industry Analysis for drive throw coffee shop ( Business Planning)

COFFEE SAUDI/Country insight SAUDI.docx

Country insight: Saudi Arabia

FT/IMG

High-Level Summary

Country Insight Headlines

Key Recommendations

Risks and Opportunities

Global Insight

Regional Insight

Country Insight Headlines

Credit Environment Outlook

Supply Environment Outlook

Market Environment Outlook

Political Environment Outlook

Detailed Analysis

Short-Term Economic Outlook

Long-Term Economic Potential

Market Potential

FX Risk

Transfer Risk

Business Environment Quality

Business Continuity

Insecurity / Civil Disorder Risk

Expropriation / Nationalisation Risk

Background

Perspectives

The Economy

Politics

Commercial Culture

Statistical Reference

Key Indicators and Forecasts

User Guide

Overall Country Risk Rating: DB3b

(A)

Slight risk: Enough uncertainty over expected returns to warrant close monitoring of country risk. Customers should actively manage their risk exposures.

Rating Outlook: Stable [right arrow]

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Country Insight Headlines

Credit Environment Outlook (A)

* Financing conditions are improving; in May 2013 credit to the private sector rose by 14.0% year-on-year (y/y). Positive short-term credit conditions should ease non-payment risk and payment delays.

* The riyal will remain pegged to the dollar, eliminating a degree of trade-related currency risk. However, any significant weakening of the dollar will push up the price of imports.

Supply Environment Outlook (A)

* Saudi Arabia has heavily invested in its logistics and infrastructure in the wake of strong economic and demographic growth, with significant upgrades in transport links and many more planned.

* The country's judicial system moves slowly, and is vulnerable to interference from the ruling elite, with poor enforcement of intellectual property rights.

Market Environment Outlook

* The Saudi authorities are trying to chart a course between ensuring stability and creating employment. The government will therefore remain committed to an expansionary fiscal policy, which will prove to be the primary driver of economic growth in the short term.

* A rapidly growing middle class will fuel demand for luxury goods, while demand for lower cost goods from other segments will also increase.

Political Environment Outlook (A)

* The government is extremely sensitive towards any 'spill-over' of regional unrest and has taken pre-emptive action to halt any internal dissent.

* The primary risk to political stability is over the succession following the death of the king.

Key Recommendations

* HR policies should account for the Nitaqat scheme for the hiring and training of Saudi nationals.

* SDs constitute minimum recommended terms for trade with Saudi Arabia. However, tighter terms are advised when trading with new customers or the public sector, which can delay payment.

* Keep an eye on how the government allocates its cash. The sectors which receive funding will also attract private investment and will show the strongest growth.

* Be aware that although local security and political risk is low, it is set to rise over the next few years.

* Companies should be aware of government sensitivities; jobs and stability will determine government decision-making.

Global Insight

Trend: Stable [right arrow]

Headline Global Issues:

* Commodity markets send mixed signals about demand and the global outlook.

* Quantitative easing is obscuring the picture by distorting asset markets.

* Europe and the 'BRIC' economies as a group require close monitoring.

Global Growth Forecast

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The global economic outlook will remain conflicted until well into 2014, with uneven growth over time and geography. Positively, growth in US is becoming embedded following household and corporate deleveraging; however, fiscal issues will act as drag. Although Chinese growth came in below expectations in Q1 2013 at 7.7% y/y, the level of growth, allied to that in other emerging economies, will help sustain global growth. Moreover, the euro zone has largely survived the immediate crisis in Cyprus, although in the short to medium term considerable reform is needed to ensure the zone's integrity and survival.

We remain concerned about the quantitative easing programmes in the US, Japan, UK and euro zone. The expansion of the programme in Japan has destabilised the government bond market, while pushing down the value of the yen, adding further volatility to global currency markets. Commodity price volatility has seen gold prices hit a four-year low and benchmark oil prices falling below USD100 per barrel in April.

IR - true

Commodity Prices

Dec-12 Jan-13 Feb-13 Latest

Aluminium (USD/tonne) 2,086 2,038 2,053 1,890

Copper (USD/tonne) 7,962 8,049 8,070 7,631

Gold (USD/ounce) 1,686 1,671 1,628 1,644

Oil (USD/barrel) 110 113 116 107

Cocoa (USD/tonne) 2,702 2,520 2,454 2,437

Coffee (US cents/lb) 164 169 162 159

2012 2013f 2014f

Aluminium (USD/tonne) 2,018 1,950 2,025

Copper (USD/tonne) 7,947 8,010 8,500

Gold (USD/ounce) 1,669 1,690 1,700

Oil (USD/barrel) 112 110 114

Cocoa (USD/tonne) 2,641 2,400 2,500

Coffee (US cents/lb) 203 190 210

Source: Haver Analytics/D&B

While the US swings back into 2%-plus growth, the euro zone stumbles into another year of recession and Japan deepens quantitative easing, most emerging markets are growing quite briskly. Since 2008, low-income emerging market growth per capita has achieved a historical high of 3% per annum. That is not true in high-income markets, where it is close to zero, or mid-income ones, where it has been confined to a 2% level since 2008. If OECD economies outside the US and mid-income economies weaken further, our global growth forecast for 2013 could dip below that of 2012.

The emerging market boom weathered the 2008 crisis but forecasts for 2013-17 suggest lower growth for Asia-Pacific, the Middle East, Latin America and Sub-Saharan Africa than in the mid-2000s. What if capital, credit and labour allocations in emerging markets have been based on over-exuberant pre-crisis premises, and the 'supercycle' falters? The world shipping fleet has overexpanded since 2008; mining firm profits were down sharply in 2012; and dips in oil/copper prices hint at less resource-intensive world growth. Low inflationary pressure is helpful for a range of economies, but a rebalancing may be under way.

Recommendations

* Look for opportunities in second-tier emerging markets at a healthier point in the business cycle.

* Business plans based on a snap-back to the growth levels of recent years are likely to be frustrated.

* Sales strategy needs to adjust nimbly to new patterns of trade and investment.

* Emerging markets in South America and mid-income Southeast Asia offer opportunities.

* Most of Europe still needs tighter credit control.

Regional Insight

Trend: Deteriorating [??]

IR - true

Headline Regional Issues:

* Government spending of hydrocarbon exports is the growth driver across the region.

* Average annual oil prices should remain flat in 2013 compared with 2012, although spot prices will be volatile and susceptible to security events such as the attack on the Algerian gas facility.

* Security issues related to the Arab Spring and the on-going crisis in Europe will continue to impact negatively on growth across the region.

* Military strikes against Iran's nuclear sector remain a possibility, raising security risks.

IR - true

Regional Growth Forecast

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Despite a flat oil price, government spending of oil revenues will drive growth in the oil-rich countries through a series of mega-projects related to infrastructure development (albeit at a slower rate than in 2012 for the majority). Meanwhile, oil-poor countries will continue to benefit from job opportunities in, trade with, investment from, and economic assistance from the oil-rich countries. Overall, we expect the region as a whole to grow less strongly in 2013 (3.5%) than in 2012 (4.4%), but growth is expected to pick up in the following few years. However, in the short term the risks to the forecast are on the downside as a result of global economic uncertainties, particularly the fallout from the crisis in Europe, and, in the medium term, from the impact of US shale gas on global oil prices and restructuring in emerging markets.

Outlook for Key Regional Countries

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The region's largest economy, Saudi Arabia, will see real GDP growth fall from 8.5% in 2011 to 3.5% in 2013 and 3.6% in 2014 as oil prices stagnate, and as the government slows its infrastructure spending. Similarly, Qatar's prodigious double-digit growth rate from 2006 to 2011 has slowed and will average 5.2% in 2013-14, before picking up as government expenditure increases ahead of the 2020 soccer World Cup. The impact of international sanctions will leave Iran's economy stagnant to at least 2015. However, the UAE will continue to recover from its 2009-10 debt crisis, expanding by 4.0% in 2013 and 4.8% in 2014.

Meanwhile, in the larger non-hydrocarbon dependent economies, Egypt will see improved growth as the economy recovers: although the political situation will remain tense we expect growth to pick up from 1.8% in 2011 to 4.4% in 2014. The Israeli economy's reliance on hi-tech exports will see growth slow in response to the global situation, from 4.6% in 2011 to 3.0% in 2013, before rebounding slightly to 3.3% in 2014; this on the proviso that security issues with the Palestinians do not deteriorate significantly.

Recommendations

* Opportunities related to the construction sector and upstream and downstream hydrocarbon sectors will be available in the oil-rich countries as they boost their infrastructure and production capacities.

* Closely monitor political developments in all countries, but particularly in Algeria, Bahrain, Egypt, Iran, Iraq, Jordan, Lebanon, Libya, Syria and Yemen, as these will impact on business risk.

IR - true

* Amid sanctions on the financial/ hydrocarbon sectors, stay vigilant on companies with ties to Iran.

Country Insight Headlines

Credit Environment Outlook

(A)

Current Issues

IR - true

* Financing conditions are improving; in May 2013 credit to the private sector rose by 14.0% y/y. Positive short-term credit conditions should ease non-payment risk and payment delays.

* The expansion of the oil industry is forecast to increase FX reserves to USD850bn by end-2017.

* Although Saudi Arabia is committed to the Gulf Co-operation Council (GCC) currency union, it remains a distant prospect.

Risks and Opportunities

* The lack of reliable data on Saudi companies' financing status heightens uncertainty and risk attached to doing business in the country.

* The riyal will remain pegged to the dollar, eliminating a degree of trade-related currency risk. However, any significant weakening of the dollar will push up the price of imports.

Trade Terms & Transfer Situation

Trade Terms Transfer Situation

Minimum Terms: SD Local Delays: 0-2 months

Recommended Terms: SD FX/Bank Delays: 0-3 months

Usual Terms: Up to 90 days

Source: D&B

Recommendations

* SDs constitute minimum recommended terms for trade with Saudi Arabia. However, tighter terms are advised when trading with new customers or the public sector, which can delay payment.

IR - true

* It is unnecessary to hedge against exchange rate risk when invoicing in US dollars.

Supply Environment Outlook (A)

Current Issues

* Saudi Arabia has heavily invested in its logistics and infrastructure in the wake of strong economic and demographic growth, with significant upgrades in transport links and many more planned.

* Local workforce productivity is low; restrictive labour conditions and an inadequately educated workforce are among the most problematic factors for doing business in the kingdom.

IR - true

Risks and Opportunities

* The country's judicial system moves slowly, and is vulnerable to interference from the ruling elite, with poor enforcement of intellectual property rights.

* Extensive infrastructure development will lead to a more efficient logistics network.

Natural Disaster Impact as a Percentage of GDP

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Recommendations

* Long time frames should be planned for in litigation matters involving local courts.

* HR policies should account for the Nitaqat scheme for the hiring and training of Saudi nationals, who display low levels of productivity.

Market Environment Outlook (A)

IR - true

Current Issues

* The authorities are trying to chart a course between ensuring stability and creating employment. Government spending will remain the primary driver of economic growth in the short term.

* Key to long-term growth potential will be government initiatives to create employment opportunities for the rapidly expanding national labour force, especially women, and narrowing the skills gap between local and foreign labour.

Risks and Opportunities

* A rapidly growing middle class will fuel demand for luxury goods, while demand for lower cost goods from other segments will also increase.

IR - true

* The government's fast-tracking of 500,000 affordable homes for Saudis highlights opportunities within the construction sector.

Nominal GDP Forecasts

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Recommendations

* Keep an eye on how the government allocates its cash. The sectors which receive funding will also attract private investment and will show the strongest growth.

* Long-term operational strategies should factor in possible increases in water and electricity pricing as subsidies are eased.

Political Environment Outlook (A)

Current Issues

* The government is extremely sensitive towards any 'spill-over' of regional unrest and has taken pre-emptive action to halt any internal dissent; however demonstrations by the marginalised Shi'a population could constitute an increasing risk in the next few years.

* The government will continue to take a supportive stance alongside its Gulf neighbours against any external or domestic threat; otherwise relations with most other Gulf states will remain cordial.

Risks and Opportunities

* The primary risk to political stability is over the succession following the death of the king.

* Political awareness and debate has increased thanks to social networks; over three million Saudis are regular users of such services. The government will try to limit their use to control dissent.

Political Freedom

Electoral Pluralism/ Functioning

Process Participation of Govt.

Saudi Arabia 0 0 1

Average for the region 3 5 3

OECD 12 15 11

Freedom of Assoc./ Rule of

Expression/ Org. Rights Law

Belief

Saudi Arabia 3 0 2

Average for the region 6 3 4

OECD 15 12 14

Personal

Autonomy/

Rights

Saudi Arabia 2

Average for the region 6

OECD 14

Source: Freedom House

Recommendations

* The local security and political risk environment is low (albeit set to rise), but companies should be aware of government sensitivities; jobs and stability will determine government decision-making.

* Pre-emptive compliance with the employment of Saudis will ease bureaucratic obstacles.

Detailed Analysis

The following sections analyse in more detail the nine core elements that influence the risks and opportunities involved when doing business in/with a given country.

The core categories that we analyse as part of our broader risks and opportunities model are as follows:

Short-Term Economic Outlook

Long-Term Economic Potential

Market Potential

FX Risk

IR - true

Transfer Risk

Business Environment Quality

Business Continuity

Insecurity/Civil Disorder Risk

Expropriation/Nationalisation Risk

IR - true

Descriptions for each of these categories can be found in the User Guide section of this report.

Short-Term Economic Outlook

The Saudi authorities are trying to chart a course between ensuring stability and creating employment. The former requires the government to maintain high levels of current expenditure in order to keep public sector wages high and consumer prices low through subsidies. The latter entails strong growth in capital expenditure, in order to diversify the economy and lay down strong foundations for future non-oil growth. The government will therefore remain committed to an expansionary fiscal policy, which will prove to be the primary driver of economic growth in the short term. Oil growth will actually contract in 2013, as the government lowers output, after having raised it over the past few years to meet market supply shortfalls.

Risks and Opportunities

* The government's huge spending plans will create myriad opportunities, especially in construction and ancillary services. It is progressing with plans to build a number of economic cities and a housing scheme to build 500,000 houses is being fast-tracked.

* Development of the petrochemicals industry has been central to Saudi's diversification strategy, but the fall in feedstock prices in the US has undermined the competitiveness of the Saudi petrochemicals sector. SABIC recently laid off large numbers of staff.

* Although credit risk is generally low in Saudi Arabia, state-owned entities are notoriously slow payers. While this is little more than an administrative nuisance to large multinationals, it can cause cash flow concerns among smaller suppliers.

Imports

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IR - true

Import growth will accelerate in the short term, as demand for imported inputs rises. In particular, construction-related goods will see a sharp rise, although recent point of sale transactions show that consumer demand is also picking up, as Saudi nationals enjoy higher salaries and the population swells from greater numbers of immigrant workers. Investment, both domestic and foreign, will also rise, as strong government spending creates investment opportunities.

Real GDP Growth and Inflation

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A contraction in oil GDP, as oil output is lowered, will pull down overall real GDP growth, which we anticipate will slow from 6.8% in 2012, to 3.5% in 2013. However, non-oil growth will stay strong, driven by sustained levels of consumption. This will inevitably exert upward pressure on prices, although subsidies will prevent prices from any meaningful increases. We see inflation remaining broadly stable over 2013-14.

Recommendations

IR - true

* Keep an eye on how the government allocates its cash. The sectors which receive funding will also attract private investment and will show the strongest growth.

* Be prepared for increasing pressure to hire locals, but also growing difficulty in finding competent candidates with relevant skills.

* Expect to have to manage cash flow very carefully; long payment terms and slow payment systems may strain finances.

Long-Term Economic Potential

We expect Saudi Arabia's average real GDP growth rate to remain healthy in the next five years. The country's real GDP will average 3.9% in 2013-17, less than the 4.9% growth witnessed in 2008-12. However, this reflects oil output, rather than domestic demand and non-oil activity, which we anticipate will remain robust. Key to long-term growth potential will be government initiatives to create employment opportunities for the rapidly expanding national labour force, especially women, and narrowing the skills gap between local and foreign labour.

Risks and Opportunities

* Saudi Arabia's large oil reserves, coupled with oil prices remaining high, will ensure sustained economic growth in the medium term.

* Longer-term growth will be driven by government plans to reduce its dependence on crude exports in favour of refining, processing and manufacturing.

* Attempts to diversify the economy are reliant on boosting national labour force participation in the private sector, a process which will prove challenging and costly for foreign companies.

* Structural reforms aimed at increasing the flexibility and productivity of the local labour force may provoke local opposition, and are therefore likely to be tentative and piecemeal in nature.

IR - true

* High levels of recurrent government spending and a flat oil price threaten the fiscal position in the longer term.

Population Dynamics

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The country's population growth rate is high, and will remain strong, with a gradual decline in fertility rates likely to be offset by inward migration. The growth in working age population is particularly amenable to long-term economic growth; the majority of the population is under 25, with up to a third of the population under the age of 15. But this depends on the creation of employment opportunities for the rising number of market entrants in the private sector, especially women graduates. To this end, the government has launched several 'Saudisation' schemes to encourage further employment of Saudis in the private sector, most recently the Nitaqat scheme, introduced in 2011.

Changes in Wealth, 2000-08 (average per year)

IR - true

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Gross fixed capital formation exceeded SAR3.8tn in 2003-12, providing a powerful base for future economic development. However, intangible (human) wealth has fallen dramatically in recent years, dragging the country's average annual wealth growth below the regional average. Furthermore, relatively high levels of population growth will reduce the rate of growth in GDP/capita, while putting added pressure on the provision of public services. Subsidies on water and electricity are expected to be reduced in the long term to better manage demand as the population expands, squeezing purchasing power.

Recommendations

* Hiring policies should increasingly take into account further increases in the 'Saudisation' factor.

* Long-term operational strategies should factor in possible increases in water and electricity pricing as subsidies are eased.

* Look for opportunities associated with infrastructure development.

Market Potential

Despite the government's attempts to diversify the economy, oil will still account for the bulk of government revenue in the coming years. However, healthy demographic increases and a rise in disposable incomes present significant market opportunities across a number of sectors, with consumer goods, construction, utilities and related sectors expected to witness significant growth. Saudi Arabia's tariffs are low across the board, with few barriers to trade, despite occasional delays sometimes experienced within the GCC.

Risks and Opportunities

* Saudi Arabia ranks highest in the Middle East for local supplier quantity, and third (behind the UAE and Qatar) for local supplier quality, growing domestic sourcing options.

IR - true

* A rapidly growing middle class will fuel demand for luxury goods, while demand for lower cost goods from other segments will also increase.

* The government's fast-tracking of 500,000 affordable homes for Saudis highlights opportunities within the construction sector

* Importers are expected to benefit from a series of free-trade agreements (FTAs) signed by the GCC, in particular with Asian countries

Expected Average Nominal GDP Expansion (USD): 2012-16

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IR - true

At USD727bn in 2012, Saudi Arabia's economy is the second largest in the MENA region. By 2017, we expect that nominal GDP would have risen to USD1.1bn, returning an annual average growth of 8.6%. This is relatively slow compared to recent trends; in the decade to 2012, average annual nominal GDP growth was as much as 14.8%. The anticipated slowdown in growth is primarily on account of flat oil production; growth will be driven instead by non-oil activity and domestic demand. As well as consumer goods, construction is expected to be a particularly rapidly growing sector, as the kingdom struggles to house its growing population. A booming construction sector will also fuel demand in related sectors such as utilities, power and water, telecoms and transport.

Main Restrictions on Imports

Saudi Arabia Iran Algeria Qatar

Tariff barriers

Overall Weighted mean tariff 3.9 19.6 8.6 3.8

Manufactures 4.2 21.2 8.9 3.8

Primary products 2.8 12.5 7.8 4.0

Share of tariff lines 0.0 56.5 53.2 0.2

w/international peaks

Manufactures 7.6 57.0 53.6 0.0

Primary products 0.2 50.4 49.9 1.1

Services Restrictiveness Index 42.5 63.3 38.3 60.1

Source: World Bank

Saudi Arabia's tariffs were already low prior to the country's accession to the WTO in 2005; the country began phasing in a 5% common external tariff mandated by the GCC in 2003, with most tariffs well below WTO limits. Further tariff reductions took place in 2009, bringing the number of products enjoying tariff exemption or reduction to 851. The GCC agreed an FTA with Singapore in 2008, with similar deals with China and India expected in the coming years. Meanwhile, imports from the UAE are sporadically subject to delay, due to occasionally cool relations between the two countries.

Recommendations

* Opportunities exist for exporters of branded Western goods and services, despite vocal opposition to Western policies from some quarters.

* Be aware that FTAs touted between the GCC and other countries, in particular China and India, are likely to take considerable time and effort to finalise.

FX Risk

Since June 1986, the central bank has fixed the riyal's middle rate against the US dollar at SAR3.75:USD. The authorities are committed to defending the pegged rate and have sufficient reserves to support it due to a series of ongoing current account surpluses. We do not believe that this arrangement will change in the foreseeable future, unless a GCC common currency replaces the riyal, itself unlikely for some years. Emphasis on the fixed exchange rate has led to the loss of control over some monetary factors; the government cannot easily use interest rates to manage the money supply as interest rates must reflect those of US interest rates in order to maintain the relative value of the currencies. In addition, inflation is prone to imported pressure when the US dollar weakens as most imports are priced in other currencies.

IR - true

Risks and Opportunities

* The riyal's peg to the US dollar is expected to remain in place, despite calls for a revaluation during the global financial crisis.

* The continued expansion of the oil industry is forecast to increase foreign reserves to USD850bn by end-2017.

* Although Saudi Arabia is committed to the GCC currency union, it remains a distant prospect.

Current Account

IR - true

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Saudi Arabia's balance of payments saw a strong recovery in 2011-12, following a collapse in exports during 2009 as a result of the global financial crisis. While exports are expected to increase steadily, the current account surplus will narrow considerably to less than 2.0% of GDP by 2017, as imports rise in response to strong domestic demand. FDI inflows will become less linked to oil market developments, as efforts to boost the non-oil sector gain pace.

Import Cover (months)

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Saudi Arabia's FX reserves are estimated at USD710bn in 2013, one of the largest in the world. In the absence of a sovereign wealth body, Saudi deposits much of its spare funds in the reserve account. As a result, import cover is a very comfortable 30 months, although this is expected to decline slightly as import values rise.

Recommendations

* Do not expect monetary union with the rest of the GCC to take place anytime soon.

* Saudi's commitment to the US peg is strong, so do not expect any imminent change to the exchange rate regime.

* Do not react to reports that may suggest Saudi will trade its oil in currencies other than oil. This is highly unlikely.

* Hedging against exchange rate risk is unnecessary when invoicing in US dollars.

IR - true

Transfer Risk

Saudi Arabia accepts the obligations of IMF Article VIII (General Obligations of Members). Countries that do so agree not to impose restrictions on current payments or discriminatory currency practices, and to maintain the convertibility of foreign-held balances and furnish information such as data on FX reserves consistent with IMF policies. The country maintains an exchange system free of restrictions on the making of payments and transfers for current international transactions.

Risks and Opportunities

* Licensed foreign companies are able to transfer money freely from their enterprises overseas, and there are no exchange controls or restrictions on the repatriation of profits.

* Portfolio investment by non-residents is restricted to mutual funds managed by Saudi banks. In addition, commercial banks require permission from the central bank to lend to non-residents.

IR - true

* There are controls on the purchase of property by non-residents: overseas investors can purchase real estate as needed for their business (including housing for staff), but any purchase must total a minimum of SAR30m.

Restrictions

Trade

restrictions restrictions restrictions

on on payments on

non-residents for invisible payments

accounts and other for imports

current

transfers

Saudi Arabia 1 0 0

Middle East 0.14 0.50 0.64

OECD average 0.06 0.35 0.06

Capital

Flows

restrictions

on inward

direct

investment

Saudi Arabia Yes

Middle East

OECD average

Financial Sector Provisions

special special special

treatment treatment treatment

for deposits for deposits for lending

in foreign held by non to noncurrency

residents residents

Saudi Arabia No Yes Yes

Middle East

OECD average

Source: IMF

Further to its acceptance of Article VIII of the IMF's Articles of Agreement, Saudi Arabia has made no use of Article XIV, which provides for exchange controls subject to certain provisos. All FX controls are administered by the central bank. The few restrictions that exist include investment in portfolio shares; transactions with Israel are prohibited.

Total Foreign Debt

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Saudi Arabia's low foreign debt burden and international investment position preclude the kind of imbalances on the balance of payments that could trigger an emergency introduction of new transfer regulations and controls.

Recommendations

* Given the stability of the currency peg, it is unnecessary to hedge against exchange rate risk when invoicing in US dollars.

* When invoicing in euros, exchange rate risk is limited to changes in cross rates between the euro and the US dollar.

IR - true

* We estimate that foreign liabilities are very low in relation to GDP, at around 19%, and thus pose an extremely low risk of non-payment.

Business Environment Quality

Saudi Arabia's business environment has seen marked improvements in recent years, thanks largely to the country's macroeconomic performance and the government's efforts to liberalise the investment climate. The country has the highest ranking of any Arab country in the World Bank Doing Business survey and achieved the highest score of any Arab nation in the World Economic Forum's Competitiveness Report for 2012-13. Yet key challenges remain, above all local workforce productivity; the World Economic Forum identified restrictive labour conditions and an inadequately educated workforce as among the most problematic factors for doing business in the kingdom.

Risks and Opportunities

* Saudi Arabia ranks 124th out of 185 countries surveyed in the World Bank Doing Business survey for success in enforcing contracts; the survey found that contracts take an average of 635 days to enforce, with enforcement costing 27.5% of the claim.

IR - true

* The World Economic Forum identified inefficient government as an obstacle to doing business; however several sections of the civil service are more efficient than others, particularly those pertaining to the oil sector.

* The country's judicial system moves slowly, and is vulnerable to interference from the ruling elite, with poor enforcement of intellectual property rights.

* A new enforcement law, introduced in 2012 as part of a suite of laws pertaining to mortgages, may have a positive impact on the wider enforcement of contracts, although it may take a considerable period of time to become effective.

Corruption Perceptions

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The perception of corrupt practices in Saudi Arabia is poor by regional standards; the country ranks joint lowest in the GCC in Transparency International's Corruption Perception Index. The country took steps in January 2013 to ratify the United Nations Conventions Against Corruption (UNCAC), an agreement it signed in 2004. However it is unclear as to what effect this move will have on the day to day conduct of business in the short term.

Ease of Paying Taxes

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Saudi Arabia has a low taxation burden, with no sales or VAT. Saudi and GCC firms are only liable to pay the religious zakat (alms) tax, calculated at a rate of 2.5% of the taxpayer's net worth per year. Non-Saudi businesses pay a flat tax of 20% of profits, with differing rates for natural gas (ranging from 30-85% of the internal rate of return) and oil (85%). Changes to the taxation regime for Saudi and GCC citizens are not anticipated. While there is periodic discussion about the introduction of income tax for expatriates, this is unlikely in the short term, as it would undermine competitiveness.

IR - true

Recommendations

* Allow for delays in invoice payment in order to manage cash flows.

* Similarly, long time frames should be planned for in litigation matters involving local courts.

* Local HR policies should take into account the Nitaqat scheme for the hiring and training of Saudi nationals.

Business Continuity

IR - true

Saudi Arabia has heavily invested in its logistics and infrastructure in the wake of strong economic and demographic growth, with significant upgrades in transport links with many more planned. It remains to be seen however whether such projects, often hampered by supply shortages and financing issues, can keep pace with population growth. In particular, the country's infrastructure remains vulnerable to flooding in big cities, as highlighted by three major floods since 2009.

Risks and Opportunities

* Total handled cargo at Saudi Arabia's nine ports increased by 21% between 2008-12; the country ranks 37th in the World Bank's Logistics Performance Index, but only 51st for customs services.

* Several major projects initially envisaged as private finance initiatives have suffered delays due to the lack of financing available, leading the government to convert them into state projects.

* Despite low annual rainfall, underinvestment in drainage systems will continue to cause flooding in the event of modest rain in major cities.

Natural Disaster Impact as a Percentage of GDP

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Disaster Risk: Flood risk is the most perennial in Saudi Arabia; scarce rains have encouraged underdevelopment of effective drainage systems, with floods particularly affecting major cities such as Mecca and Jeddah, surrounded by mountains. Floods in 2009 and 2011 caused USD900m and USD300m worth of damage respectively. Promises to improve drainage and flood defence systems have resulted in little progress; heavy rainfall in May 2013 caused flash floods in the capital Riyadh, and northern, southern and western parts of the country, with more than 20 reported deaths. Meanwhile, Saudi Arabia's Western region has experienced three minor earthquakes since 2004, but damage in each case was negligible, with no recorded loss of life. The country announced in April 2013 that it would build a series of emergency earthquake shelters, after tremors from earthquakes in Iran earlier in the year were felt in the region.

Logistics Performance Index

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IR - true

Logistics and Infrastructure: Saudi Arabia invested heavily in its logistics and infrastructure in recent years, in particular its transport links. The country continues to heavily invest in road links and train networks, including the Mecca monorail, Haramain High Speed Rail, the Land Bridge and the North-South Mineral Line. However, shortages of building materials and labour continue to delay the completion of key infrastructure projects; while the bottleneck was loosened somewhat by the global recession in 2009, shortages have recently resurfaced, particularly of cement. In April 2013, King Abdullah personally ordering the import of 10m tonnes of cement, together with the construction of up to four cement plants by 2016, with SAR3bn (USD800m) assigned for the scheme. The quality of basic infrastructure still varies between regions, with water shortages and electrical brown-outs not uncommon at peak times.

Recommendations

* Be prepared for potential higher flood premiums following recent flooding incidents.

* Ensure access to water and electricity supplies.

* Be aware that into the medium term internal supply chains will continue to rely on road-based freight services as train projects are likely to take time to come on stream.

IR - true

Insecurity / Civil Disorder Risk

The Al Saud family's grip on power in the kingdom is expected to remain intact in the medium term. Protests and disturbances are rare, but have occurred with increasing frequency in recent months in Shi'a areas in the Eastern Province. However, the protests have remained localized and do not pose a significant threat to the political legitimacy of the ruling family. The primary risk to political stability is over the succession following the death of King Abdullah bin Abdulaziz Al Saud. In the event of the king's death, a transfer of power to Crown Prince Salman bin Abdulaziz Al Saud, is expected to run smoothly. However Salman's age (77), and the dwindling number of direct male descendants of the country's late founder King Abdulaziz Al Saud, makes the transfer of power to the next generation an ever-closer reality.

Risks and Opportunities

* Effective counter-terrorist measures adopted since 2005 have dramatically reduced the threat of domestic terror attacks, but risks remain, especially emanating from neighbouring Yemen.

* Political awareness and debate has increased in recent years thanks to social networks; over three million Saudis are regular users of the service.

* Pay increases and other benefits for unemployed nationals in early 2011 prevented Arab Springlike protests, but without deep-rooted reform, such measures will not be effective indefinitely, particularly in the Shi'a dominated east of the country.

Business Cost of Terrorism

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World Economic Forum surveys show terrorism risk is limited for businesses. Since suffering domestic terror attacks in 2003-04 the security situation has improved markedly. The government has cracked down on terror cells operating inside the country, while also offering rehabilitation programmes for domestic militants. However a significant number of Saudis, including rehabilitation graduates, are believed to be operating with the Al-Qaeda in the Arabian Peninsula (AQAP) in neighbouring Yemen. Such individuals may pose a terrorist threat to the country in the future.

Level of National Grievance

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Although Saudi Arabia avoided the widespread unrest of the Arab Spring (including in neighbouring Bahrain and Yemen), there is widespread dissatisfaction in the country over wealth inequalities, unemployment and perceptions of corruption, fanned by a growing use of social networks. Protests over lack of economic opportunity and elitism are possible if economic grievances are not effectively addressed. The country's Shi'a population, located mostly in the Eastern Province, has become more vocal in recent years about discrimination in employment, education and justice; such protests are expected to remain largely non-violent and local in scope. However, neither these protests nor more widespread economic grievances are likely to question the political legitimacy of the House of Saud in the near future.

Recommendations

* Monitor government terrorist threat assessments regularly.

* Businesses with higher numbers of Saudi employees are less likely to draw the ire of local protestors with economic grievances.

* Be prepared for a possible increase in political tensions in the next few years.

Expropriation / Nationalisation Risk

As a net exporter of capital, Saudi Arabia continues to actively seek to attract inward investment. The government has gradually opened up several sectors to foreign investment, including wholesale and retail trade, distribution services, air transport and rail passenger transport, with other transport related sectors predicted to follow. Several sectors will remain off limits to foreign investors, while Saudi Aramco will continue to insist that foreign companies form local partnerships to be able to bid for contracts. Foreign companies that fall out of favour may find that local partners seek to renegotiate contracts and partnership agreements on less favourable terms, but outright expropriation or nationalisation of assets is unlikely.

Risks and Opportunities

* The government may nationalise large infrastructure projects that have struggled to attract private funding, for example, the Landbridge rail project in 2011.

* A new arbitration law was approved in April 2012, based on the UNCITRAL model law, making arbitration in the kingdom a more predictable process.

FDI Stocks

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Saudi Arabia's inward FDI flows more than tripled between 2005-11, with inward flows forecast to rise to more than USD20bn by 2017. The country's economic growth strategy depends on massive investment in its energy sector and its basic infrastructure, which will rely on plenty of FDI. There is little or no intent to commit, or probability of, expropriation or nationalisation of foreign firms; domestic interests may combine to frustrate market entry, but not sponsor outright expropriation.

Efficiency of the Legal System in Challenging Government Regulations

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Saudi Arabia is a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, the World Bank Multilateral Investment Guarantee Association and the 'Washington Convention', the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (although in the latter case, disputes pertaining to 'oil and matters of sovereignty' are excluded). It is signatory to more than 20 bilateral investment treaties, as well as multi-lateral agreements through its membership of the GCC. In the World Economic Forum's Competitiveness Report, Saudi Arabia is second only to Qatar for challenging regulations, ranking higher than France and the US.

Despite being a signatory to the New York Convention, foreign arbitral awards often go unrecognised in the Saudi courts, in some instances being reopened with judgments reversed. A new arbitration law, based on the UNCITRAL model law and approved in April 2012, is expected to make both arbitration in the country and the enforcement of foreign judgments a smoother process, but will take time to be absorbed by the local judiciary.

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Recommendations

* While foreign access to the oil sector is likely to remain restricted, sectors pertaining to real estate and transport infrastructure are likely to see further liberalisation.

* Foreign investors that can demonstrate active compliance with Nitaqat schemes are likely to be particularly favoured.

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Perspectives

The following sections provide an overview of the broader/longer-term factors that influence the way that business is done in Saudi Arabia. These factors provide the foundations upon which the economy is built and the frameworks within which business is done, and provide a richer insight into the background influences that lie beyond the raw data and focused insight that is supplied elsewhere in the report.

The Economy

Economic Overview

In common with its oil-rich neighbours, Saudi Arabia is strongly dependent on the hydrocarbons sector, which directly accounts for 50% of nominal GDP and the majority of exports and government revenues. The sector is dominated by crude oil production; natural gas production, oil refining and the petrochemical industry are set to increase their share of GDP in the short to medium term but oil production remains the dominant activity at present. The performance of the hydrocarbons sector can support or undermine growth; government recycling of hydrocarbon revenues also determines how the private sector performs.

Until recently, oil revenues were recycled by the government mainly for recurrent spending rather than investment purposes; this produced high levels of wealth within Saudi society. Although the oil windfall has resulted in high standards of living for some, anecdotal evidence suggests that poverty is widespread.

Economic Framework

Industrial Relations and the Labour Market

The three main tenets of Saudi Arabia's labour policy are: a ban on trade unions, including a comprehensive ban on union activity, strikes and collective bargaining; a heavy reliance on foreign workers; and a strategy of 'Saudisation' of the private sector. The government does not adhere to the International Labour Organisation Convention protecting workers' rights.

Saudi Arabia greatly depends on foreign labour; most Saudis refuse to take unskilled or menial jobs as these are often considered socially unsuitable. The policy of 'Saudisation' aims to raise the share of Saudi nationals employed in the national economy. Job creation for the young and a rapidly growing population constitutes the most serious stress point in the labour market.

The issue of labour market rigidity also needs to be addressed. The most necessary reforms should include the liberalisation of regulations governing the hiring and firing of Saudis. At present, these include archaic regulations restricting the hiring of women, lengthy dismissal procedures and high mandatory severance pay in the public and private sectors.

Fiscal Framework

Oil is the most important source of fiscal revenues for the government, comprising about 90% of total revenues. This results in a series of alternating periods of fiscal surpluses and deficits, which are directly related to world oil prices. There has been pressure to diversify sources away from the current dependence on oil revenue but other sources of revenues are minimal at present. Indeed, Saudi Arabia has yet to introduce VAT and income tax, despite pressure from the IMF to do so. In the long term, dependence on oil revenues will increase Saudi Arabia's fiscal vulnerability.

Monetary Regime

The main aim of the kingdom's monetary policy is to keep the pegged exchange rate between the riyal and the US dollar. Thus, controlling inflation has become less important. Emphasis on the fixed exchange rate has also led to the loss of control over some monetary factors; for example, the government cannot easily use interest rates to manage the money supply as the movement of interest rates must reflect those of US interest rates in order to maintain the relative value of the currencies. In addition, inflation is prone to imported pressure when the US dollar weakens as most imports are priced in other currencies.

Exchange Rate Regime

Since 1986, the central bank has fixed the riyal's middle rate against the US dollar at SAR3.75:USD. The government is committed to defend the pegged rate and has sufficient reserves to support the currency peg. Plans for a single GCC currency are in place but the project has been disrupted by Oman and the UAE announcing that they will not be joining: we expect that focus on the project will be diminish, given the problems facing the single currency euro.

Export Profile

Saudi Arabia is the world's largest net oil exporter: oil exports account for around 90% of total exports. This high degree of dependence makes the economy susceptible to downward swings in world oil prices. However, the government is aware of this problem and is using the present buoyant flow of revenue to diversify the industrial base. The petrochemical industry has been a successful component of this policy. However, much of the industrialisation, including petrochemicals, is indirectly reliant on oil through cheap energy prices (oil and gas are sold internally at subsidised prices); consequently, the kingdom is still vulnerable if a prolonged downturn in oil prices materialises.

Asian countries form a large part of the export profile, reflecting increased demand for oil. Exports destined for Asia are likely to increase as those countries look to grow their economies. The US and Western Europe will remain key markets.

Export Mix

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Export Markets

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Import Profile

Given the dominance of oil production and the country's weak industrial base, Saudi Arabia has to import most of its consumer and investment goods. The composition of imports has remained relatively stable. However, the huge industrialisation project driven by government capital investment of oil revenues increases the representation of inputs in the overall import profile; imports of electrical machinery, transport equipment and base metals tend to comprise over half of total imports. The main risk lies in a prolonged weakening of oil revenues, as Saudi Arabia will still need to import most of these goods in the short to medium term.

Europe, Asia and the US are the main providers of Saudi Arabia's imports. Within the euro zone, the largest import partner is Germany, followed by Italy and then France.

Import Mix

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Import Sources

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Politics

Saudi Arabia has been ruled by the Saud royal family since the country's formation in 1932. The conservative policies, with a strict adherence to the extremist wahhabi interpretation of Islam, adopted at that time, as well as the discovery of huge oil reserves in 1938 continue to shape political and daily life in the kingdom today.

A wave of terrorist attacks in Saudi Arabia after 2003 prompted the government to alter its approach to the problem posed by Islamist terrorism; security measures were increased, while some limited political change was also introduced. In recognition of the changing global and regional environment, Crown Prince Abdullah bin Abdulaziz Al Saud announced municipal elections. However, voter turnout was low, reflecting the limited power that the municipal councils yield. Although another round of municipal elections were held in September 2011, there have been few additional efforts to liberalise the political environment, which continues to be dominated by the royal family, supported by the conservative ulema (clergy) and merchant families.

King Abdullah bin Abdulaziz Al Saud has ruled the kingdom since 2005. While denying true democracy, the absolute rule of the monarchy and its smooth succession ensure stability. King Abdullah issued a decree announcing the establishment of the Allegiance Institution in 2006. This formalises the method of succession and opens the way for the eventual emergence of younger rulers: King Abdullah is in his late 80s, while the new crown prince, Salman bin Abdulaziz Al Saud, is in his mid-70s.

Constitutional Arrangements

Saudi Arabia is a monarchy without elected representative institutions, except for 50% of the seats on the municipal councils, which have limited power, or political parties. It is ruled by the descendants of King Abdulaziz bin Al Saud, who unified the country in the early 20th century. The political system is based on the 1992 Basic System of Government, the Qur'an and the Sunnah (the body of traditional legal and social custom) as the constitution of the country; therefore, there is no concept of separation regarding religion and state.

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Legislature: Members of the Consultative Assembly serve a four-year term. Members are appointed by the king and only have an advisory function. The Assembly reviews new laws that are proposed by the Council of Ministers, but it is not empowered to initiate laws in its own right. As such, the Assembly is effectively a forum for debate with no oversight authority; policy options can be mooted through it without any endorsement or commitment by the monarch. However, it is also a route for technocrats to enter government. Assembly members have called for wider powers to push ahead with economic and educational reform; this is happening, albeit very slowly, as entrenched conservative interests attempt to block change.

Executive: The king is the head of state and rules according to shari'a (Islamic) law, which forms the theological basis for legislation. The king also takes the title 'guardian of the two holy mosques', which underscores the importance of Islam in the kingdom. Although the monarch's powers are technically absolute, in practice, royal decrees and ministerial resolutions function as the kingdom's legislative instruments. The king governs with the assistance of an appointed Council of Ministers, whose members have a four-year term of office, which gives advice and makes recommendations to the king, and reviews proposals put forward by the majlis al-shura (Consultative Council). The Council of Ministers also examines proposed royal decrees and directs government bureaucracy. Final approval of council decisions rests solely with the king, who is also the de facto prime minister.

Political Parties

The Saudi political system does not allow for political parties and power is exercised by key figures within the ruling Al Saud family. Key figures include:

King Abdullah bin Abdulaziz Al Saud: The current ruler ascended to the throne in 2005, succeeding his half-brother, Fahd bin Abdulaziz Al Saud, although he had been the regent of the country since Fahd was hit by a stroke in 1996. He is quite popular and people perceive him to be honest. He has proposed bold steps to solve the Israeli-Palestinian conflict and to promote inter-faith dialogue. With his team of advisors, he is also the driving force behind the wave of economic reforms that have introduced a certain degree of liberalisation in the business sector.

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King Abdullah represents the reformist element, which believes that Saudi Arabia must adapt to the changing global situation and become more inclusive (including political liberalisation) while retaining its Islamic credentials in order to forestall the rise of militant Islam. However, he faces powerful opposition from some royal family members. Despite some disagreements with the US over the 'war on terror', Washington regards him as a reliable ally due to his reformist outlook.

Crown Prince Salman bin Abdulaziz Al Saud: Governor of Riyadh between 1963 and 2011, Salman is very popular and enjoys high levels of support among the younger generations of the royal family. He became next in line to the throne in June 2012 following the death of Crown Prince Nayef. Salman is regarded as more conservative than Abdullah, and his positions have been the subject of internal political disputes.

The al-Sudairi Brothers: Over recent decades, this group has been the most powerful alliance within the royal family, originally being made up of seven full brothers, headed by former King Fahd. However, only Crown Prince Salman is still politically active. As there are a number of potential candidates, it remains unclear who might be the favourite candidate to take over from Salman should he either become king or die. King Abdullah has seemingly tried to divert power from the al-Sudairi branch, promoting second generation royals to key posts in late 2012 and 2013. These include Prince Mohammad bin Nayef, who became minister of the interior in November 2012 and King Abdullah's own son, Prince Miteb, who was made minister of the National Guard in May 2013.

Interest Groups

The Ulema (Clergy)

The ulema act as a conservative force, slowing reforms such as allowing women to vote in municipal elections. The ulema review government policies for compliance with shari'a law and the government takes their views into account when promulgating legislation. Crucially, the ulema's sway over large sections of the Saudi population, many of whom view the ulema as a comforting reference point in a fast-changing society, and the under-developed nature of the civil society heighten their political role. Preachers are no longer permitted to glorify jihad (holy struggle). However, there are divisions within the ulema regarding the role of wahhabism; some favour a more strictly religious state than the current situation, while others want a more tolerant and religious model, which has earned the support of the non-Wahhabis and is advocated by Shi'a and liberals.

The Shi'a

Most Shi'a, which comprise around 10% of the total population, live in the Eastern Province, the final province to be incorporated into the modern Saudi state, which contains around 90% of the kingdom's oil reserves. The Shi'a has tended to be marginalised economically and politically; however, King Abdullah is working to improve relations by co-opting key representatives of the Shi'a into the political and economic system. Nevertheless, Sunni-Shi'a tensions have risen throughout the region, initially driven by the conflict in Iraq and exacerbated by problems in Lebanon and Yemen; unless key grievances are addressed, tensions are likely to heighten in the medium term, threatening security.

The Private Sector

Large merchant families with strong connections to the royal family dominate the private sector. The business environment has been very beneficial for the private sector. That said, some within the private sector, mostly the young and Western-educated, acknowledge the need for reform and change.

International Environment

The basic tenets of foreign policy were laid out by the founder of modern Saudi Arabia, Abdulaziz bin Al Saud; he established the basis of the bilateral relationship first with the UK and then the US, which continues to shape external relations. Saudi Arabia has always been one of Washington's staunchest allies in the Middle East; the kingdom has supported efforts to reconcile different positions within the Arab world and oil-exporting countries. However, this regional leadership has often been challenged by other ascending powers, such as Iran at present.

Diplomatic relations between Saudi Arabia and Iran have never been smooth primarily because of both countries' aspiration to be the regional leader and their conflicting religious views; Saudi Arabia is the cradle of wahhabi Sunnism, whereas Iran is the most important Shi'a country in the world. Iran's nuclear programme is currently a key source of bilateral tensions. Meanwhile, Saudi supports the opposition in the conflict in Syria, the aim being to dilute the strong ideological links between Tehran and Damascus as a means of lessening Iran's regional influence.

The Arab League: Saudi Arabia is a founder of the Arab League, which comprises 22 Arabic-speaking countries. It aims to promote political, economic and cultural interests. The Arab League created the PAFTA in 1997, which gradually eliminated trade tariffs.

Saudi Arabia is also a founding member of the Organisation of Petroleum Exporting Countries (OPEC), which is made up of 12 oil-producing states that control around four-fifths of global reserves. Despite the difficulties in reaching an agreement between the various producers on oil output, OPEC is instrumental in setting the barrel price. Saudi Arabia plays a central role in this process, contributing to the enforcement of OPEC decisions: the kingdom is the largest producer and therefore acts as 'swing' producer, adjusting its production to preserve the official price on global markets.

Saudi Arabia was finally admitted as a member of the WTO in December 2005; membership has made the trade regime more transparent and more accommodating to non-resident businesses. The kingdom is also a member of two regional free-trade areas, the Pan-Arab Free-Trade Area (PAFTA) and the GCC.

Commercial Culture

The commercial environment is improving significantly in many respects, as reflected in key international rankings. Access to credit is more readily available and the incidence of late payment has declined, spurred by fiscal expansion against a backdrop of high oil revenue. In the absence of current or capital account restrictions, the transfer situation is favourable, with strong oil-backed liquidity ensuring that local and FX/bank delays are usually minimal.

The World Bank ranks the kingdom relatively well for property registration, construction permits, paying taxes and starting a business. However, several aspects of the commercial climate still warrant careful attention such as contract enforcement and closing a business. Corruption is also a significant problem. Other commercial risks range from concerns over intellectual property rights to a weak judicial system, which favours peaceful dispute settlement in line with the principles of shari'a law, sometimes to the detriment of sound business practice.

Export Payment Indicators

US Eximbank Full cover available

Atradius Full cover available

ECGD Full cover available

Euler Hermes UK Full ST cover available

Sources: Export credit agencies

Competitiveness

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Infrastructure

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The government is investing a good portion of its oil revenues in infrastructure, as part of its programme to attract foreign investment and diversify Saudi Arabia away from hydrocarbons. The effects of the plan are evident; for example, domestic cement production is rising rapidly.

The country has 156,000km of roads; about one third are paved. Some cities are linked by motorways, such as Riyadh, Jeddah, Dammam, Ras Tanura, Taif and Mecca. A causeway connects Saudi Arabia with Bahrain. Generally, it is possible to access all neighbouring countries via land. However, construction of new roads can be challenging; climate and terrain conditions are not conducive to building in the south. Railways are under-developed, mainly because of the size of Saudi Arabia and the elevated costs related to building a railway network in a scarcely populated area. The government plans to expand the national network, especially in the context of the construction of new industrial cities.

Airport links are the easiest way to travel in Saudi Arabia. There are three international airports and 25 domestic airports; the government intends to expand existing facilities and construct new airports. There are also 21 ports.

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The pipeline network is key to the national infrastructure. The network is operated by Saudi Aramco and comprises more than 9,100km of pipeline, mainly for oil; condensate, liquid petroleum, gas and other refined products are transported via the pipeline as well.

Water supply constraints constitute a major challenge. Rainfall is erratic and usually very low in most of the country; surface water can be found in the west and southwest, and accounts for a small percentage of total supply. Groundwater, via the exploitation of renewable and non-renewable aquifers, as well as desalination fulfils most of the total water demand. For these reasons, Saudi Arabia is gradually phasing out water-intensive crops and taking an increasingly active interest in purchasing land abroad in order to ensure its food security.

Legal and Regulatory Environment

Judicial Environment

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Settling disputes is time consuming and costly, both by European and American standards, as well as by regional ones. The judicial system is based on shari'a law, which emphasises the consensual settlement of conflict in the commercial field. This area is usually highlighted as a key weakness by members of the business community.

Positively, in 2007 King Abdullah approved extensive reform to the judicial system; hence, commercial courts now deal with disputes previously handled by committees within the Ministry of Commerce and Industry, while labour courts similarly look after disputes previously referred to the Ministry of Labour.

However, several challenges remain such as the lack of a codification of legal rulings, although an official website has been launched to publish Islamic legal rulings and give prominence to those issued by recognised scholars. There are plans for further reform including the codification of legal rulings, the principle of precedent and the publication of legal proceedings.

Bankruptcy and Insolvency

Corporate bankruptcy is regulated by the 1996 Code of the Settlement for Preventing Bankruptcy. According to this regulation, the local chambers of commerce and industry set up committees where creditors and debtors can meet and seek conciliation within this framework. If the two parties are unable to find an agreement, the debtor can file a request to the Board of Grievances requesting its intervention in order to obtain a settlement. Although this code represents an improvement on prior legislation and introduces a non-punitive process for addressing insolvency, instruments of protection for both creditors and debtors are limited. No official data on bankruptcy is available.

Corporate Governance

The World Bank states that starting a business is a relatively smooth process, especially compared with the regional average, and Saudi Arabia is improving in this regard. The number of required procedures is below the OECD average and far lower than the regional average; it takes five days to set up a business, less than both the regional and the OECD average; and the cost, expressed as a percentage of income per capita, is much lower than the regional average but slightly higher than it is in OECd countries.

The Regulations of Companies Act permits various forms of corporate organisation. The limited liability partnership is the most common but joint venture arrangements are favoured, both for public and local private firms, with respect to inward foreign investments. All joint ventures require prior government approval.

Corruption

Corruption is a serious obstacle to doing business. Indeed, the kingdom is perceived as being far more corrupt than any other Gulf country. This is unsurprising given that political activity in Saudi Arabia is governed by association and not by accountability; corruption is considered to be widespread within the royal family due to the lack of independence in the judiciary, as well as the lack of transparency in government accounts, property rights and contracts. Royal family members often profit from tenders, oil revenues, state-owned firms and arms deals; moreover, the government budget does not include a detailed breakdown of sources of revenues and expenditure, nor is it subject to any independent oversight.

In this context, senior officials protect their business interests and maintain their influence on the system. Consequently, corruption is almost institutionalised. An organisation dedicated to tackle corruption and improve efficiency in the public sector was established in 2007 and a National Authority for Combating Corruption was created in April 2011. Saudi Arabia has also signed the UN Convention Against Corruption. However, given the level of entrenched interests, we do not expect any significant decline in corruption.

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Sanctions

There are currently no known international sanctions applied against Saudi Arabia.

Statistical Reference

Key Indicators and Forecasts

Historical Data

2003 2004 2005 2006

Real GDP growth, % 7.66 5.27 5.55 3.16

Nominal GDP (LCUbn) 933 1,088 1,371 1,548

Nominal GDP (USDbn) 248.76 290.23 365.87 413.46

GDP per capita (USD) 11,138 12,502 15,219 16,672

Population (year-end, m) 22.33 23.21 24.04 24.80

Exchange rate (year- 3.75 3.75 3.75 3.75

average, LCU:USD)

Current account (USDbn) 28.05 51.93 90.06 99.07

C/A balance, % GDP 11.28 17.89 24.62 23.96

FX reserves (year-end, USDbn) 22.62 27.29 155.03 226.04

Import cover (months) 4.96 4.91 21.21 23.9

Inflation, annual ave, % 0.6 0.37 0.61 2.28

Govt balance, % GDP 4.5 11.4 18.4 21.0

2007 2008 2009 2010

Real GDP growth, % 2.02 4.23 0.1 4.75

Nominal GDP (LCUbn) 1,672 2,071 1,638 1,976

Nominal GDP (USDbn) 446.28 552.20 436.72 526.81

GDP per capita (USD) 17,499 21,103 16,290 19,193

Population (year-end, m) 25.50 26.17 26.81 27.45

Exchange rate (year- 3.75 3.75 3.75 3.75

average, LCU:USD)

Current account (USDbn) 93.38 132.32 20.95 66.75

C/A balance, % GDP 20.92 23.96 4.8 12.67

FX reserves (year-end, USDbn) 305.46 442.25 409.69 444.72

Import cover (months) 25.23 30.04 30.33 30.63

Inflation, annual ave, % 4.14 9.87 5.02 5.38

Govt balance, % GDP 12.2 32.5 -6.1 5.2

2011 2012

Real GDP growth, % 8.48 6.81

Nominal GDP (LCUbn) 2,511 2,727

Nominal GDP (USDbn) 669.51 727.31

GDP per capita (USD) 23,840 25,337

Population (year-end, m) 28.08 28.71

Exchange rate (year- 3.75 3.75

average, LCU:USD)

Current account (USDbn) 158.49 179.16

C/A balance, % GDP 23.67 24.63

FX reserves (year-end, USDbn) 540.68 664.2

Import cover (months) 32.76 31.69

Inflation, annual ave, % 4.88 4.04

Govt balance, % GDP 13.7 14.2

Source: Haver Analytics/D&B

Forecasts

2013f 2014f 2015f

Real GDP growth, % 3.5 3.6 3.9

Nominal GDP (LCUbn) 2937.41 3157.72 3419.81

Nominal GDP (USDbn) 783.3 842.1 912.0

GDP per capita (USD) 26716.78 28135.17 29862.74

Population (year-end, m) 29.3 29.9 30.5

Exchange rate (year-average, 3.75 3.75 3.75

LCU:USD)

Current account (USDbn) 127.6 92.5 57.2

C/A balance, % GDP 16.29 10.99 6.27

FX reserves (year-end, USDbn) 690.0 725.0 750.0

Import cover (months) 28.62 27.18 25.55

Inflation, annual ave, % 4.2 3.9 4.4

Govt balance, % GDP 6.1 3.4 0.9

2016f 2017f

Real GDP growth, % 4.1 4.2

Nominal GDP (LCUbn) 3727.59 4051.89

Nominal GDP (USDbn) 994.0 1080.5

GDP per capita (USD) 31913.94 34026.25

Population (year-end, m) 31.2 31.8

Exchange rate (year-average, 3.75 3.75

LCU:USD)

Current account (USDbn) 36.4 19.7

C/A balance, % GDP 3.67 1.83

FX reserves (year-end, USDbn) 780.0 830.0

Import cover (months) 24.26 23.84

Inflation, annual ave, % 4.9 4.5

Govt balance, % GDP -0.7 -1.1

Source: Haver Analytics/D&B

Comparative Market Indicators

Saudi Arabia Iran Algeria

Income per capita (USD) 25,337 7,355 5,291

Country population (m) 29 76 36

Internet Users (% of population) 47.5 21.4 14.0

Real GDP growth (% p.a., 2013-2022) 3-6 1-4.5 3-5

Qatar US

Income per capita (USD) 95,427 49,658

Country population (m) 2 316

Internet Users (% of population) 86.2 77.9

Real GDP growth (% p.a., 2013-2022) 5-7 1.5-2.5

Source: Haver Analytics/InternetWorldStats.com/D&B

User Guide

Ratings and Indicators

Traffic Light System

The traffic light system used in this report gives you a speedy way of assessing the balance of risks and opportunities in a given country or category of analysis for that country. Three traffic lights are used:

(G) Green: indicates that positive factors/influences dominate.

(A) Amber: indicates that there is a balanced mixture of negative/positive factors/influences.

(R) Red: indicates that negative factors/influences dominate.

The traffic light indicators act as a quick guide to the overall balance between the detailed analytical components covered elsewhere in the report. This allows you to rapidly identify areas of concern or promise, which you can then explore further, either elsewhere in the report or via the content of the other products in our portfolio. You should always use the more detailed analysis as the basis for any further investigation/assessment/decision-making.

D&B Risk Indicator

D&B's Country Risk Indicator provides a comparative, cross-border assessment of the risk of doing business in a country. The risk indicator is divided into seven bands, ranging from DB1 to DB7. Each band is subdivided into quartiles (a-d), with 'a' representing slightly less risk than 'b' (and so on). Only the DB7 indicator is not divided into quartiles.

The individual DB risk indicators denote the following degrees of risk:

DB1 Lowest risk Lowest degree of uncertainty associated

with expected returns, such as export

payments and foreign debt and equity

servicing.

DB2 Low risk Low degree of uncertainty associated

with expected returns. However, country-

wide factors may result in higher

volatility of returns at a future date.

DB3 Slight risk Enough uncertainty over expected returns

to warrant close monitoring of country

risk. Customers should actively manage

their risk exposures.

DB4 Moderate risk Significant uncertainty over expected

returns. Risk-averse customers are

advised to protect against potential

losses.

DB5 High risk Considerable uncertainty associated with

expected returns. Businesses are advised

to limit their exposure and-or select

high-return transactions only.

DB6 Very high risk Expected returns subject to large degree

of volatility. A very high expected

return is required to compensate for the

additional risk or the cost of hedging

such risk.

DB7 Highest risk Returns are almost impossible to predict

with any accuracy. Business

infrastructure has, in effect, broken

down.

Headline Category Descriptions

These headline categories combine the analysis from a number of detailed categories in order to provide focused analysis of business-critical issues.

Credit Environment Outlook

This category assesses the factors that affect the country's credit environment, and helps cross-border traders and investors understand the level of risk related to non-payment or delayed payment.

Supply Environment Outlook

This category covers the factors that could disrupt supply chains associated with the country, thus allowing cross-border traders and investors to assess risks in this area.

Market Environment Outlook

This category provides an assessment of the factors affecting the market environment over the short- to long-term; this assessment will help businesses involved in cross-border trade and/or investment to make informed decisions about increasing, maintaining or decreasing business links in a country.

Political Environment Outlook

This category helps cross-border traders and investors to understand the risks associated with expropriation/nationalisation, and also takes account of intentional human actions that could affect the quality of the business environment.

Detailed Analytical Category Descriptions

These analytical categories provide our most detailed, in-depth coverage of the core components of risks and opportunities associated with a given country. Together, they embody our broadest, deepest assessment of a country's risk and opportunity environment.

Short-term Economic Outlook

Analyses the economy/business cycle over the next 2-8 quarters, identifying recession, recovery, growth or stagnation. Helps businesses anticipate the impact of short-term developments in the sphere of aggregate supply and demand.

Long-term Economic Potential

Assesses long-term economic prospects over the next 5-15 years on the basis of trends in the physical environment, natural and human capital, and demographics and labour supply. Helps businesses foresee the long-term impacts on market potential of factors such as ageing, resource depletion and innovation.

Market Potential

Covers the ability of foreign providers of goods and services to access a target country's markets. This helps businesses understand the practical and regulatory barriers, as well as incentives and opportunities.

FX Risk

Looks at the risk of lack of FX, significant devaluation or depreciation, or any instability of the exchange rate over the next 90-180 days. This helps businesses anticipate the pressures facing customers billed in foreign currency, or the risks if their receivables are in local currency.

Transfer Risk

Covers the risk of existing or new regulations, requirements or other government actions preventing, delaying or burdening cross-border transactions. This helps businesses to anticipate risks related to crossborder payments arising from the regulatory environment.

Business Environment Quality

Assesses the risks and opportunities in the business environment associated with regulations, institutions and business culture. This helps businesses assess how intangible aspects of the business environment can facilitate business operations or otherwise.

Business Continuity

This category looks at factors that could affect the physical supply chain due to the effects of natural phenomena or other unintended consequences. This helps businesses anticipate the likely/current impacts of extreme weather, seismic activity and inadequate/improved infrastructure.

Insecurity / Civil Disorder Risk

This covers the risk of disruption of business operations and the services of a functioning economy due to the negative effects of intentional human action on civil peace and internal/cross-border security. This helps businesses to understand the context and risk spectrum for threats arising from social and political disturbances.

Expropriation / Nationalisation Risk

This category assesses the risk of forcible/compulsory, full/partial loss of control or ownership of assets at the hands of a sovereign government, and whether or not there is compensation or judicial redress. This helps businesses understand the country's track record in this respect and highlights the risks posed by acts of expropriation/nationalisation.

Full Text: COPYRIGHT 2013 Dun & Bradstreet, Inc.

http://www.dnb.com/

Source Citation:

"Country insight: Saudi Arabia." D&B Country Report: Saudi Arabia. Dun & Bradstreet, Inc., 2013. Business Insights: Global. Web. 7 Feb. 2015.

URL

http://bi.galegroup.com.glacier.sou.edu/global/country/SA

Document Number:

GALE|A349224741