Saudi Arabia’s economy in the post-oil world

Saudi Arabia’s 2030 vision is no desert mirage. Alistithmar Capital will play a lead role in seeing this bold plan for economic diversification come to fruition

Saudi skyscrapers

The past 24 months have been decisive moments for Saudi Arabia, and the country’s leadership rose to the occasion. It’s widely known this period of time has seen a transformation in the global economic landscape, with a steep decline in oil prices creating fiscal pressure for oil producing countries. While the Saudi economy is strong, with healthy reserves and the capacity to see off such jitters, the oil price decline was an indication, appropriately recognised by the nation’s leadership, that Saudi Arabia should no longer depend solely on the energy sector as its main source of revenue.

Diversification drive
Saudi Arabia is capable of diversifying its economy while utilising its vast natural resources. One of the most critical elements of this, and a main point of emphasis for the Vision 2030 programme, is the human factor. Saudi Arabia has a young population, with more than half below the age of 25. It is vital this is used to the economy’s advantage, by nurturing and directing youth aptitude and energy effectively, and by expanding entrepreneurship and enterprise opportunities. The Saudi Vision 2030 programme clearly sets out goals to further develop the promising new generation by improving education from a young age, tailoring education to suit market requirements and ensuring a good supply of quality graduates in emerging fields. The government is prepared to continue its support for talented youth through scholarships for education at prestigious international universities, while also aiming for a minimum of five Saudi universities to ranked among the top 200 internationally by 2030.

Meanwhile, noting the relatively low contribution of SMEs to the country’s GDP – currently only 20 percent – the government has established a dedicated SME Authority to enable young people to explore and venture into entrepreneurship by eliminating existing obstacles and facilitating funding. Generally, it is of crucial importance that Saudi Arabia works towards diversifying and strengthening the economy’s private sector contribution. Currently, this stands at around 40 percent of GDP, but the Saudi Vision 2030 programme has set the ambitious goal of raising this by 20 percent. Several strategies have been identified, including the privatisation of the public sector, establishing free zones, opening doors to foreign investors, loosening visa restrictions and offering long-term residency to expatriates.

ICAP’s relationship team helps clients to clarify their needs and financial goals, and to create investment strategies and build diversified portfolios

Likewise, tourism is expected to give a significant boost to the Saudi economy. Saudi Arabia is host to two of the holiest Islamic sites in the world, currently attracting over eight million visitors each year. That number is expected to rise to over 30 million by 2030. The government has already launched a plan to facilitate this, with projects including metro systems, railways and the expansion of airports, as well as the expansion of the holy sites themselves. This is alongside many other plans, such as investing more in UNESCO heritage sites, building and expanding museums, and creating an easier visa application process for visitors.

Alongside this, we also envisage developing new sectors, including a localised defence industry and renewable energy ventures, while solidifying existing sectors, including the mining sector – as the country contains rich mineral resources, including aluminium, phosphate, gold, copper and uranium. Saudi Arabia has the ability, resources and – with the Saudi Vision 2030 programme – a clear sense of direction to create a more robust, vibrant and diversified economy.

Short-term opportunities
While there is optimism about the long term, keeping in view the current socio-economic baseline and the regulatory framework, three to four sectors have the potential for positive performance in the short term also. The hospitality sector should benefit from religious tourism, which continues to grow. The aim to increase the number of visiting pilgrims and convert their visas to tourist visas will have tremendous growth implications for the sector, as well as the real estate and cement sectors. I would also expect these latter sectors to benefit from anticipated increased real estate development, given the recent imposition of fees on undeveloped land, which should excite construction activity. The government’s announcement of the construction of residential units in an effort to address housing shortages will also have a positive effect on these sectors.

In the short term, the healthcare, agriculture and food sectors will benefit from demographic changes. A growing population will ensure consumption growth, while low global commodities prices will keep margins intact for companies, despite rising operational costs. Given the opening up of the Saudi stock market, the Tadawul, last year, there are also opportunities for qualified foreign investors to enter the market and invest in these potentially lucrative sectors.

The listing of other types of securities and investments will increase the depth and range of the Tadawul and the Saudi investment market

While the Tadawul has already taken some very positive steps that will help increase the participation of foreign investors, the rate of participation is still low when compared to other emerging markets. As such, further steps should be taken to encourage more foreign investment, helping to further unleash the country’s market potential. The listing of other types of securities and investments, such as preferred shares, Saudi riyal-denominated bonds and sukuks, real estate investment trusts, and exchange traded funds, will increase the depth and range of the Tadawul and the Saudi investment market. Similarly, the introduction of new indices for SME companies is essential, as more of these companies are being listed. The infrastructure and resources that are available in the Saudi stock and financial markets are among the best in world, meaning it has the potential to become one of the world’s leading emerging market stock exchanges, with the right encouragement and policies in place.

The key role of ICAP
Alistithmar Capital (ICAP) is well placed to help with this historic mission. ICAP is an investment services company fully owned by the Saudi Investment Bank and licensed by the Capital Market Authority. It offers wide-ranging investment products and services to individuals, as well as institutional clients. ICAP has a state-of-the-art online trading platform called Istithmarcom, and has well-trained brokers for local and international brokerage services in place. It also offers conventional and sharia-compliant margin facilities to increase clients’ purchasing power. ICAP’s asset management team is dedicated to delivering returns above client expectations and also offer innovative solutions in many asset classes, including equity, fixed income, money market and real estate, with different strategies in different markets. In addition, it offers mutual funds, discretionary portfolios and customised investment products.

ICAP’s talented corporate finance team works to manage initial public offerings, rights issues, underwriting of issuances, mergers and acquisitions, and sukuk and bond issuances. At the same time, ICAP’s relationship team helps clients to clarify their needs and financial goals, and to create investment strategies and build diversified portfolios. In short, for an investor, ICAP is an all-inclusive financial services company, with appealing products for all type and classes of investor.

The investment services firm has also invested heavily in building a sophisticated technological infrastructure and a talented workforce capable of delivering top-quality services. This approach has consistently been the strategy of ICAP, and the results are clear for all to see.

The company’s market share in local brokerage stands at 8.5 percent yearly to-date, while it ranks fourth in the market. Growth over the last three years has been phenomenal compared to all its peers: ICAP’s funds are among the top three performers for the past two years. It also launched two equity and two real estate funds last year, and will soon launch a new fund of about $133m for a 40-floor luxury building with sky villas, penthouses and apartments in Al-Khobar. It will be a first-of-its-kind project in Saudi Arabia, and very close to the sea.

Attention will also be focused on income-generating funds that produce income semi-annually, equivalent to seven to eight percent per annum, which is a very good return. ICAP is also working to launch a real estate investment trust and may be the first company in Saudi Arabia to offer this. Furthermore, the company is planning to assist people by creating funds for long-term security, such as funds for retirement and child education, among other areas. These investments and initiatives will enable ICAP to perform very well over the medium to long term, and be an effective partner to realising the goals of the Saudi Vision 2030 programme.