock exchange
could seem intriguing to a foreigner; it is a very
safe place for investment. There is a lot of stability.
The country is sitting on a huge amount of natural
resources and will remain a major economic and
political player both regionally and globally.”
Mr Al Ismail adds that apart from the strength of
Saudi petrochemical companies and their leading
position worldwide, “one of the major incentives
for investors is the availability of funding for huge
projects. There is massive funding by the Saudi
Industrial Development Fund, the Public Investment
Fund and other government agencies that encourage
foreign companies to come and invest in the country.
So the government has had, and still has, a key role
in the success of the Saudi petrochemical sector.”
Another leading petrochemical executive, Abdullah Al-Suwailem, CEO of Petro Rabigh, a joint venture between Saudi Aramco and Sumimoto Chemical
that built and operates a $10.1 billion petrochemical
complex producing refined petroleum and petrochemical products, explains that his company is
looking for long-term partners in order to double
the size of the business to a $20 billion operation.
“We are expanding and will become the largest
refining and petrochemical complex in Saudi Arabia
– larger even, from a facility point of view, than
Sadara.” (Sadara is a joint-venture between Saudi
Arabia’s Aramco and American giant Dow Chemical to build in Jubail a complex of 26 integrated
manufacturing plants producing more than three
million tonnes of products each year.)
“We are looking for private investors, including
foreign ones, to facilitate our operations and take
part in providing a long chain of petrochemical products that are currently not available in the kingdom
or in the Middle East,” explains Mr Al Suwailem.
Petrochemical companies’ profits dropped in the
first quarter of 2015 mainly due the fall in oil prices.
But with oil prices rising again, Riyad Capital, the
investment arm of Saudi Arabia’s Riyad Bank,
advises investors to “look beyond 2015” towards
the interesting opportunities that will arise from
stronger worldwide demand for petrochemicals
and plastics.
08
This is an independent publication by Upper Reach
Talent and technology
development push
petrochemicals up
the value chain
“The key area we are
concerned about is to go
further downstream. Not
only because it is more
profitable but also because
it employs more people
and allows us to build
their skills. Our objective
further down the line is
also to invest in R&D”
Investing in innovation and nurturing local talent is seen as
key to boosting industry growth
Jamal J. Malaikah,
President and COO of Natpet
S
whom to venture further downstream. “Partnerships
are very important because when you go further
downstream, you are getting closer to the market
whereas when you are a commodity, you are far
from the market. Once you go down further to the
end user, things are more complicated and you need
a partner who has the technical knowhow, knowledge
and experience.”
Natpet is a subsidiary of Alujain, a holding company that has various interests in the petrochemical
sector. “Our strategy is to develop our capacity from
a technology perspective and to establish partnerships that allow us to do so,” explains the President
of Alujain Corp., Marwan Nusair. “For example
Natpet is in a joint venture with Bonar to produce
fibres and non-woven geotextiles for the fast growing
civil engineering markets in the Middle East and the
Indian subcontinent.”
Bonar Natpet is a 50:50 equity joint venture of
Natpet and Low & Bonar Technical Textiles Holding
(a subsidiary of UK-based Low & Bonar) which has
a leading position in technical fabrics. “In addition
to the investment, Low & Bonar bring the technical
knowhow and the training of staff, which is very
important,” says Mr Nusair. “From a technical,
management and operational point of view it is very
important to focus on enhancement and innovation.
Potential UK partners can bring this definite added
value when they come and invest in Saudi Arabia.”
audi Arabia has built its massive petrochemical industry on the back of cheap oil and gas.
But with the slump in oil prices between mid2014 and mid-2015 and the shale gas boom in North
America, which has fuelled a chemicals revival and
a crunch on gas resources in the Arabian Gulf, Saudi
and other regional producers are under pressure to
increase their profit margins by pushing the petrochemical industry up the value chain.
“Access to abundant fossil resources has always
been a competitive advantage for Saudi Arabia and
the regional industry,” said Mohammed Al Mady,
the former CEO of the Saudi Basic Industries Corporation (Sabic), the fourth largest petrochemical
producer in the world, during the Gulf Petrochemicals
and Chemicals Association conference in Dubai last
year. “Shale gas developments in the US have driven
down the natural gas prices but do not present a
dramatic challenge for the cost competitiveness of
Gulf Cooperation Council (GCC) petrochemicals
producers and their future expansion plans. However,
investment in technology and talent is now even
more important to maintain industry growth. And
innovation is a must. We need to step up our efforts
to develop our local innovation capabilities faster.”
Innovation and the downstream sector are two
priorities of Saudi producers and authorities alike.
With downstream activities offering more potential
for profit as well as generating greater employment,
significant investments are being made in this sector.
$28 billion worth of petrochemical plants are due to
come online this year alone, and over the next decade
a staggering $91 billion will be invested downstream
by the giant national company Saudi Aramco.
Sadara Chemical, a $19.3 billion joint venture
between Saudi Aramco and Dow Chemical, is to
start production in the second half of this year and
reach full capacity in 2016. The Sadara project, which
will produce three million tonnes of petrochemicals
a year, is the first in the Middle East to use refinery
liquids, such as naphtha, as feedstock. Production
from naphtha allows for a greater variety of products.
The plant will also use mixed feedstock of ethane gas
and liquids unlike other plants in the region, which
rely on ethane to produce petrochemicals.
“Investment in technology
and talent is important to
maintain growth. We need to
step up our efforts to develop
our capabilities faster”
Mohammed Al Mady, former CEO of Sabic
Saudi Refining and Petrochemical (PetroRabigh),
a joint venture between Saudi Aramco and Japan’s
Sumitomo Chemical, will start production in December from the $8.5 billion plant expansion known as
PetroRabigh II. It is expected to reach full capacity
in the first quarter of 2016. The new products from
Sadara include Isocyanates, which are key ingredients used to make polyurethane rigid foams and
other speciality applications. The output from Sadara
will also be used in the production of automotive
parts, medical equipment, healthcare products and
building materials.
Another example of a successful Saudi petrochemicals firm who are aiming to boost their downstream
activities is the National Petrochemical Company
(Natpet). As the President and Chief Operations
Officer of Natpet Jamal J. Malaikah affirms: “The
key area we are concerned about is to go further
downstream. Not only because it is more profitable but also because it employs more people
and allows us to build their skills. Our objective
further down the line is also to invest in research
and development.”
He adds that Natpet is keen to find partners with
This is an independent publication by Upper Reach
09
Strong consumer spending
sends retail sales soaring
Retail sector growth is being driven by the country’s many wealthy citizens
and residents, a young population eager for Western goods and more
women with disposable incomes from new employment opportunities
T
he ancient bazaars of Saudi Arabia are a delightful window into the culture of the Middle East
with their bustle of shoppers and merchants,
rows of narrow store fronts offering everything from
sparkling gold jewellery and traditional clothing to
fruit and veg and electronic goods, and with the scent
of incense wafting through the air.
A charming and timeless scene but as the country
quickly catches up with the rest of the world, modern
shopping malls easily rivalling those in the UK and the
United States are sprouting up around the kingdom as
developers hitch their fortunes to the dramatic rise in
the petro-dollar-fuelled retail sector.
Indeed, Saudi Arabia is ranked as one of the top
destinations in the world for retailers, both multinational
and regional players, eager to position themselves in a
market which shows only signs of growth.
Analysts say that despite the fall in the price of oil,
consumer spending remains strong in Saudi Arabia
driven by a wide range of factors such as the many
wealthy citizens and residents, a significant young
and sophisticated population eager for Western goods
and more women with disposable incomes from new
employment opportunities.
Over the past five years, per capita retail sales have
expanded 9 per cent each year with non-grocery retail
totalling around 60 per cent of the entire market. At
the same time, the increasing number of malls and
shopping centres is giving consumers more choice in
where to shop and what to buy. And it is not just domestic demand. Each year, Saudi Arabia hosts millions
of Muslim pilgrims from around the world, many of
whom take the opportunity to shop for personal items
and gifts for friends and family back home.
“The retail sector in Saudi Arabia is moving forward
in strengthening its position as the biggest and fastest
growing in the Middle East region. It is exceptionally promising and possesses many untouched and
expansion opportunities,” a local chamber of commerce official told the recent InRetail Summit Saudi
Arabia in Jeddah.
One Saudi company which is expanding in the country and beyond is Fawaz Alhokair Fashion Retail, part
of the Fawaz Alhokair Group, which has the franchising rights to 80 top brands in Saudi Arabia including
such names as Marks & Spencer, Zara, Gap, Banana
Republic and Miss Selfridge.
“Three brothers started this company 25 years ago
after buying two menswear stores from their father,”
says CEO Simon Marshall. “Over the next 15 years this
evolved into a business of some 500 stores and at that
point the brothers realised they needed to go into real
estate if they wanted growth to continue.”
In order to finance that next step, the brothers listed
30 per cent of the company on the Saudi Stock Exchange
and now the group has 16 malls, an investment interest
in another three and 12 more malls opening over the next
18 months, as well as hotels, a food and entertainment
firm, a security company and a construction outfit.
Outside the kingdom, Fawaz Alhokair Group now
has retail operations in 16 countries with 2,100 stores;
profits and revenue grew by 20 per cent last year.
“We currently have 1,300
stores and I believe we can
double this figure quite
comfortably. This is very
much a developing market
with growing gross domestic
product and an increasing
middle class”
Simon Marshall, CEO of Fawaz Alhokair
Fashion Retail
“Looking at Saudi Arabia, we currently have 1,300
stores and I believe we can double this figure quite
comfortably,” Mr Marshall argues.”This is very much
a developing market with growing gross domestic
product and an increasing middle class.”
Another formerly family-owned Saudi retailer
which went public is Jarir Marketing and is now one
of the country’s leading listed companies. Chairman
Muhammad Al Agil explains why he expects more
closely-held enterprises to do the same.
“More companies are going public now and I think
we’re going through a huge change. About ten years
ago we used to have a lot regulatory barriers, however
with the founding of the Capital Market Authority,
everything is much easier,” he says.
According to the executive, companies going
public enjoy a number of advantages such as better
governance allowing for more professional management and it mitigates possible family disputes about
the business.
“It is also necessary for these companies to expose
and organise their finances and it forces them to come
up with a plan. Going public is much better in the long
term and I believe the number of companies doing this
will increase by 10 per cent or 15 per cent a year.”
Jarir Marketing imports and sells a wide range of
office and school supplies, educational materials,
Arabic and English-language books and periodicals,
computer and mobile telephone accessories and other
high-tech goods.
Betting on what they perceive as a sure thing,
foreign multinationals are entering the Saudi retail
sector through investing with local partners but Al
Agil says he does not see these powerful rivals as
a threat. “Office Depot has opened stores here and
I think some competition is good for us, it keeps us
sharp,” he argues.
10
This is an independent publication by Upper Reach
$800 billion of mega-projects to boost
infrastructure and spur development
The government has initiated a number of large-scale construction works in order to ease pressure on existing infrastructure
T
he boom of Saudi Arabia’s construction sector –
its second largest industry behind hydrocarbons
– has seen the rapid expansion of the country’s
infrastructure over the past two decades. Today, the
industry contributes approximately 8 per cent of Saudi
Arabia’s total GDP, and is the largest construction
market in the Middle East.
Despite the massive increase in building projects,
Saudi’s rapidly expanding population continues to
put pressure on existing infrastructure. As a result,
the government – which accounts for 67 per cent of
construction investment – has initiated a number of
large-scale projects in the sector for the coming years
valued at $800 billion (£523 billion).
As part of the country’s economic goals for diversification and job creation, the major emphasis of upcoming projects is to achieve more balanced development.
Together, education and healthcare remain a priority for
the government, accounting for 37 per cent of construction sector spending, with a total of $85 billion set to
fund more than 500 new schools and colleges and 19
new hospitals over the next few years.
Meanwhile, $43.8 billion has been allocated for
transport, telecommunications, water, agriculture and
other related infrastructure, with transport development in particular seen as essential to enhancing
construction industry growth. Saudi Arabia has several
railway projects in the pipeline, for instance, which
aim to support intra-regional trade and increase the
country’s export capacity. Alongside this, the country
also began work on its long awaited first metro rail
network in the capital Riyadh last year, which is set to
be the world’s largest public transport system.
Other mega projects – designed to promote development across the country – are the construction of
six economic cities, including the 168 kilometre, $75
billion King Abdullah Economic City in Rabigh (set
for completion in 2029). The Kingdom Tower in Jeddah, meanwhile, will be a true symbol of the strength
of the Saudi construction industry when it is unveiled
in 2019; becoming the world’s tallest building.
However, while such feats of engineering will
undoubtedly put a jewel in the kingdom’s construction crown, the industry also has to face
some significant challenges, namely, addressing
the massive housing shortage. In a bid to meet
market shortfalls, the kingdom is accelerating the
delivery of new homes, while other initiatives, such
as promoting real estate activity on unused land,
are also being deliberated.
Another challenge posed is ‘Saudisation’ – a
government policy meaning a certain percentage
of employees must be Saudi Arabian citizens.
It is a factor that has hurt the dynamism of the
construction sector, with the quota causing an
unsustainable dependency.
However, with dialogue now having started
with the Saudi government over the issue, stakeholders in the industry say that progress is being
made on finding a solution. “We are grateful that
they eventually accommodated a dialogue, which
started two years ago,” says CEO of Abdullah
A.M. Al-Khodari Sons Company, Mr Fawwaz Al
Khodari. “[It] was extremely helpful as a testing
ground for some of the initiatives they were willing
to share with our industry.”
Although the government and its massive rate
of spending in construction over the past twenty
years has largely powered the kingdom’s growth,
unprecedented investment from the private sector
has also played a major role in driving the sector
forward. Abdullah A. M. Al-Khodari Sons Com-
“The government
accommodated a dialogue
(on Saudisation). That was
helpful as a testing ground
for the initiatives they were
willing to share with our
industry”
Fawwaz Al Khodari, CEO of Abdullah A.M.
Al-Khodari Sons Company
pany is a prime example of a domestic business
that has contributed to this dynamic.
Established in 1966 by Mr Al Khodari’s father,
the company began its focus mainly in developing
the country’s road network, taking advantage of the
70s oil boom. During the 80s, it then diversified
into city cleaning and maintenance.
“While construction is a cyclical business, city
cleaning operations never stop and they provide a
sustained business as well as revenue opportunity,”
explains Mr Al Khodari. “By the late 1980s we were
one of the largest city cleaning contractors in the
Middle East. At that point in time it even became
the back-bone of the company when oil price plummeted and construction dramatically slowed down.
We continue to employ this business model as a
sustainable cash-flow strategy.”
During the past 10 years, the company has been
responsible for numerous vertical construction
projects, including developments such as universities, training centres, and other public buildings. To
further transparency and efficiency, the company
went public just under a decade ago, which has
fortified Abdullah A. M. Al-Khodari Sons Company
and also added to its recent growth.
As the diversification of Saudi Arabia’s economy
continues to gather pace – with evolution in the
country’s different industries leading to the creation of more offices, shopping malls, hotels and
other tourist and service-oriented facilities, private
sector companies like Abdullah A. M. Al-Khodari
Sons Company – which itself is targeting the many
new opportunities for the construction sector in
renewable energies – will look to continue experiencing healthy profits, and in turn, increase their
contribution to the desert nation’s development.
Cement production keeps pace with growing demand
Cement sector sales in 2015 are expected to witness a visible rise on the back of improved demand, backed by heavy infrastructure development
F
uelled by its massive oil reserves, Saudi
Arabia’s construction boom continues to
accelerate. Government spending at all levels of infrastructure is high, keeping on par with
a rising population that demands more housing,
more schools, more hospitals and more roads.
Mega projects are the norm, with huge transport
networks under development along with six new
economic cities.
Indeed crucial to all of these projects is cement.
Saudi cement sales are expected to increase substantially in 2015, despite short-term problems
such as labour shortages and uncertainty over the
availability of subsidised fuel for capacity expansion. Cement is an investor’s market at this point
in the game, with healthy returns on the horizon.
Cement consumption growth has been steady
during the past few years. The residential building
sector, which makes up 60 per cent of the market,
is expected to grow in the long term at a rate of
10 per cent. A rising population, a new focus on
nuclear families and new mortgage laws have all
contributed to this.
However, fuel allocation has proved a bottleneck
in the industry. In the past, expansion plans have
been delayed due to disputes over fuel supply
with the government, as was the case in 2011 with
Yanbu Cement (the leading cement company in the
Western region).
There are also supply concerns. Over the past
few years, clinker inventory levels have declined
substantially. However, the government has adopted a number of measures to mitigate this threat.
These include government mandated minimum
inventory levels, obligatory cement imports when
needed, and government support for additional
cement companies.
Due to the rise in demand, cement prices are
regulated if necessary. Export bans have also been
instituted. In 2012, the price ceiling was set at
SAR240 ($64) per ton.
The customary high profits stem much in part
from cheaper raw materials and fuel, which account
respectively for 32 per cent and 29 per cent of
production expenditure. With average net margins
of 45.9 per cent, the kingdom’s cement companies
enjoy on average better profitability than their
regional and global competitors.
While supply shortage risks exist, many expect
that cement production capacity will be able to
cope with construction demands. In 2015, Saudi
Arabia has 60 million tons of production capacity, with an estimate of over 70 million tons for
2017. This number nearly doubles the production
capacity of Qatar and UAE combined.
Yanbu Cement is the largest cement company
in the western region, which is the largest cement
market in the kingdom, being comprised of four
major cities: Jeddah, Mecca, Medina, and Ta’if.
The company is the third largest at a national level
out of a group of 15 players in terms of production, sales, and revenue, having a current market
capitalisation of almost $3 billion.
These numbers are the result of a strategy of
efficiency, becoming more eco-friendly, and a
sustainable commitment to ‘Saudisation’. The
former being done in the form of training, both at
their own training centre and also in partnership
with companies abroad.
Recently Yanbu Cement signed an agreement
with a leading Chinese company, Sinoma Energy,
to install an innovative waste heat recovery (WHR)
system. It will be the largest of its kind in the cement industry worldwide, producing 34 megawatts
“We can produce 34
megawatts of clean energy.
This will be utilised to
increase the availability of
our cement grinding mills. In
addition, our cement plant
operation becomes more
environmentally friendly”
Ahmed Zugail, CEO of Yanbu Cement
and helping to significantly mitigate the impact on
the environment.
CEO of the company Ahmed Zugail further explains: “There is a lot of heat that’s being produced
from burning raw meal for clinker production,
with a heat up to 1400ºC. This heat is generally
disseminated into the air. In the WHR plant, we
are capturing this waste heat and hot gases from
the kiln, the cooler, and the preheater tower.
These produce steam, which drive the turbines
to produce electricity.
“The amount of hot gases and steam are so large,
we can produce 34 megawatts of clean energy. This
additional energy will be utilised to increase the
availability of our cement grinding mills. In addition, our cement plant operation becomes more
environmentally friendly because carbon emissions
will drop by more than 100,000 tons.”
Some of Yanbu’s most notable projects include
the expansion of the Prophet’s Mosque in Medina
and they have their eyes set on securing an execution contract for the Jeddah metro as well.
The Committee for Cement Companies is currently planning the establishment of a cement
academy, which will provide training for the whole
industry in the kingdom.
The committee will be a joint effort between
various cement companies to further the sector’s
strength in regards to human resources. Most of
the training will focus on the technical side, which
has traditionally been troublesome in regards to
finding qualified Saudis.
Cement is a binder, a substance that holds materials together. This serves as a good metaphor for
the Saudi cement industry itself, which is bringing
this increasingly economically diversified nation
together, one project at a time.
11
This is an independent publication by Upper Reach
‘Saudi Arabia is in
the best position to
redefine tourism’
Investment in infrastructure to cater for some 19 million visitors per year
is top priority. At the same time authorities aim to leverage “unique
and diverse heritage of natural and archaeological sites” to attract
discerning global travellers in search of something out of the ordinary
S
ome day there will be nothing odd about hearing
Saudi Arabia talked about as a tourist destination.
The transformation, when it comes, need not be a
lengthy one. After all, agrarian Spain required less than
a decade to reconfigure itself as the world’s third-ranked
destination for foreign visitors. But it did so by attracting
the sun, sand and sangria crowd, a path you can be sure
the Saudi authorities are not interested in exploring.
“Endowed with a unique and diverse heritage of
natural and archaeological sites, Saudi Arabia could potentially attract the most sophisticated global travellers,”
says Dr Costas Verginis, Senior Director of Development
for the Marriott hospitality chain. “Not mass numbers,
but a few hundred thousand of discerning travellers
from across the world for whom travel is closer to a
scientific and academic endeavour than a leisurely tour.
Saudi Arabia is in the best position to redefine tourism.”
Virgin beaches along the rim of the Red Sea are a
natural draw for divers and surfers, while exclusive
resort facilities could be developed at Dammam, on
the opposite side of the peninsula. Not to be missed by
even the most casual visitor are the spectacular ruins
at Mada’in Saleh, most of which were left there by
the Nabaeteans, the ancient people responsible for the
breathtaking “rose red” city at Petra in Jordan.
The Arabian peninsula was culturally shaped and
enriched by the caravans linking the Mediterranean
world and the Far East, passing through trade hubs such
as Najran, near the Yemeni border, famous to this day for
its traditional souk (market) as well as its architecture
incorporating details from merchants’ places of origin.
Nearly 3,000 archaeological sites from different civilisations and eras, including a surprisingly active prehistoric
period, are being examined, catalogued and placed under
government protection, with stone tools from the Shuwayhitiya site dated at over a million years old.
But why single out for priority development a sector
that at present represents just a 4.3 per cent total (1.6 per
cent direct) contribution to GDP? Because it can best
be addressed in conjunction with two closely related
problems appearing high up on the nation’s to-do list.
In recent years, what used to be a relatively manageable influx of religious pilgrims has become a gushing
torrent the Saudi authorities admit they were not prepared
for. Now the country is hosting some 19 million visitors
per year, including pilgrims, business travellers and
family members of foreigners working in the kingdom
under contract, etc. They are not quite tourists, properly
speaking, but in many respects their needs are similar.
It has come to the point where only passengers with
confirmed bookings are allowed in the terminal at King
Abdulaziz International Airport in Jeddah, the point
of entry closest to Mecca and Medina that handles
6 million passengers per year. A Spanish consortium
Majid al-Haram mosque attracts millions of religious pilgrims each year
is reportedly having trouble finishing the $30 billion
rail link between the three cities. New metro lines and
premium hotels are under construction in Riyadh and
Jeddah, but a plan to issue tourist visas was scrapped a
few months after it was introduced last year.
“Given the constraints of existing infrastructure, the
government has had to limit the allocation of visas for
pilgrims. I think the aim is to issue 20 million visas
by 2020,” says Abdullah bin Nasser Al Dawood, CEO
of the Al Tayyar Travel Group, which specialises in
religious travel.
“That is almost five times as many visas granted now
to Muslims worldwide, excluding domestic pilgrims
and citizens of Gulf Cooperation Council countries who
are not required to have them. So the government is
spending hundreds of billions of dollars on infrastructure,” adds Mr Al Dawood, whose firm just acquired
its first British travel agency.
The other determining factors are tourism’s impact
on economic diversification and the employment it
creates for the coming generation of Saudi citizens
“The government is spending
hundreds of billions of
dollars on infrastructure”
Abdullah bin Nasser Al Dawood,
CEO of Al Tayyar Travel Group
who are arriving now in numbers far greater than the
job opportunities that may be available to them when
they finish their studies.
So tourism in Saudi Arabia is a long-term proposition,
but the groundwork that will someday sustain it is being
laid right now by the Supreme Commission for Tourism
and antiquities, whose chairman, Prince Sultan Bin Salman
Bin Abdulaziz, has committed to creating an “environment
for investment” through drafting a regulatory framework,
offering incentives for general and targeted investment,
and devising long-term strategies for recruiting and training personnel in the hotel and hospitality sector.
12
This is an independent publication by Upper Reach
Telecoms to grow 3 per cent annually
to $18.7 billion by 2019
The Saudi Arabian telecoms market was worth $16.2 billion as of 2014 and not only is it the largest in the MENA region, but the kingdom also
has the highest social media penetration in the world and experienced 43 per cent growth in e-commerce between 2013 and 2014
I
n addition to banking and petrochemicals, telecommunications is considered among the most interesting sectors for international investment in Saudi
Arabia. As of the end of 2013, there were 51 million
mobile telecommunications subscribers; a number
which is largely due to the rapidly expanding local
economy and growing disposable income for young
people in the kingdom who are increasingly spending on
goods and services related to mobile communications.
Between 2013 and 2014, e-commerce grew by 43 per
cent, and over the next five years, the annual growth
of the Saudi telecoms market will average 3 per cent
per year, reaching $18.7 billion (£12.2 billion) by
2019, according to numbers from Pyramid Research.
Valued at $16.2 billion as of 2014, the Saudi Arabian
telecoms market is currently the largest in the Middle
East and North Africa (MENA) region, due largely to
the fact that social mores make it difficult for people
to interact in a conventional way. Oddly enough, this
has had the curious side effect of turning Saudi Arabia
into a place with the highest penetration of social media
in the world.
Dominated by three players, the telecoms industry
offers a unique competitive landscape with abundant
opportunities, especially with regards to data, which
has quickly become the key strategic focus of the main
players. “Saudi Arabia is among the top three countries
in the world for data connectivity per person,” explains
Hassan Kabbani, CEO of Zain, one of the country’s bigthree telecoms companies. “We are in a country where
people have huge appetite for data and the internet is
a main Saudi window to the rest of the world – users
access information, entertainment, movies, games,
trading, you name it,” he says.
Though Zain entered the market later than its competitors, this actually provided it with a competitive edge,
according to Mr Kabbani, in the sense that it was able
to enter with the latest telecommunications technology.
This technology did not come easily – the company paid
$6.1 billion for an operating licence which has held it
back from offering real value to investors, though Mr
Kabbani is confident that the company’s costly licence
will pay back generous dividends.
“There are companies which claim they are technology leaders, others claim they are price leaders,”
he explains. “Other companies care about their customers and consider that the customer is the source
and the reason for their existence. We belong in this
third category, and we are investing heavily in order
to make the Zain customers satisfied, to know more
about what they want.”
It would seem that such attention to consumers is
paying off for Zain, as the latecomer company already
has 10 million customers, who were drawn to its solid
network and attractive service. Though it is sandwiched
between two large dominant players, according to Mr
Kabbani it has devised a growth strategy that plays
nicely to its strengths. In a market of big, industrial
players, he compares Zain to a boutique hotel – a hôtel
de charme, where the customer is treated differently
than at other hotels. “We want the customer to talk about
us, and this is what’s happening,” he states.
Essential to the future growth of the company is a
three-pillar plan, which Mr Kabbani defines as operational, regulatory and related to capital structure. From
an operational perspective, he explains that Zain needs
to improve the customer experience at all levels, by
investing in shops and in customer service. In terms of
regulation, as a latecomer to the market it also needs
to negotiate favourable terms for the very expensive
licence it purchased; and as far as capital structure
goes, it should focus on more streamlined communication with shareholders. Despite recent hiccups, Mr
Kabbani has faith that there is a type of investor who
does not require solid performance and an institutional
approach, but instead looks for opportunities. It is the
type of investor who will see risk but also the opportunity behind it – and who will be willing to invest in
a company that has potential. That, according to Mr
Kabbani, is the ideal investor for Zain.
As far as more industrial players go, the Saudi Telecom Company (STC) is the kingdom’s market leader
and oldest provider. Its growth strategies differ widely
from those of Zain and are more focused on growth in
Telecoms are expanding and Saudi Arabia is already among the top three countries in the world for data connectivity per person
“STC presents an attractive
opportunity for international
investors, given its proven
historical performance,
improved margins and EBITA,
and its generous dividends
yields of 6 per cent”
Dr Khaled H. Biyari, CEO of STC
the domestic market and on providing advanced services to the enterprise sector. For instance, according
to the company’s CEO Dr Khaled H. Biyari, in addition
to traditional telecom services, STC offer a number of
managed services, cloud and data centre services, and
machine-to-traditional telco services, as well as ICT
solutions to various verticals. In parallel, the company
is also putting a greater focus on fibre-optic services
and tapping into the different international submarine
cables that it co-owns, in order to offer other operators and internet players a suite of advanced products.
Both globally and domestically, STC has a reputation for being a pioneer in terms of adopting advanced
technologies in the fixed and wireless arenas. It introduced 4G/LTE technology as early as 2011, and now
covers more than 85 per cent of the population with 4G,
and 95 per cent of the population with 3G. In order to
keep pioneering, it has been working hard to heavily
deploy its fibre network across the kingdom, so that
in the future, it will be able to expertly accommodate
the exponential growth in data usage.
From an investment perspective, the company presents promising opportunity backed by a record of solid
historical performance. It had the highest telecom brand
value in the Middle East in 2014, which has increased
by 14 per cent, to reach $5.7 billion. It is also the
only Saudi brand that is classified among the top 500
brands in the world by Brand Finance. The company
welcomes foreign investment and has had an investment
relations team in place since 2008, which is largely
responsible for creating communications channels with
the financial community, including both regional and
international analysts and fund managers. According
to Mr Biyari, “STC presents an attractive opportunity
for international investors, given its proven historical
performance, improved margins and EBITA, and its
generous dividends yields of 6 per cent.”
Adding to STC’s potential as a solid investment is the
opening of the Saudi Stock Exchange to international
investors. It is already predicted that the telecoms sector
will be among the most popular for foreign investors,
and Dr Biyari sees this occasion as an excellent opportunity to improve corporate governance, enhance
transparency and provide increased exposure to the
financial community within the regulatory framework
of the country. As a more established company, STC is
also more actively involved in CSR and philanthropic
projects, including initiatives that contribute to the
development of local human capital.
With a firm desire to become the ICT leader, Dr
Biyari is setting his company on a solid path to future
growth with a select set of goals. “We will continue
opening new horizons, serving our community and
earning customer trust by providing innovative solutions. We are willing to go the extra mile for our
customers.” However, in the realm of ICT, it faces
competition from Saudi Arabia’s third major telecoms
player, Mobily.
Having just recovered from a major corporate scandal that rocked its profits and brand image, Mobily is
slowly recovering and looking for opportunities in
the burgeoning ICT market, backed by government
spending on projects that are increasing demand for
high quality ICT services. Despite these new opportunities, estimates from Al Rajhi Capital indicate that
top-line growth will continue to remain moderate, as
the contribution from ICT is still modest. Furthermore,
ICT is a relatively lower margin business and requires
a high capex, though by 2017, Mobily expects that
the business segment will contribute to roughly 20 per
cent of its top-line, with an annual 7 per cent growth.
In other words, the total market size would be more
than 1.5 times the current annual revenue for Mobily.
Until ICT picks up, fixed data usage will be the main
driver of growth, though the changing environment of
the telecom industry has made it more challenging for
the sector as a whole to sustain growth. According to
market intelligence from Aljazira Capital, STC’s main
challenges come in the form of needing more innovative
ideas and getting a better handle on capex plans. Mobily,
on the other hand, would be well served by considering
a new segment of clients, revising its dividend policy
– which is currently too high to be sustainable – and
reviewing its operations. Finally, Zain could benefit
from a new niche business model that would allow it
to better balance its high debt and licensing fees, small
customer base, and depleting capital base.
Across the board, network infrastructure is a matter
of extreme importance, which Zain is constructively
approaching by developing strategic partnerships with
companies such as Huawei, Nokia, and Cisco, so as
to better provide the types of platforms that will best
serve the burgeoning needs of its customers. “It is not
a case where the big fish is eating the smaller fish – we
are more about living together in a world where value
can be created, we can join efforts, and have a win-win
situation,” affirms Zain’s CEO, Mr Kabbani.
This is an independent publication by Upper Reach
13
Competition heats up in
undersaturated insurance market
Double-digit growth coupled with low penetration rates means big opportunities in this nascent industry.
But the main challenge for insurers is changing the Saudi mindset on insurance
S
audi Arabia is best known for its oil riches
but the kingdom has been diversifying and
looking to grow other sectors including its
insurance market that in spite of its risks remains
a field with vast untapped potential.
“We are still very young in terms of the industry,
I think the achievements made in the last three
years are unbelievable, many countries that have
started before us have not really achieved the level
in which we are now,” says Raeed Tamimi, CEO
of Tawuniya, the largest insurer in the country.
One of three dominant players with a 22 per cent
share of the Saudi insurance market, the company
wrote the equivalent of $1.6 billion (£1.05 billion)
in gross written premiums and reaped an all-time
high of $160 million in profit last year.
While Mr Tamimi is optimistic about the future
of the industry he expresses some caution. Like any
other young business, it has its growing pains. The
market has had its share of newcomers that have
vanished just as quickly as they entered, due to the
high operating costs required to stay competitive.
“I remember when we reached the level in one or
two years, where we had 120 insurance companies
working in Saudi Arabia, and none of them lasted,”
he says. “Usually every year a good number of
those companies disappeared, so we were competing with something we did not even see.”
Regulatory changes imposed by the Saudi Arabian Monetary Agency (SAMA) in 2006, including minimum pricing and compelling cooperative
insurance models that require a percentage of
profits returned to their customers, have helped
to mitigate some of the sector’s volatility. A new
regulatory climate has levelled the playing field
for operators and pushed double-digit growth in
recent years – 18 per cent annually during the
period between 2008 and 2012.
Mr Tamimi was consulted in the development
of the new regulatory policy, and the company
welcomes the changes.
Beginning as a state-owned company, Tawuniya
was created by the government in 1986 to serve
as an insurance model for the rest of the country.
Young population and
strong economy reinforces
rise of reinsurance market
Reinsurance company Saudi Re is the lone domestic company in an increasingly
competitive and profitable market
A
“A gradual and profitable growth based on steady
ccording to Fahad Al-Hesni, Managing Diand sound steps is far better than trying to make a big
rector and Chief Executive Officer at Saudi
impact and then end up with big liabilities which will
Re, most of the local reinsurers in the Arab
eventually impact the company’s status.”
world enjoy compulsory cession from their markets.
Saudi Re’s influence is not just limited to the
“Saudi Re, by contrast, is forced to compete with big
insurance industry; it also has made a significant
brands without such an advantage,” he says. “The
contribution to the government’s overall effort to
law in Saudi Arabia requires insuring 30 per cent of
diversify its interests outside of the oil industry.
operations within the kingdom but does not name us
“Expanding the financial sectors
exclusively. We are not against this,
to increase their contribution to the
Saudi Re welcomes competition and
GDP is part of the government’s stratfeels it is healthier for its well-being
egy,” says Mr Al-Hesni. “Insurance
and the sector in the long term to
is an integral part of the developoperate in a completely competitive
ment plan.”
environment.”
Saudi Arabia’s insurance market
Competition certainly has not hurt
has doubled since 2010 and exceeded
growth, which under Mr Al-Hesni’s
$8 billion in premiums last year.
leadership was up 32 per cent in 2014
The country’s massive energy rewhile the expense ratio was held to
sources has served as the backbone
8 per cent, compared to 30 per cent
of its economy but the government
four years ago. The company’s assets
has been intent on diversifying its
exceeded $500 million, earning it a
economy to support job creation and
sound rating of BBB+ and a stable
development. The country’s youthful
outlook from the Standard & Poor’s
population is another factor fueling
rating services.
growth in the insurance industry.
While the company has enjoyed Fahad Al-Hesni,
The growth potential of the Saudi
robust growth thanks to a strong Managing Director and
insurance market has captured keen
economy and untapped potential, it CEO of Saudi Re
interest from abroad, a fact that is
values stability, the raison d’être for
not lost on the Saudi Re. The company has already
its founding. It was created in 2008 to help address
developed a broad network of international clients
volatility and bring balance to the industry. In recent
from 35 countries in the Middle East, Asia and Afyears the overall profitability rate in the sector has
rica. It also boasts a portfolio of assets evenly split
improved from 100.3 per cent (indicating a slight
between local and non-Saudi companies. And its
underwriting loss) in 2010 to 92.2 per cent in 2012.
strong balance sheet which reflects $276 million in
Regulatory changes in the cost structure ratio have
capital provides the impetus to expand. Although it
contributed to improved bottom lines, but so has
does not have any current plans to operate beyond
leadership, a responsibility that Saudi Re embraces.
its borders, it is a vision that is part of its future.
“Part of our role is to educate the market players
“We are relatively young, but regardless of size
and help them adopt best practices as a basic means
we have great ambition,” says Mr Al-Hesni. “Reinof alleviating market volatility and dealing with unsurance is international by nature. It is essential for
certainty,” says Mr Al-Hesni. “The changing nature
doing business, especially for expanding exposure.
of the market is something Saudi Re has paid close
Doing business not only revolves around making
attention to in the past few years and we have set up
profits and meeting stakeholders’ interests, but it also
dedicated risk management procedures using top of
involves the exchange of experiences, cultures and
the line models and IT systems.”
knowledge. We welcome relationships and openness.
A prudent strategy with a focus on customer service
The world is a big place, but relationships make it
is helping Saudi Re maintain its course to sustainable
easier to know.”
growth, according to the CEO.
Over the years the government has scaled back its
support but not its standards. Tawuniya continues
to maintain the highest level of industry standards
particularly when it comes to developing and attracting personnel.
“We have lots of training programmes and that
differentiates us from the rest of the market,”
says Mr Tamimi. “Everybody has a very clear
job description, with very challenging targets,
which have to be fulfilled otherwise you cannot
continue in such a position.”
Tawuniya personnel undergo rigorous training
and certification requirements accompanied by
varying levels of internships with senior representatives of the company.
While it remains the industry leader, competition is fierce and in recent years the company has
lost market share to some of its rivals. Still, improved regulation, changes in the law mandating
motor and health insurance, a youthful population,
a robust economy, and low market penetration are
all factors that provide for plenty of opportunity.
A market penetration rate that hovers around
1 per cent, considerably lower than the global
rate of 6.5 per cent, may represent an attractive
business opportunity but it also represents one of
the industry’s biggest challenges.
“Awareness is very low, people are not buying
insurance. The mentality is different. Products
like property insurance that have high penetration
in the US and the UK, just do not have the same
penetration rates here,” explains Mr Tamimi. “Nobody in Saudi Arabia insures their houses. People
still think insurance is an expense not a benefit.”
Tal Hisham Nazer, CEO of Bupa Arabia
That thinking may start to evolve as the Saudi
Arabian government introduced mandatory health
insurance for expatriates beginning in 2008. The
government mandate has served as a key driver
for growth and lends a huge boost for the leading
health insurer in the country, Bupa Arabia.
Formed in the late 1990s, the company was
born out of a partnership between Bupa, the UK’s
oldest insurer, and the entrepreneurial Nazer family. Bupa was looking to extend its international
reach while the Nazer family sought to diversify
its business. The partnership has resulted in steady
growth and profit for 18 years.
“Taking advantage of Bupa’s healthcare expertise worldwide is a huge advantage, combined
with the Nazer family’s great network and local
know-how; this compliments well with Bupa,”
says Tal Hisham Nazer, CEO of Bupa Arabia.
The successful arrangement has made Bupa the
leading provider in the country with a 37 per
Continues on page 14
14
This is an independent publication by Upper Reach
Continued from page 13
cent share of the health insurance market. “Our
focus has always been health insurance; we are
the only insurance company in the market that
focuses exclusively on this line.”
The number of Bupa Arabia customers has skyrocketed since the government mandated health
insurance for expatriates, who make up more than
one third of the country’s population. Over the
past seven years the company’s client base has
grown from 100,000 to 2.8 million, remarkable
growth given the roster of the more than 30 health
insurers Saudis and expats can now choose from.
Mr Nazer acknowledges that prior to the regulatory changes there was considerable cultural
resistance to health insurance.
“A key aspect of the SAMA regulations that
all insurance companies have to be co-operative,
removed a lot of lingering doubt from customers
with regards to the Sharia aspect,” says Mr Nazer.
“In addition to that, health insurance is probably
the least controversial. It is straightforward and
easy for customers to understand.”
Imposing the cooperative model on insurance
companies made them Sharia compliant and more
aligned to Islamic values, which encourages
Muslims to donate a portion of their savings to
those less fortunate.
The law mandates health coverage in the private sector, of which 10 per cent of its workers
are expatriates, which is a key target with great
potential for growth. But Bupa Arabia says it is
also focused on developing products for Saudi
families and improving its services.
“We moved from a healthcare insurer that pays
your claim to more of a healthcare partner,” says
Mr Nazer. “We have been investing heavily in a
service proposition that satisfies our customers
and helps them lead healthier happier lives.”
Bupa Arabia points to proactive programs designed to engage its customers. One of its healthcare
initiatives launched in 2014 has put the company
in touch with 700,000 of its customers on a regular
basis through diabetic, maternity and diet coaching,
as well as smoking cessation programmes.
The company prides itself in providing innovative programmes, an approach that extends to
Health insurance is obligatory for expats, who make up more than one third of the kingdom’s population. Above, King Khaled Hospital in Riyadh
its staffing philosophy. Bupa deliberately avoids
recruiting from the insurance industry; instead it
has opted to hire top-quality people from service
industries like banking.
“Service industries are all about people. A lot of
trust comes from our brand, and that trust comes
from having quality people,” explains Mr Nazer.
Inspiring trust and offering quality services
has been a successful formula for Bupa Arabia.
Its track record includes 18 years of continuous
growth and profitability. Revenue has grown from
$500 million in 2010 to just over $1 billion in
2014, while its share price climbed from $8 to
$48 since 2013.
The company avoided provisional write offs
in 2013 when under pricing forced many others
to do so.
“We did not get into that game; our focus was
on service proposition and value. We did not get
into the price war. As a result we have grown year
after year,” says Mr Nazer.
Dominant players like Bupa Arabia have done
little to discourage newcomers like Amana Cooperative Insurance from getting into the field.
Drawn by the potential profits in medical insurance sales, Amana set up shop in 2010. The company got off to an impressive start racking up the
equivalent of $69 million in sales in 2011. But
ambition soon set the company on a rollercoaster
ride as it expanded to include different product
lines. The following year the company saw its
sales revenue plummet to $14 million followed
by a year that saw the bottom line turn red with
$22 million in losses.
The company had to regroup and headed into
2015 with a different strategy. “We needed to look
at all aspects of the company from efficiency first,
cutting down costs came second,” says Majed
Sorour, General Manager of Amana Cooperative
Insurance. “The focus in 2015 is to sell only the
profitable lines that we have and diminish the
other lines.”
Industry-wide losses was one of the impetuses
for SAMA to introduce new regulations that called
for readjusting reserves and actuarial pricing, to
induce stability and ensure that companies like
Amana are true to their name – which in Arabic
means “keep your promise”.
“We increased our reserve and we feel good
about it. I think it is better to have over reserve
to protect policy holders,” says Mr Sorour. “Basically what we are saying is God forbid in case
of the biggest disaster, we can pay every single
policy holder.”
Against fierce competition, Amana is getting
creative with its sales pitch by offering unique
services. One of the assets that Amana is highlighting is a membership card that allows its
members to access medical services in the Gulf
region as well as overseas; the wider the coverage
area the more expensive the premium.
Mr Sorour says Amana Cooperative Insurance
is also setting itself apart from its competition
by settling its claims promptly.
“That sets you aside from the market because
what we are selling here really is we are selling a
promise and if you are going to sell a promise to
anybody, you can lose face value immediately if
you do not deliver on your promise. So you have
to deliver on your promise immediately once it
happens,” he says.
Another feature that distinguishes Amana from
its competition: a technique that Mr Sorour refers
to as “cross selling,” or tying different products
in one package, such as offering clients combinations of medical, motor and home insurance.
Mr Sorour is resisting any proposals to merge
to improve growth and efficiency; he is instead
looking towards acquisitions.
“If you look at the market,
as big as it is, we are not
covering much of that
market. We are expecting
huge growth in home
insurance, livestock, and
travel – all things we are
not covering”
Majed Sorour, General Manager of
Amana Cooperative Insurance
“Acquisition is what Amana is looking at,”
he confirms. “We are evaluating companies as
we speak.”
Fuelling acquisition plans is interest expressed
by German and Swiss investors with insurance
expertise looking to exploit growth in a market
that has undeniable potential.
“If you look at the market in Saudi Arabia,
as big as it is, we are not covering much of that
market,” says Mr Sorour. “We are expecting huge
growth in home insurance, livestock, and travel
– all things we are not covering.”
While insurance providers agree that the potential to expand the industry is sizeable, those who
have weathered the storms say a prudent approach
is necessary. “We have to watch the bottom line
and the top line at the same time, and we have
to be careful. I think we have to be conservative
for three years before we go into any massive
growth strategy,” says Mr Tamimi, reflecting on
the success of his company’s performance in 2014.
“I think it is a positive message for everyone,
you can make money,” he adds. “But there is a lot
of work to be done in order to grow with the same
target profitability. It is our biggest challenge.”
15
This is an independent publication by Upper Reach
Seven-fold increase in
manufacturing adds value
Private-sector manufacturing
companies are playing a key role
in the kingdom’s socioeconomic
development and diversification
“For there to be really
widespread employment
opportunities, manufacturing
has to play a key part”
A
s Saudi Arabia looks to add diversity to
its oil-based economy, the government has
prioritised the development of manufacturing. According to the Saudi Industrial Development
Fund, the number of industrial units in the kingdom
has increased from 198 in 1974 to 6,471 today.
Capital investment in manufacturing has risen more
than seven-fold during the same period to SAR883
billion ($222 billion) in 2013, up from SAR12 billion in 1974. Manufacturing currently contributes
about 10 per cent to Saudi Arabia’s GDP, but it has
the potential to make up a much larger share of the
kingdom’s wealth.
Saudi officials have long recognised that fact.
Around 25 years ago, they launched a Made in Saudi
Arabia branding campaign, aimed at “developing
a strong manufacturing base in the country,” says
Abdullatif Al Abdullatif, CEO of the family-owned
Al Abdullatif Industrial Investment Company.
The government-backed initiative offered Saudi
businesses incentives, including financial ones,
to transform companies that merely bought and
resold products into manufacturers that produce
finished goods. With the leg-up from the government, Al Abdullatif Industrial Investment Company
moved from importing and selling finished products,
mainly carpets, to manufacturing products itself
and then exporting them – often to the same firms
from which Mr Al-Abdullatif’s father used to buy
finished products.
M. Al Zamil. “We don’t need nuclear physicists or
biochemists,” he explains. “Most of the workers that
we need are in semi-skilled roles. We need to start
working on ethics and discipline as a priority over
skills sets. If you create a foundation in work ethic
and discipline, teaching skills on the job is a relatively
straightforward process.”
Saudi Arabia already has a foothold in midstream
manufacturing: it produces plastics and petrochemicals,
as well as aluminium. But just as the country is trying
to diversify away from all things petroleum-related, it
is also trying to develop new areas of manufacturing
and move even further downstream in the manufacturing life-cycle. In other words, the Saudis are looking at
turning the plastics they produce into containers and the
aluminium into automobiles and aeroplanes.
Abdullatif Al Abdullatif, CEO of the
Al Abdullatif Industrial Investment Co
Today, the Saudi government continues to support
manufacturing by investing in infrastructure, building
manufacturing hubs labelled industrial cities, and
setting up the Saudi Industrial Development Fund
(SIDF), which provides loans and advisory services
to promote the industrialisation of the kingdom.
In its Comprehensive Growth Strategy, released at
the G-20 meetings in Australia last year, the government also acknowledges the “need to adopt a set of
serious steps, including the development of educational and training curricula guided by international
standards” to try to improve the quality of the workforce. Indeed, lack of expertise among Saudi workers
is a problem, says Mr Al Abdullatif. To rectify this,
his company has set up centres “to provide training to
locals who can then take that expertise to develop their
own responsibilities over the longer term.”
Another company, Zamil Industrial – a regional,
if not global leader in the manufacturing of air conditioning systems and pre-fabricated steel structures
– offers training opportunities that focus on instilling
a strong discipline and work ethic, says CEO Abdulla
Mr Al Abdullatif says that sort of diversification of
the manufacturing sector is an essential step toward
tackling another problem: high youth unemployment.
Approximately half the population of around 28.8
million is under the age of 25, and almost one in three
of those youngsters do not have a job.
“The oil sector can create employment to a certain
extent, but for there to be really widespread employment opportunities created by the private sector,
manufacturing has to play a key part,” Mr Al Abdullatif explains. “As far as we can see, it won’t only be
huge companies developing the manufacturing sector;
it will also be small and medium-sized enterprises.”
Both Al Abdullatif Industrial Investment Company
and Zamil Industrial have a strong global presence.
Mr Al Abdullatif’s company exports to some 60
countries throughout Asia, Europe and the Americas,
and is looking to open new markets in Ghana, Nigeria,
Ethiopia and Sudan.
Continues on page 16
16
This is an independent publication by Upper Reach
Continued from page 15
“Last year we saved
12 million barrels of
oil equivalent just by
increasing the efficiency of
our supply”
Zamil Industrial employs more than 14,000 people
in 55 countries and operates manufacturing facilities in
Saudi Arabia, the United Arab Emirates, Egypt, India,
Vietnam and Italy. The company derives around 30 per
cent of its revenues from outside Saudi Arabia – selling
its products in more than 90 countries around the globe.
Empowering women
Zamil Industrial is also something of a pioneer in
Saudi Arabia, not only when it comes to developing
the manufacturing sector but also when it comes to
employing women. However, it has not always been
easy being a trend-setter. When the company first
began taking on women workers, Zamil Industrial
had to invite relatives of the women to its factories
to give the working environment the once-over,
the CEO told the Global Competitiveness Forum
when it was held in Riyadh in January. Once the
families gave the go-ahead for a woman to work at
Zamil, she would undergo nine months of training
to improve her technical and communication skills
and then start work on the factory floor.
Today, more than 100 women work in the company’s Saudi Arabian plants. Mr Al Zamil says
his family-run company was one of the first to
encourage the employment of Saudi women in the
industrial sector, particularly in the eastern region
of Saudi Arabia where it is headquartered.
“Initially we encountered a great deal of resistance,” Mr Zamil recalls. “We wanted to enter the
semi-skilled market, from a needs perspective, as
we often found this category of female employee
needed the job far more than more highly skilled
counterparts. They may need the salary to support
their families, or to become a breadwinner and an
integrated part of their families.”
Hiring low-skilled women “created an incredible
culture of discipline, with attrition rates at almost
zero,” says Mr Zamil, who adds that many of the
women who work on the factory floor also found
new confidence that pushed them to seek education
opportunities that they might never have imagined
were attainable for a woman.
He recalls the story of a young woman named
Samar Al Zahrani, who could neither read nor write
when she came to the company. “Given her level of
Ziad bin Mohammed Al Shiha, CEO of the
Saudi Electricity Company
Government incentives are encouraging greater numbers of private sector training schemes
“We have created a platform
at Zamil Industrial where
women can reach their
full potential, and we are
extremely proud of this”
Ms Al Zahrani has gone on to her middle school
studies and has set her sights on becoming an
engineer. She is the head of the shop floor and
recently won an award for Mr Zamil’s most committed Saudi female employee.
“We have created a platform at Zamil Industrial
where women can reach their full potential, and
we are extremely proud of this,” says Mr Zamil.
The company’s jobs-for-the-girls initiative is
also offering women jobs in accounting, engineering design, human resources and information
technology, and the CEO tells his male colleagues
“that the key threat to them is not international
workers or expats, but from their female compatriot
employees” who are rising.
Abdulla M. Al Zamil,
CEO of Zamil Industrial
Powering diversification
Saudi Arabia’s burgeoning manufacturing sector
education, she was initially declined employment
with Zamil Industrial,” he says.
Nevertheless, the young woman insisted that she
be given a chance, telling the CEO: “I know you
don’t look for education as much as attitude, character and enthusiasm.” He agreed to take her on.
“She has proven to be amazing employee,” he adds.
and well-entrenched oil industry need power to
run. That power comes from the Saudi Electricity
Company (SEC), which Chief Executive Officer
Ziad bin Mohammed Al Shiha calls “the battery
and the energy that powers the kingdom, for the
kingdom to power the entire world.”
“We not only realise our importance to the
kingdom in terms of bringing electricity and
power to the operation of the kingdom itself, but
we are talking about bringing power to the commercial centres, to the petrochemicals industry,
to oil and gas exports out of the kingdom, to
hospitals, schools, and everything that you can
see,” he explains.
Most power in Saudi Arabia comes from hydrocarbons, but Mr Al Shiha says the kingdom
is making an effort to move into different power
sources, including tapping into its abundant solar
power potential, and to improve efficiency in
power generation.
“Last year, for example, we saved 12 million
barrels of oil equivalent just by increasing the efficiency of our supply,” he notes. “That translates
into saving hydrocarbon resources, saving the environment and reducing carbon dioxide emissions.”
Like many Saudi companies, the SEC runs
vocational training schools to “train our people,
groom them and prepare them for this kind of occupation,” he adds.
“We train them to become skilled technicians, to
operate our generation facilities, and to understand
the transmission and distribution infrastructure,”
and to provide security at SEC facilities, Mr Al
Shiha says. Around 7,000 graduates of the vocational programmes were hired by SEC in the past
year alone.
Old media firms adapt
to new media world
Upper Reach talks to Sulaiman Al
Hudaithi, CEO of one of Saudi’s
top media firms, SRMG
Saudi Research and Marketing Group (SRMG)
is very much the cornerstone of the Saudi media
market with many leading newspapers and media
products. Can you give an overview of the group?
Since its establishment in 1987, Saudi Research and
Marketing Group (SRMG) has been playing a pivotal
role in the markets of publishing and journalism in the
Arab world, through its flagship political, economic and
lifestyle dailies, weeklies and monthlies like Alsharq
Alawsat, Arab News and Aleqtisadiyah newspapers and
widely circulated magazines like Sayidaty and Alrajol.
Our businesses have been expanded locally in Saudi
Arabia, regionally and internationally.
Exploring new horizons of growth, SRMG paved
the way for a new specialised commercial and licensing platform in 2006 with the new Saudi Specialised
Publishing Company, SSPC, established to publish
international licensed titles in Arabic and English editions for our region.
Saudi Arabia has got the highest penetration of social
media in the world. How does that affect traditional
media companies?
That is where the pressure is today on all the newspapers and magazines around the world. And, more
importantly, that is where opportunities are looming
at the same time. With such pressure and challenges
exacerbating day after day, our advertising share of the
market has not dropped. What has dropped is the value
of the market itself.
And how are your competitors faring with regards
to the change in media habits and transforming
their businesses?
Everybody is trying their best, racing towards that
digital ‘wonderland’. Like slate.com and huffingtonpost.com, the online market in Arabia has been
surfing such Arabic websites imitating this international model, or that where some traditional editorsin-chief, managing editors or writers jump from the
print wagon to the digital one.
We hear a lot about the modernisation story of
Saudi Arabia and diversification of the economy.
What are the key driving forces behind these
trends of modernisation in your view as a leader
in the media? Is it something that young people
are driving?
Well one may say that a mixture of the wisdom of
the elders together with the enthusiasm of the young
generation is driving the society towards our flavour
of modernisation. Many people have been mistakenly confused by the notion that to modernise is to
necessarily ‘Westernise’. Surprisingly enough, the
government is today the leading force behind such
great initiatives to develop our societies to pave the
way for the best international levels of development
– economically, financially, culturally, educationally
and socially. Also, the private sector, with the support
of the government, has been developing a strong base
of industrialisation outside the oil sector.
One of the big steps is the opening of the Saudi
Stock Exchange and inviting international investment. How much excitement have you detected here about the opening of the stock market
amongst the business community?
Opening the Saudi Stock Exchange for international
investment is probably a positive step. More money
will be coming into the country. There will be more
people interested in coming and participating. As a
result, Saudi Arabia is moving confidently to have
one of the major stock markets in the world.
17
This is an independent publication by Upper Reach
Innovative industry tests could reduce
irrigation water usage by 90 per cent
Food security and keeping water usage as low as possible are key concerns in the food industry and Saudi companies have innovated and invested
in groundbreaking means of overcoming challenges in one of the world’s driest countries, developing a low-impact base for the cultivation of food
B
eing covered almost entirely in desert has
been a mixed blessing for Saudi Arabia: the
Gulf country’s economy and well-being are
largely dependent on oil and scientists say deserts
and arctic regions hold some of the largest hydrocarbon reserves on Earth. But oil alone cannot fuel
a nation and being one of the driest countries on the
planet has its drawbacks – particularly when it comes
to developing a stable and sustainable food industry.
Because of the constraints facing farmers and
livestock breeders, Saudi Arabia imports 80 per cent
of its food needs, with the main food imports being
barley, sheep, rice, chicken and wheat. Agricultural
and food imports cost the country around $12 billion (£7.8 billion) each year and limited agricultural
production is expected to result in imports either
remaining at the same level or increasing in future.
Food companies have not let the challenges of
growing or rearing in Saudi Arabia dissuade them
from setting up shop in the kingdom. Enterprises
such as Almarai, which prides itself on the quality
dairy, poultry and bakery products it produces in
Saudi Arabia and the broader Gulf region, have
been successfully doing business in the Gulf region
for generations.
“When you are in a country or a region like Saudi
Arabia, water is a key issue,” Almarai CEO Georges
P. Schorderet says. “Obviously we work in a sector
which needs some water, but we have been committed to sustainability from the early days.”
Renowned Professor of Water Management Arjen
Hoekstra states in his 2012 research paper for the
University of Twente that “by far the largest contribution to the total water footprint of humanity
is related to the production of animal products.”
Rearing the meat people eat and producing the
dairy products we use accounts for 27 per cent of
our water footprint, compared to only 4 per cent
which relates to home water use.
This is not widely known however, as growing
feed crops is “far removed from the consumer, which
explains why consumers generally have little notion
about the fact that animal products require a lot of
land and water,” explains Prof. Hoekstra.
Almarai, on the other hand, is more than aware of
what its animals need in terms of space and nourishment. As a company that prides itself on the sustainability of its goods, it has been importing feed for
its cows that produce Almarai’s high-quality dairy
products since it was established in Riyadh in 1977.
“In principle, there is absolutely no problem in
finding this feed on the worldwide market,” says Mr
Schorderet. “You can find corn, soy and cottonseed
everywhere in the world in the quantity and the
quality required.”
Only alfalfa hay is difficult to source, which is
why Almarai has entered into cooperative ventures
in Argentina, Poland, Ukraine and the United States.
The company is considering investing in even more
alfalfa-growing projects in Eastern Europe, Turkey
and Africa, the CEO reveals.
“By doing that we reduce the reliance on Saudi
Arabia’s water resources and that is our commitment
to this country,” he says.
The Almarai CEO adds that the company has also
taken steps to cut down on waste at its production
facilities. “We are trying to do the same with less,
to reduce the consumption of water, electricity
and diesel. We want to have a saving of 8 per cent
in the current year, and when we have achieved
that we want to move further. This is how we get
more efficient and that is our commitment to the
water issue.”
Hydroponics growing
An alternative way of saving water – which is currently being tested in Saudi Arabia – is hydroponics.
Hydroponics is a process whereby plants are grown
in mineral nutrient solutions without soil. Crops
grown in hydroponic greenhouses use about 10
times less water than crops grown the traditional
way, says Dr Patricia Rorabaugh of the University
of Arizona’s Controlled Environment Agriculture
Animal agriculture accounts
for 27 per cent of the world’s
water consumption,
compared to only
4 per cent which relates
to home water use
“Obviously we work in a
sector which needs some
water, but we have been
committed to sustainability
from the early days”
Georges P. Schorderet, CEO of Almarai
Centre. Hoping to benefit from this, Saudi’s National Agricultural Marketing Company, which is
also known as Thimar, recently struck a deal with
a U.K. company to build hydroponic greenhouses.
Thimar’s Managing Director Sari Almaayouf
claims developing hydroponics will finally allow
the country to grow crops organically.
“There is no organic crop growth in Saudi,
regardless of the labels that we see or what the
Agriculture Ministry is proposing or saying,” says
Mr Almaayouf. “Organics depends on several important things, which are air, water, soil and also
use of chemicals, and there is nothing in Saudi that
is ready to be organic,” he adds. “The water is not
100 per cent pure water. It is all salty, and this is
one of the main reasons that you cannot have an
organic product.”
The Thimar managing director says the hydroponic greenhouses the company is building will
use “100 per cent organic water” and “much less
than what we should use in the normal scenario. For
tomatoes, for example, we will use only 1 per cent of
what the tomatoes would consume if you water the
plant. So this is one of the reasons that we should
get organic products very soon.”
Mr Almaayouf also notes a strong foreign element in the Saudi farming and food sector, while
the government has invested heavily in farming
infrastructure outside of the country, where water
access is not a problem. “A large-scale project is
already started in Sudan but this will take a while.
This will take three to four years minimum to receive
the product,” he notes.
Multi-level sustainability
As in other sectors of the Saudi economy, one of
the main problems facing the food and agriculture
sector is finding capable and trained workers. Almarai treats this as another level of sustainability.
“It is not just about the environment,” expresses Mr
Schorderet. “It is also about developing local talent.
We still employ quite a lot of expat workers. When
I joined this company in 2004, it had about 4,000
people and now there are 35,000. So even if we have
the same percentage of local staff, 20 per cent in
2004 was 800, while now it would be 7,000 people.”
But the company has in fact increased the percentage of locals it takes on and it offers them vocational
training. “It is not only offering a job, it is offering
sustainable employment for the people,” continues
the Almarai CEO. “We use what we call GPT –
Gradual Professional Training. We take people from
the universities, about 200 or 250 every year, and
they go into an apprenticeship in the company. Over
time they get responsibilities and we prepare them
to take a leadership role.”
The company also has a partnership with the
Technical and Vocational Training Corporation in
Al-Kharj to train dairy workers and food technicians. “We believe it is our duty as a leader in this
region. I think it is much more important to focus
on the quality of what you give to the young locals –
quality employment, not just employment – because
otherwise you have a lot of turnover, people come
and go,” says Mr. Schorderet.
According to the investment and advisory firm
Aljazira Capital, the outlook for the kingdom’s food
sector is expected to remain ‘positive’ in spite of
the hurdles facing the Saudi food and agriculture
sector. The Saudi government’s vision “is to secure
the supply along with managing several challenges,”
Aljazira states, while “diversification and product
innovation are expected to continue to drive growth
in the food sector.”
18
This is an independent publication by Upper Reach
Pharma sales make
up more than half
of the GCC market
and are growing
Healthcare services, medical
equipment and pharmaceuticals
are increasingly in demand as
population growth and lifestyle
changes put pressure on supplies
R
ising demand for essential healthcare services,
medical equipment and pharmaceuticals, as the
kingdom’s population growth, lifestyle changes
and demographic shifts put increasing pressure on its
current infrastructure, mean opportunities for private
sector participation are in a healthy state.
Saudi Arabia’s population, currently an estimated
28.4 million people and the largest in the GCC, is
experiencing annual growth of 2.7 per cent and shows
no signs of slowing down. By 2025, forecasts suggest
they will number 35.4 million and – to cite just one
complication – not all will be living in the big cities
or on the edge of the Red Sea or Persian Gulf, but
scattered over nearly a million square miles of desert.
This imposes additional strain on an overstretched
public health system already being called on to absorb
a demographic bulge created by a large generation of
young people who are going to be marrying and starting
up a family in the near future, and Saudi families have
a tendency of being large in number.
Then there is the impact of what public health officials
refer to as lifestyle issues. Expressed in numbers, it means
that at least 30 per cent of Saudis are classified as overweight,
around 22 per cent are habitual smokers, and some 17 per
cent suffer from diabetes. Cardiovascular and kidney disease
are becoming increasingly common as the number of Saudi
residents aged 45 and over grows steadily steeper on the
charts and is expected to double by 2030.
Treatments for such behaviour-based ailments, among
others, are therefore in high demand. In 2014 the pharmaceuticals market in Saudi Arabia was estimated to be worth
$7.3 billion (£4.75 billion), representing more than half of the
whole GCC market. Pharmaceutical sales in the GCC were
$5.6 billion in 2010 and are forecast to grow in the range of
6-8 per cent (compound annual growth rate, CAGR) over
the following decade to be in the range of $9.9 billion to
$11.6 billion by 2020.
“In Saudi Arabia, the private sector contributed approximately $3.5 billion and comprises around 300 companies,
with only about 12 to 15 having local industrial operations,
covering just 25 per cent of market demand,” says Fahad
bin Ibrahim Al Khalaf, CEO of Spimaco. “So there are still
a lot of opportunities for the pharmaceutical industry in the
Saudi market.”
Spimaco was the country’s first and is its largest pharmaceutical and medical appliance manufacturing firm, having
been in the business since 1986, when its innovative Al
Qassim manufacturing plant began production of six highdemand items. These days its sales force has nearly 200
“The fundamental drivers
for pharmaceuticals are
strong in MENA (Middle
East and North Africa) and
the region holds significant
opportunities for Spimaco
in generics and licensing
patented drugs”
Fahad bin Ibrahim Al Khalaf,
CEO of Spimaco
products in their portfolio, a reputation for superior relations
with regulatory bodies, and a customer base spanning the
Middle East, North Africa and the Maghreb through strategic
local partnerships.
“The fundamental drivers for pharmaceuticals are strong
in MENA (Middle East and North Africa) and the region
holds significant opportunities for Spimaco in generics and
licensing patented drugs,” comments Mr Al Khalaf. “The
average forecasted growth is higher than in developed
markets – this is due to growing populations, low yet fast
growing expenditure on pharmaceuticals, and the sizeable
occurrence of specific chronic diseases, e.g. obesity being
three times higher than the global average and the kingdom’s place among top 10 countries worldwide in diabetes
prevalence rates.”
Other factors have already begun to affect pre-existing
paradigms and made it clear that the ways in which healthcare
is paid for, managed and delivered to clients are going to
undergo some major changes and spur higher demand for
pharmaceuticals. One will result from the gradual implementation of laws requiring mandatory health coverage for
everyone living, working or visiting Saudi Arabia for any
length of time, with no more than a few exceptions, such as
for diplomatic staff and religious pilgrims.
Mandatory private health insurance has been on the table
since 2005, when it was first made applicable to the relative
handful of people entering the country on tourist or business
visas. Later, authorities gave some thought to making it applicable to all government employees, which proved technically
unfeasible. At the present time, there is talk of taking it one
sector at a time, starting with education in 2017. Obviously,
insurers will have to provide this massive new pool of clients
with a full range of facilities and treatment options.
Another development affecting Saudi Arabia’s healthcare
sector include the June 2015 opening up of the Saudi Stock
Exchange to foreign investment, and billions of dollars
in capital flows from abroad seeking to home in on the
more than 165 companies on the Tadawul All Share Index.
Spimaco is the only one in its sector with a Tadawul listing
and Mr Al Khalaf says the new investment flow entering
the market will be seen as a welcome development in his
company’s boardroom.
“Apart from the liquidity, foreign capital flows will help
improve corporate governance, on matters such as disclosures.
New liquidity would help us to aggressively expand into new
markets. As a listed company with a long-established track
record that counts for a good deal,” notes Mr Al Khalaf.
Spimaco’s capitalisation of SAR1.2 billion (£208 million)
makes it one of the largest of the 14 industrial investment firms
listed on the exchange, second in fact only to the SaudiArabian
Mining Company (Ma’aden), which stands at SAR11.68
billion, and ahead of the Abdullatif Industrial Investment
Company at SAR812.5 million. “Financially, Spimaco is
in a very strong position and the outlook for the industry is
very positive,” states Mr Al Khalaf, adding that specialist
European companies could partner in a lucrative, expanding
pharmaceuticals market in the kingdom and expand technical
know-how and expertise in the sector.
Record budget boosts
healthcare spending
The 2015 budget increased the allocation for healthcare by 48 per
cent, adding to the sector’s momentum
T
he regional leader in healthcare and biggest spender
on the sector, Saudi Arabia aims to build on the
momentum of recent major investments and significantly increase quality, capacity and private sector activity
in the sector over the coming years, prompting analysts
to project a compound annual growth rate (CAGR) of
around 9 per cent between 2015 and 2020 in the kingdom’s
healthcare sector.
The government’s budget in 2014 earmarked SAR108
billion (£18.7 billion) for healthcare and social affairs,
representing 12.6 per cent of the total, and a rise of 8 per
cent on 2013. In the kingdom’s record 2015 SAR860 billion
budget, healthcare and social affairs received the secondbiggest allocation, after education, and the largest boost to
spending – health received SAR160 billion, representing
18.6 per cent of the total and an increase of 48 per cent.
This came as further confirmation of the government’s
dedication to healthcare. Over the past five years the Ministry of Health has opened 77 hospitals and medical centres
with a capacity of 11,161 beds, and raised the total number
of hospitals in the kingdom to 295. Plus, at least 34 medical centres specialising in the treatment of cardiac, kidney
and tumour diseases were opened over the same period. In
February, the ministry announced that work is under way
to complete the construction of 88 centres holding 70 beds
and focusing on a wide range of specialist treatments. The
government’s plans also include the construction of 132
hospitals, five new medical cities providing a total of 6,200
beds in hospitals and clinics, and expanding the existing
medical cities in Makkah and Riyadh.
Currently, the Ministry of Health directly provides around
60 per cent of healthcare services in Saudi Arabia, with a
further 20 per cent coming from entities that cater for state
employees, such as soldiers or oil workers, and about 20
per cent by the private sector.
Three decades of experience in the field has led Dr
Abdul Aziz Al Hammadi of the Al Hammadi Development and Investment Co to affirm that the private sector
is poised to play a key role in providing health-related
services to the Saudi people offering them the best and
most inclusive care, the most qualified personnel, stateof-the-art technology and efficient management. “There
is huge potential,” he comments.
In 1985, Al Hammadi opened its first facility, a 340-bed
hospital in the Olaya district of Riyadh, and has put the final
touches on new facilities at Al Suwaidi and Al Nozha on
the outskirts of the capital.
Dr Al Hammadi notes that at one point he and his associates on the Board of Directors were faced with a more
localised demographic dilemma: “My father, who founded
the business, had 10 kids, and my uncle, who was his partner,
had eight, so altogether we are now 18 families. That is just
not a viable way of running a company.” Accordingly, last
year the family took the company public with an IPO in
which total share capital was increased by 30 per cent, with
22.5 million new shares placed with institutional and retail
investors. Since then the listing has performed consistently
well on the Saudi Stock Exchange, or Tadawul.
As for challenges ahead, Dr Al Hammadi cites the
persistent difficulty in recruiting staff who possess the
high-level skill set he has pledged to make available to his
clients. “The cost of physicians and medical staff is very
high. There is a shortage of nurses everywhere in the world,”
he says. “A lot of companies, including Al Hammadi, are
opening a healthcare private training centre.” Investing in
human capital is thus an essential component of the strategy
that Dr Al Hammadi is confident will pay off for healthcare
providers who are prepared to meet the challenges and adds:
“We believe in quality healthcare and we believe demand for
it is going to grow massively over the next 10 to 20 years.”
02
This
This isis an
an independent
independent publication
publication by
by Upper
Upper Reach
Reach
19
Three clear objectives for Halwani
The fortunes of one of Saudi Arabia’s leading food companies have been turned around since Saleh Ahmed Hefni took over as CEO in 2007.
In the past seven years, Halwani Brothers’ profits have grown from 20 million Riyals ($5.3 million) to nearly 100 million Riyals, while sales have
increased to 1 billion Riyals ($267 million). Mr. Hefni aims to double revenues to 2 billion Riyals, one of three clear objectives he set when entering the company eight years ago. In this interview, he talks about these objectives, why he will not sacrifice quality to lower prices, re-branding
the company, and the possibility of entering the growing health foods market.
When you say establishing Halwani as an institution,
what do you mean by that?
Most family businesses have a decision making structure
that is based upon what the owner wants. The board
structure is a little more democratic and transparent.
When you have a public company, you require particular
decision-making structures and committees that approve
investment decisions, senior appointments and such like.
At the same time, it is very important to separate management from ownership in structuring public companies. All
of this has been done in our organisation, and we are very
proud to demonstrate this to all of our stakeholders and
can confidently move forwards as a result.
“Currently Saudi Arabia
accounts for around 80% of
local production and 20%
for international export. The
same balance goes for Egypt.
We believe that the sky is the
limit for how we can grow
this international proportion
of the Saudi production.”
Eng. Saleh Ahmed Hefni,
CEO of Halwani Brothers
Since your arrival in 2007, you have restructured the
company and transformed performance. Please tell
us more about the company when you arrived and
Halwani Brothers today?
When I first arrived at the company we had three strategic objectives. First was to start building state-of-the-art
industrial facilities and move out of the existing facility
that had been in operation for 40 years.
Our second objective was to take the company to an IPO
(Initial Public Offering). The third objective was to take
the company up to revenues of 2 billion Riyals ($533
million). This involved both organic growth as well as the
acquisition of companies locally and regionally.
Thus far we have completed two of the strategic objectives, the company was listed in 2008 following the IPO.
Secondly, the industrial complex begun construction in
2009 – we are now in the process of moving locations
and will start commissioning in the middle of this year.
Thirdly, we have achieved our organic growth as projected,
but have yet to acquire new companies. We have looked
at a number of opportunities In Egypt, Turkey and Saudi,
but as of yet nothing has materialized.
The restructuring phase was very important for the company, the vehicle that we wanted to use to achieve our
future goals and strategic objectives required a new setup
on the board and a different setup in the management.
What was the rationale behind taking Halwani Brothers to the stock market, and how has this influenced
the company’s development subsequently?
Our expansion mechanism was behind the decision to go
public. Secondly, the major shareholders wanted to build
an institution out of Halwani; it is no longer a family business. We are now fully fledged in corporate governance in
terms of internal audit, transactions and board structure.
This was really a second reason for us to ensure that the
company was perceived in the local market as a company
that can grow upon a solid and transparent foundation, as
well as to attract capital for our expansion plans.
You are in quite a unique position in that you have
worked with the company before it was listed for an
IPO, as well as after. How has this changed the company from your perspective?
It has been very important, particularly as the Capital
Market Authority has evolved towards requiring strict
regulations and transparent structures. Board members
now have real responsibility on the things that are said
and done – it is no longer about coming along for a cup of
coffee and a casual meeting. The whole team is far more
focused. The position of the Board is far more prestigious,
this presents a challenge in itself because finding directors
willing to take on the responsibility that comes with being
a board member can sometimes be difficult.
Coming back to point one on the strategic plan: infrastructure. Could you elaborate further on how
having world-class facilities has served to move the
company in forward?
In Egypt for example we doubled our meat production last
year. In 9 months we used most of our extra capacity. Also
in Halawa production, we have increased our production
capacity by 50%. Also, in Egypt we are in the process of
building a factory that produces chicken fillet and nuggets;
this will become operational later this year.
Considering your production balance, is most done in
Egypt or in Saudi Arabia?
Looking at revenue, in 2014 the balance was about 50/50
with 80% of profit coming in Egypt and 20% coming from
Saudi Arabia. In Saudi, we are building nine factories
right now. Basically, the equipment available on site will
service our future requirements until 2020, but the facility
will serve us for the next 30 years.
Saudi Arabia is not considered a beacon of world-class
standards in food production such as in the United
States or Europe. How do you keep up with the highest
international standards from your position in Jeddah?
We have been able to penetrate the international market
with certain niche products such as Maamoul (pastries
with dates) that are allowed in these markets. We have
been able to develop export markets by using the highest quality materials and implementing the best possible
international standards such as those of the International
Organization of Standardization and the Hazard Analysis
and Critical Control Points.
Halwani has developed a wide portfolio of international export markets as well as the business in the
Kingdom. How important is Saudi Arabia for the
overall business?
Currently Saudi Arabia accounts for around 80% of
local production and 20% for international export. The
same balance goes for Egypt. We believe that the sky is
the limit for growing this international proportion of the
Saudi production.
How do you perceive the Halwani Brothers brand and
what direction do you want to take that in?
We have been thinking about the brand carefully and
working on re-branding the company for the past couple
of months. Halwani has numerous sub-brands; we are
going through a process of re-focusing our brands. Our
main brand, that is, the green logo gives a seal of quality
symbolic of Halwani. We have been positioned for the
past 30 years as a trusted product; our prices are higher
than our competitors but we use the highest quality materials and processes. Those customers that want quality
are welcome, but we shall not be cutting on our prices or
quality as a competitive strategy.
Sales have increased by approximately 80 million Riyals ($21 million) year on year for the past five years.
What’s driving this growth in terms of product lines
and strategy?
We have doubled sales over the course of the past 5 years.
Seven years ago the company was making 20 million Riyals profit, now the company is making above 90 million
Riyals profit. There was a lot of focus and work done in
order to deliver that growth – the key thing was to focus
on products with strong growth. On top of this, we have
re-visited all of our input processes, our pricing structures,
sales and distribution. All of this has accumulated to reach
sales in excess of 1 billion Riyals for 2014.
A key risk for the region concerns health. Rates of
diabetes, obesity and such lifestyle related illnesses are
a key issue. To what extent does helping counter this
issue factor into your strategic plans?
This issue is a core part of our strategic planning. Many
of our products depend upon sweetness. Nevertheless, we
are seriously discussing how we can diversify into healthy
products that will be more attractive over the long-term.
We are capable of producing such foods and it is a great
intention of ours to do so.
What are your thoughts on the opportunities presented
by the opening of the Saudi Stock Exchange and the
ability of Saudi companies to work at a strategic level
with international investment partners?
It is extremely important, especially for those companies that have not yet adopted strong corporate
governance measures. This change will influence
such companies to become more compliance focused
in their operations. The Saudi Stock Market is huge,
by welcoming foreign investors into the market it shall
open up doors for family businesses to start operating
in a more sustainable way. On top of this, the Saudi
market is quite volatile, having international institutions will take some of this volatility away and replace
the sentiment driven investment culture with a more
fundamentals-based approach.
How is Halwani Brothers gearing up to work with
international investment partners?
Any international investors will be looking for clear
strategic goals in the companies they are considering
partnering with. Any investor that comes into the market
will look at several key points such as board structure,
governance, cash flow and such key performance indicators. Management is also a very important point, as well
as, obviously the product offering. This detailed investment approach will add great value for the market as a
whole; I think everyone involved will do well from this.
If I was an international investor I would certainly look
into developing a relationship with Halwani.
20
This is an independent publication by Upper Reach
Real estate is on the rise with
urban rentals up 15 per cent
Foreign capital and expertise in
the property sector team up well
with local real estate firms as a
critical shortfall in the residential
market and soaring demand
keep prices and returns high
I
t is no secret that Saudi Arabia’s principal source of
wealth lies under the ground. But comparatively few
people outside the country realise the importance of the
ground itself and what gets constructed on top of it in the
dynamics of a vigorous economy. With oil prices in a slump,
however, and a good deal of surplus liquidity looking for
a home, investment flows are being channelled into Saudi
real estate, as it is powered by something more reliable than
oil, namely demand.
Demand was what led essentially all the major players at
the international real estate table to set up or double down on
existing operations in the kingdom, including JLL Colliers,
Sotheby’s, Century 21 and other well-known brokerage
houses. The property developers with whom they work
closely are local firms of impeccable standing and experience, but they would be the first to acknowledge that more
foreign expertise as well as foreign capital would be welcome.
Foreigners were not allowed to own property in Saudi
Arabia until 15 years ago, when authorities became aware
that an open market was more likely to come up with solutions to a situation that even that long ago was looming on
the horizon. Now, as a foreigner, you will not be allowed to
own real estate in Makkah or Medina, and you must have
official legal status in the kingdom, either as a bona fide
resident or registered corporate entity. But those are the only
limitations of any consequence.
As from June 2015, foreigners will be allowed to trade
shares in the companies listed on the Riyadh stock exchange
or Tadawul, where listed companies in the sector include
Dar Al Arkan, Saudi Arabia’s largest property developer by
market value, which has massive housing projects under way
in the greater Riyadh area, as well as zones around Medina
and Jeddah. Other closely tracked listings in this area are
Emaar Economic City and Jabal Omar.
All have focused their efforts on easing what is still a
critical supply shortfall in the residential property market,
though you would never know it from the accumulation of
cranes and bulldozers visible on the outskirts of the big cities,
or in mega-projects like the King Abdullah Economic City,
a complex of developments and industrial zones covering
168 square kilometres of prime Red Sea coastline. The
KAEC, as it is known, will offer both upscale and budget
housing for 2 million residents as well as schools, clinics,
sports and recreation facilities. The promoters like to boast
that, when completed (set for 2020), the KAEC will be
larger than Washington DC.
The late King Abdullah is credited with realising that a
major effort would be needed to provide affordable housing
to a population that is both young (over half the Saudi people
under age 30) and growing (by 2.7 per cent in 2013), and so
allocated $67 billion through the Ministry of Housing for
the construction of 600,000 residential units, including an
extra 200,000 per year near to make up the shortfall caused
by new house-hunters entering the market when they marry.
The King himself, they say, examined and approved
the plans. It was stipulated that when appropriate, many of
the dwellings would be offered at the entry-level end of the
price range so as to be available to young people when they
are ready to start a family – the tradition is for Saudi men to
have acquired their future home before their wedding day.
In this respect, demographics is decisive, as these same
young people do not seem to mind living in rented quarters,
preferring to avoid long-term obligations for the sake of a
home they will likely outgrow. Nor does “acquired” necessarily imply ownership. Only 4 per cent of Saudi families
are burdened with a mortgage. New laws introduced late in
2014 freed up bank liquidity and made it easier on paper
to get a mortgage, but capped the amount of the loan at
70 per cent of the sale price, creating a dampening effect
that persists to this day.
This year a special tax on undeveloped land was introduced
to discourage speculators and free up land for development.
The extremely high cost of land is another drag on new home
construction and one of the most difficult of all to remedy.
As a result, in a recent survey of the Riyadh property
market, the return to investors on residential rentals outperformed sales in the first quarter of 2015, which were up by
5-7 per cent in the benchmark city of Riyadh (and as much
as 10 per cent in the north of the country, where freehold
property is even scarcer). And the income from desirable
urban rentals shot up 15 per cent.
Notably, a number of identifiable factors have been
impacting in different ways on different segments of the
real estate market. For example, retail property is on a roll,
with so much loose liquidity ending up as discretionary
income for a country of dedicated consumers. New shopping malls are going up everywhere, although not all of
them are as enormous and family friendly as the Mall of
Arabia, near Jeddah, that covers 260,000 square metres
of service outlets, restaurant dining and shops offering
most international signature brands in fashion, electronics
and accessories.
Rentals of prime location office space are steady but sluggish, in part on account of delivery delays affecting a number
of showpiece skyscrapers, however this is seen merely as a
temporary setback.
A blitz of new hotel construction has added thousands
of new units to the lodgings pool, the majority of which
offer four and five-star accommodation. The country’s
current ruler, King Salman bin Abdul Aziz, has ordered
that more modest three-star and under facilities be built to
accommodate pilgrims – many of which travel all the way
from Asia – who would appreciate having budget accommodation available to them.