This year, Saudi Arabia’s Council of Ministers gathered and agreed to implement the Vision 2030, which promises to enact sweeping changes to reduce the kingdom’s dependence on oil. Not only does Saudi Arabia’s new economic plan seek to create a more productive private sector and workforce, it also hopes to introduce sustainable fiscal management policies and increase investment opportunities within and beyond Saudi’s borders.
One of the biggest steps taken to encourage an investment-driven economy in Saudi Arabia has been the restructuring of the country’s sovereign wealth fund also known as the Public Investment Fund (PIF). By combining the proceeds from Aramco’s initial public offering and various other assets, the PIF, currently holding $100 billion, will eventually be worth an estimated $2 trillion. Ultimately, providing Saudi Arabia with the financial capital needed to create a more diversified economy and become a stronger regional and global player.
Attracting Foreign Direct Investment to Saudi Arabia
On a recent visit to the U.S.A, the Deputy Crown Prince Mohammed bin Salman, second deputy premier and defense minister, met with senior U.S. officials and business executives to rally support for the recently approved National Transformation Plan (NTP) of 2020 and convince American companies to invest in Saudi Arabia. This 5-year plan aims to expand Saudi Arabia’s private sector, while simultaneously promoting “Saudization” and foreign investment.
By introducing a number of key policy reforms, such as reducing the average resolution time for commercial cases by 30%, cutting the percentage of delayed projects from 70% to 40% and speeding up the visa issuing process by two-thirds, the NTP aims to make it easier for people to conduct business in Saudi Arabia. In addition to adding more than 450,000 nongovernment jobs by 2020, creating new investment opportunities worth $613 billion and increasing the foreign direct investment in Saudi Arabia from $8 billion to $19 billion.
According to Mckinsey and Company’s recent Saudi Arabia Beyond Oil report, the following 8 sectors will require an estimated $4 trillion in investment to grow in the kingdom: mining and metals, petrochemicals, manufacturing, retail and wholesale trade, tourism and hospitality, healthcare, finance and construction. To further ease the investment process, the Saudi Arabian General Investment Authority (SAGIA) has even developed an Android and iOs app that investors can use to explore and discover the investment opportunities available in the country.
Saudi Arabia’s Investment in Foreign Economies
Not only does Saudi Arabia’s 2030 Vision aim to expand the worth of the PIF to approximately $2 trillion, it also intends on increasing the portfolio’s foreign investment share from 5% to 50% by 2020, according to Yasir Alrunmayyan, the PIF’s Secretary-General. By increasing foreign investment, Saudi Arabia hopes to support the growth of Saudi investors and companies abroad to further diverse its existing investment portfolio and economic growth.
While the PIF’s recent $3.5 billion investment in Uber has been praised as a bold move from Saudi Arabia to reinvent its economy, there have also been several other promising investment initiatives in the past two months. In April, Saudi Arabia formed a joint coordination council with Jordan to identify potential opportunities for PIF to invest in the Hashemite kingdom. Although the size of the investment fund and the sectors that will receive its support have yet to be determined, it’s clear that the Jordanian economy needs this influx of capital now, more than ever, to generate jobs for its citizens and economically integrate the country’s 1.5 million Syrian refugees.
King Salman bin Abdulaziz Al Saud also visited Cairo in early April to announce the establishment of a $16 billion investment fund to be shared between the PIF and the Egyptian government. Saudi representatives also signed 17 investment deals and memoranda of understanding for cooperation in the agriculture, industry and infrastructure sectors. Other projects in the works include the creation of an economic free trade zone in Sinai and a new industrial city near the Suez Canal.
During this visit, both Saudi Arabia and Egypt also made a historic agreement to construct a bridge over the Red Sea to connect the two countries. When asked about the proposed bridge, Prince Mohammed said that the crossing would link Europe and Asia, provide building and investment opportunities and help move billions of dollars in cargo across the Red Sea. While no detailed plans have been revealed yet, it is expected that the bridge will span from Nabq on the Egyptian side to Ras Al Sheikh Hamid on Saudi Arabia's western coast.
A Role Model of Economic Reform
Since announcing the 2030 Vision, Saudi Arabia has taken great strides to translate this plan into action, which is already strengthening diplomatic relations and re-energizing economies in the MENA region. If the Saudi government is also able to successfully implement the necessary changes required to improve the ability of foreign investors to conduct business within its borders, the kingdom could become a model for economic reform and global community building in the future.
Like its neighbours, Qatar’s economy is feeling the pinch of lower oil prices. Known as the richest country in the world per capita, the small Arab state is set to post its first fiscal deficit in 15 years. But Qatar is much better off to weather the tough times. Its non-oil sector is growing at a rapid pace and so is its high-income population. Qatari nationals as well as the majority of expats living in the country continue to enjoy gigantic spending power, giving the service sector a bigger market to invest in and a much needed demand boost.
Qatar outlook at a glance, 2015-2017
Note: Real GDP in constant 2004 prices.
Source: Qatar Economic Outlook 2015-2017, Ministry of Planning, June, 2015.
The Ministry of Development Planning and Statistics said in its 2015 annual report that “real economic growth, despite lower oil prices, is expected to remain strong on the back of vigour in the non-hydrocarbon economy that is set to carry through to 2016 and 2017.” The ministry also estimated a deficit of 4.9% of GDP and said government spending “continues to move on a lower trajectory than in the recent past”. However, it expects Qatar’s current account to remain in surplus throughout 2017. The good news is that the economy is likely to remain healthy for the short term at least. The International Monetary Fund estimates Qatar’s GDP to grow by 6.4% in 2016, and though this was taken down to around 4% between now and 2019 by Standard & Poor’s (S&P) Rating Services, experts say it should provide plenty of scope for the banking sector to grow
Despite lower hydrocarbon revenues, the government continues to invest heavily in a number of service-oriented industries, and remains committed to providing financial and logistical support to both local and foreign investors.
A variety of institutions heavily involved in Qatar’s diversification drive include Enterprise Qatar, the Qatar Foundation, the Supreme Council of Information and Communication Technology, Qatar Financial Centre and Qatar Development Bank.
Education, healthcare, the insurance and financial sectors as well as hospitality, property and construction are all bringing billions of dollars to the economy, with the World Cup acting as a magnet for investors from all corners of the globe. Switzerland, for example, which recently established a trade and investment promotion agency in Doha, has shown much eagerness to capitalise on an array of business opportunities Qatar has to offer. The Swiss agency known as OSEC, which changed its name to Switzerland Global Enterprise, signed a strategic deal with the Qatari Businessmen’s Association, an entity that enjoys great influence in the country’s business circles.
The Peninsula, a Qatari daily newspaper, reported recently that a free trade agreement to further boost trade and investment is expected in the near future, as the volume of trade between the two countries almost doubled for the period between 2010 and 2014 (from 558 Million SFr to 872 Million SFr).
On top of the government’s agenda for now is to make it this growth sustainable and available for future generations, while optimising the efficiency of its markets and diversifying the economy.
Swiss main exports/imports with Qatar 1985-2014 (Million CHF)Source: Swiss customs data
(In order to see the detailed data on exports and imports by commodity please click here)
“Mobilising and using the Qatari resources and abilities together with the Swiss know-how, experience and technology will, without doubt, boost the socio-economic development of the country,” said H.E. Sultan Rashid Al Khater, Under Secretary at the Ministry of Business and Trade. Growing tourist numbers as the wealthy Arab state becomes a much desired travel destination and plans to host the World Cup in 2022 as well as the less known World Athletic Championship in 2019 will require Qatar to provide some 60,000 hotel rooms. Currently, it only has around one fifth of that.
To sustain and continue this growth, Qatar will need to develop a well-educated and highly-skilled workforce and to do that it needs a world class education. According to a recent report, the education sector in the country is set for rapid transformation in the coming years, with between eight to 12 new schools expected to be required every year in the run up to 2022. Demand for schools has increased at a compound growth rate of 6% primarily on the basis of population growth. Government schools comprise 48% of all schools in the country. However, the fastest growing segment is international schools, which as of the academic year 2013 made up 35% of the total number of schools. A persistent school shortage in Doha makes it among the most attractive markets for school developers globally. World renowned education provider, GEMS, which owns and operates over 70 schools in 12 countries, including Switzerland, is set to open a base in a new purpose-built campus in Doha. GEMS is one among many private English curriculum education companies operating in the region.
Data from Qatar National Bank shows that financial services are making the greatest contribution to the country’s non-hydrocarbon growth, accounting for almost a third of the total of 10.6 percent in 2014. It achieved similar growth in 2015, well ahead of other sectors such as construction, hospitality and manufacturing. From 2010 to 2014, banks in Qatar saw their assets surge by an average annual growth rate of 15.3%, according to Qatar National Bank, the country’s biggest lender. The government, however, will need to continue to invest across the board, from construction and property, to healthcare, education and tourism, to sustain economic growth and encourage foreign investment. Another important avenue for diversifying its income, is investing petrodollars in foreign assets, a strategy that has worked well in the past.
Qatar’s construction industry is faring much better than its neighbours’ like Saudi Arabia and the UAE, who have suffered from severe project delays, massive job cuts and project cancelations. A recent report found that confidence in the Qatari market among leading construction companies at the end of last year was 19 percentage points higher than the year before. One of its famous construction projects is the $45 billion Lusail City, which has attracted volumes of sizeable investments from all over the world. Once completed in 2017, it is expected to house 200,000 residents as well as scores of hospitality, entertainment and retail developments. Perhaps another reason why construction activities in Qatar maintain healthy growth levels is well-performing property market. In contrast to Dubai, where buying a property would probably cost you half the price of what you’d pay a year ago, prices in Qatar have stayed steady, while demand has held up and in some cases increased.
Meanwhile, developers have been quick to respond to a market hungry for more retail options. A spike in demand has been largely spurred by a fast expanding population, which hit 2.46 million in November last year, and the consistent development of Doha’s residential and transportation infrastructure. The country’s population centre has 13 malls currently in operation and it is looking to more than double that by 2019, according to a recent report by the Oxford business Group. Mall of Qatar, one of the largest retail centres currently under construction, accounts for a $5.4 billion, the size of investment that would be needed to build a small industrial plant. But this is understandable given Qataris’ famous shopaholic inclinations. People’s love for brands have led luxury retailers to give the market a vote of full confidence when it comes to investing in an outlet or setting up local presence. “Qatar is the kind of market that can sustain the high-end segments,” says Sean Kelly, project developer at United Developers, which has a significant portfolio of investments in the country.
Qatar took the world by storm in 2010 as it became the wealthiest nation per capita, while its economy grew by an unprecedented 19.4%. Although its economy remains largely dominated by the public sector, the small Gulf Arab state is embracing more privatisation of state-controlled enterprises. It also provides significant support to more locally owned Small and Medium Enterprises (SMEs) and encourages them to get involved in heavy and light industries, international partnerships and trade.
As one investment expert in the US said, “Qatar is clearly geared more to the institutional investor” or groups that pull their money like retirement or hedge funds. The country has made significant strides in easing its laws on foreign investment and simplifying business ownership in order to incentivise and attract foreign capital. For example, the number of restrictions in non-citizens owning land was taken down significantly with the view to spur real estate investment. Qatar also allows up to 100% of foreign ownership in health and power projects — with approval from the government, as well as agriculture and manufacturing.
Timely diagnosing and treatment of diseases across the MENA region is extremely problematic, with one mind bogging statistics pointing to as much as 40% of people aged between 21 and 79 who suffer from diabetes not being diagnosed on time and in some cases not being diagnosed at all. Many would agree that this is mainly due to a lack of expertise from across the countries, which is increasingly leading governments to seek qualified experts from abroad.
Qatar’s healthcare and insurance sectors would also require significant foreign expertise to keep up with the country’s rapid population growth, which according to the Ministry of Development Planning and Statistics, has more than tripled since 2004. Meanwhile, the rising incidence of lifestyle-related diseases means the state represents the fastest-growing health care market in the GCC. The Oxford Business Group estimates the sector to be worth some $9 billion by 2018, about double the $4.6 billion seen in 2013, with the inpatient market pegged to hit $2.5 billion and the outpatient market expected to reach $6.6 billion. As the government looks to build one of the world’s best healthcare systems, scores of new state of the art hospitals will be required and more robust and efficient healthcare infrastructure will need to be built. In the 2014/15 budget, allocations to the sector increased by 12% year-on-year to 15.7 billion Qatari riyals ($4.3 billion), with the number of health care facilities set to more than double by 2022. Pharmaceutical giants have seen an increased amount of sales off the back of a regional healthcare market that is projected to grow to almost $70 billion in 2018, according to estimates from Alpen Capital. A significant contributor to this health expansion has been the introduction of mandatory health insurance in some of the region’s largest markets. Along with Saudi Arabia and the UAE, Qatar has also made health insurance compulsory for expats, with the rest of the GCC expected to follow suit and thus give rise to a fast expanding insurance market.
Qatar is aspiring to “sustainable economic prosperity” but the truth is it continues to grapple with setbacks ranging from a lack of entrepreneurial spirit among its own people and falling productivity levels across the private and public sectors alike to limitations due to the size of its own economy and damaging external forces like exchange rate appreciation, which makes its exports more costly and less competitive. Qatar’s domestic economy is too small to attract significant foreign investment focused on internal markets, proving futile as a training ground for local companies hoping to expand regionally or globally. In addition, due to its geographic location, Qatar is one of the most isolated states in the GCC which some believe is significantly hampering intra-regional trade and limiting investment.
For now, diversifying its economy and exploring new channels to bring in money to the country remains its most viable option.
Investing in downstream industries such as petrochemicals and metallurgy and developing their subsectors like fertilizers and even chemicals will play a crucial role in decarbonizing Qatar’s economy. On top of that, it would create more jobs for the youth and take advantage of cheap feedstock. But this is easier said than done. In order to fully realise its future ambitions, Qatar will first have to make up for the shortages of local labour. Historically, Western expats have been filling the gap. A more long-term solution would be to better engage its own people and encourage home-grown entrepreneurship. The government is warming up to the idea and as part of Qatar’s National Vision it pledges to provide support and training to the private sector which it sees playing “an essential role in achieving sustainable development”, and raise productivity levels across the entire economy. At the same time, it admits that more needs to be done to improve competitiveness and attract investment in what it calls “a dynamic and increasingly borderless international economy.”
But Qatar is not alone in its push for economic diversification. Many of the Gulf Arab states have the exact same objectives and have for years been pumping huge amounts of money into petrochemicals, air transport, logistics, real estate, knowledge services and finance, among other sectors. If Qatar wants to relive the glory of enviable growth and economic momentum, it needs to address head on the challenges at stake. From low demand for skills amid rising labour surplus and limited capabilities of discovery and innovation, to a weak private sector and low levels of entrepreneurship, the obstacles for growth – at least for now – continue to abound.