24 Jan 2018
Saudi Arabia: Market Profile
Major Economic Indicators
- Following the sharp slowdown from 4.1% in 2015 to 1.4% in 2016, Saudi Arabia’s economic growth is projected to decelerate further to 0.1% in 2017 due to sluggish oil prices and oil production cuts. The IMF projects the Saudi economy to grow modestly at 1.1% in 2018.
- In observance with output cuts agreed with other major oil exporting countries, Saudi oil output fell from 11.7 million barrels per day (MBD) in 2015 to 10.5 MBD in 2016, and declined further to 9.9 MBD in November 2017. In November 2017, OPEC and non-OPEC oil producers announced to further extend oil the output curb to December 2018.
- Prince Mohammad bin Salman, who leads the “Vision 2030” economic reform, was appointed Crown Prince in June 2017, making him the heir apparent to the throne. Meanwhile, the recent arrests of royals and ministers associated with his anti-corruption campaign have added to political uncertainty of the country.
- Saudi Arabia’s cumulative inward FDI amounted to US$231.5 billion in 2016, 31.3% above the 2010 levels. As of end-2016, China’s FDI stock in the country jumped from US$760.6 million to US$2.6 billion, based on statistics from China’s Ministry of Commerce.
- Saudi Arabia is Hong Kong's third largest export market in the Middle East (after the UAE and Israel). In the first eleven months of 2017, Hong Kong's total exports to Saudi Arabia decreased by 6.8% year-on-year (YOY) to US$918 million and imports from the country fell 16.7% YOY to US$366 million.
Current Economic Situation
Saudi Arabia’s industry, services and agriculture sectors represent approximately 43%, 55% and 2% of its GDP. The oil sector is the pillar of the Saudi economy, accounting for about 80% of exports, over 80% of government revenue and over 40% of the country’s GDP.
Given the reduced oil production in compliance with the OPEC agreement on output cuts and sluggish oil prices, the Saudi economic growth is expected to be sluggish in 2017. According to the preliminary estimate by the General Authority for Statistics, the Saudi economy contracted by 0.7% in 2017, following the growth of 1.7% in 2016. The dismal economic performance was mainly due to the contraction in the oil sector which shrank by 3% in 2017 compared with the previous year. Some non-oil industries have suffered from the spillover of the oil sector sluggishness. The construction sector contracted further, with the change of -3.4% in 2017, compared with -3.2% in 2016. Meanwhile, the wholesale and retail, restaurants and hotels sector grew slightly by 0.6%, recovering from the 1.6% contraction in the previous year.
Oil and Gas Export
Saudi Arabia is the largest oil producer within the Organisation of Petroleum Exporting Countries (OPEC) and the world’s second-largest oil producer after Russia. Saudi oil output fell from the record high of 11.7 MBD in 2015 to 10.5 MBD in 2016 after OPEC and non-OPEC producers agreed to output cuts. To continue drawing down the oil stocks overhang, OPEC announced to extend output cut until the end of 2018. While Saudi Arabia continues to be a leading oil exporter, it is also stepping up natural gas production. The country’s natural gas production was 110.9 billion cubic metres (cu.m.) in 2016.
The Saudi government is keen to develop alternative energy sources such as nuclear energy and solar energy to reduce its oil use in future. It has planned to build 16 nuclear reactors over the next 20 years at a cost of more than US$80 billion, with the first reactor to be established by 2022. With rapid growth of electricity demand, Saudi Arabia plans to increase its generating capacity from 55 gigawatts (GW) to 120 GW by 2020. Apart from that, the Kingdom aims to generate one-third of its electricity with solar energy by 2032.
The Saudi Arabian government is keenly aware of the need to promote economic diversification for the oil-dependent economy. In April 2016, Prince Mohammed bin Salman launched the ambitious “Vision 2030” economic reform. Prince Mohammed bin Salman became the heir apparent to the throne, as he was appointed Crown Prince in June 2017, further strengthening his political clout to reform the Saudi economy. Meanwhile, the recent arrests of royals and ministers associated with his anti-corruption campaign have added to political uncertainty of the country.
Tourism, defense manufacturing and mining are sectors identified with huge potential under “Vision 2030”. Consistent with this economic thrust, the Saudi government also encourages the development of industrial sectors such as production of chemicals, petrochemicals, aluminum and plastics.
The reform aims to balance the fiscal budget and end the country’s oil dependence through an initial public offering (IPO) of 5% of state-owned Aramco and channeling the receipt to the Public Investment Fund (PIF). The IPO is expected to generate US$2 trillion to create the largest sovereign wealth fund (SWF) in the world, which will be used to protect Saudi Arabia from global oil market turbulences. This much anticipated IPO is expected to take place in the second half of 2018. Besides, there will be measures to raise new taxes, increase female workforce participation, and develop the non-oil sectors.
The Saudi government ran into a budget deficit for the fourth consecutive year in 2017, which narrowed to 8.9% of the country’s GDP from 12.8% in 2016. The deficit was financed by bond sales and drawing down reserves. In December 2017, the government presented its 2018 budget, which is the first expansionary budget in three years with an increase in capital spending by 13.6%. The increase in expenditure will be largely covered by rising revenues, including the newly introduced VAT of 5%, which came into effect on 1 January 2018.
Similar to the UAE, Saudi Arabia has ambitious plans of infrastructure expansion. The main difference between the two countries of the six-member GCC (consisting of the UAE, Saudi Arabia, Kuwait, Qatar, Bahrain and Oman) is that the UAE puts more emphasis on commercial development, while Saudi Arabia focuses on a wider range of infrastructure and building projects: oil and gas facilities, water and electricity plants, residential and commercial buildings, and roads and railways.
One of the country’s mega projects is the King Abdullah Economic City (KAEC) in Rabigh, located along the Red Sea coast, covering an area of 181 sq km, approximately the size of Washington DC. It is expected to create 1 million employments for the country according to the Saudi Arabian General Investment Authority (SAGIA). The KAEC comprises six main areas, including the industrial zone, sea port, residential area, educational zone, resorts and financial island. Connecting the KAEC with the major trade routes between Asia and Europe, the King Abdullah Port was opened in December 2013, with an annual capacity of 20 million twenty-foot equivalent units (TEU) upon completion of all phases.
As part of the government’s “Saudisation” programme, a labour reform aimed at raising employment of Saudi nationals was introduced in 2011, along with a crackdown on illegal foreign workers in 2013. Over one million expatriates out of Saudi Arabia’s nine million foreign workers left subsequently, hampering growth in sectors that relied on cheap foreign labour. However, given the structural issues in the labour market, such as the high reservation wages for Saudi nationals, the unemployment rate for Saudi nationals remained high at 12% in 2016 (stayed the same as in 2012), compared with 5.6% for the overall population.
To encourage women participation in the economy, Saudi Arabia issued a royal order allowing women to drive In September 2017, which will take effect in June 2018. Although women’s rights have been extended in recent years, including the right to vote and run in local elections, there are still social restrictions on the female population. For instances, women need a male guardian’s consent for travelling and obtaining a passport. In addition, women are not allowed to use public swimming pools available to men.
Attracting foreign direct investment (FDI) forms a vital part of Saudi Arabia's economic policy. With effect from 2000, Saudi investment law allows 100% ownership of projects by foreigners (except for activities ruled out by the negative list) and relaxes rules for sponsoring foreign employees. The law also permits foreign ownership of property, and lowers corporate taxes. In June 2013, Saudi Arabia switched its weekend from Thursday-Friday to Friday-Saturday, in line with other Gulf States countries, as a move to boost regional and international business relations. According to the World Bank’s Doing Business 2018 Survey, Saudi Arabia ranked 92nd out of 190 economies, falling behind other GCC peers like the UAE, Bahrain, Oman and Qatar. To gain easier access to the Saudi market, foreign investors invariably partner with Saudi companies.
The Saudi Arabian General Investment Authority (SAGIA) is the primary agency responsible for FDI promotion and has prioritised energy, transport and logistics, ICT, health, life sciences and human capital as key investment sectors. FDI projects must be licensed by the SAGIA; additional licenses from government authorities such as the Saudi Arabian Monetary Agency (SAMA) may be required for investment in specific sectors. More information on investment climate and regulations in Saudi Arabia can be found on the SAGIA website.
Saudi Arabia’s cumulative inward FDI amounted US$231.5 billion in 2016, 31.3% above the 2010 levels. During the same period, China’s FDI stock in the country jumped from US$760.6 million to US$2.6 billion based on statistics from China’s Ministry of Commerce.
In December 2005, Saudi Arabia became the 149th member of the WTO, with tariff commitments phased in six phases through 2015. In 1993, when Saudi Arabia first applied for membership of the General Agreement on Tariff and Trade (GATT), the predecessor of the WTO, 75% of Saudi's tariffs on imports were at 12%.
In April 2008, Saudi Arabia started to decrease or exempt voluntarily import duties over six years on 180 goods, which had attracted import duties ranging from 12% to 25%. In 2010, the number of tariff-free goods reached 763 and constituted 23% of import value in 2010. In 2013, Saudi Arabia's average MFN applied import tariff rate was 4.8%, with average rates of 6.0% for agricultural products and 4.6% for non-agricultural products respectively.
Saudi Arabia has not imposed tariff quotas, applied seasonal tariffs, and other duties and charges on imports. There are no VAT, excise duties or any other internal tax or charges on domestically produced or imported products as well. In September 2013, Saudi Arabia eliminated the only one export duty, to untanned hides and skins. The Kingdom maintains export bans on 12 categories of products, including breeding livestocks, wood and antiques and historical items.
Saudi Arabia's WTO commitments provide for foreign participation in its wholesale and retail trade. Upon accession, Saudi Arabia allowed foreign companies to hold up to 51% of the equity in a wholesale or retail business. The limit has been increased to 75% since January 2009.
However, some products remain restricted from entering Saudi Arabia for religious, health or security reasons. Prohibited items include alcoholic beverages, pork, non-medical drugs, non-Islamic religious materials, weapons and weapon-related electronic equipment. In addition, foreign companies that are deemed to support Israel in one way or another are blacklisted because of the Arab League boycott of Israel, to which Saudi Arabia is a participant. 98.6% of Saudi tariff lines are applied on an ad valorem basis.
The tie between Saudi Arabia and its fellow members of the GCC is strong. In November 1999, the GCC agreed to form a customs union, which took effect from January 2003. The accord establishes a single tariff of 5% on 1,500 imported items from non-member countries. It also provides a list of other essential items that can be imported duty-free. Under the accord, goods imported into the GCC area can be freely transported subsequently throughout the region without paying additional tariffs. Saudi Arabia is a member of the Pan-Arab Free Trade Area too, with almost all trade barriers among its members eliminated from January 2005. In January 2008, a GCC common market was formed between the members to eliminate cross country investment barriers and facilitate free movement of services.
There are health and sanitation regulations for all imported foods. Saudi Arabia has however agreed to take on the obligations of the WTO Agreement on Sanitary and Phytosanitory Measures. Under the agreement, Saudi Arabia has to apply science-based safety standards to all agricultural goods.
Saudi Arabia maintains regulations on product labelling and country of origin marking. In addition, there are safety regulations on toys, and product standards regulations for electrical and electronic goods.
Imports for exhibition purposes have to be accompanied by an invoice with the value of the goods endorsed by the local chamber of commerce, and a certificate of origin. The invoice should show clearly that the goods are imported for exhibition purposes, and will be re-exported. Saudi Customs requires a deposit, which is refundable, for these goods.
While the Saudi Riyal is pegged to the US dollar, Saudi Arabia is committed to the planned Gulf Monetary Union, along with three other members of the GCC, to work towards a single currency. Nonetheless, Oman withdrew from the monetary union in 2006, followed by the UAE in May 2009. Although a joint monetary council has been set up since December 2009 with a view to setting up a single GCC currency in the future, progress has been stalled over the past few years amid the economic and currency problems in the European Union.
Saudi Arabia is part of the Greater Arab Free Trade Area Agreement (GAFTA) which came into force on 1998, Under the GAFTA, the country enjoys free trade with Algeria, Bahrain, Egypt, Iraq, Kuwait, Lebanon, Libya, Morocco, Oman, Palestine, Qatar, Sudan, Syria, Tunisia , the UAE and Yemen.
As member of the GCC, Saudi Arabia also has free trade agreement (FTA) with Singapore, New Zealand and the European Free Trade Association (EFTA) comprising Switzerland, Norway, Iceland, and the Principality of Liechtenstein. Negotiations on the establishment of FTA with the EU, Japan, China, India, Pakistan, Turkey, Australia, Korea and the Group of Mercosur (Brazil, Argentina, Uruguay Paraguay, and Venezuela) are on-going.
Saudi Arabia has double taxation agreements (DTA) and Investment Promotion & Protection Agreement (IPPA) with the Chinese mainland and concluded the DTA with Hong Kong in August 2017.
Hong Kong's Trade with Saudi Arabia
Saudi Arabia is Hong Kong's third largest export market in the Middle East, trailing the UAE and Israel. In the first eleven months of 2017, Hong Kong's exports to Saudi Arabia fell 6.8% YOY to US$918 million, following an expansion of 15.6% in 2016.
Major export items in the period included telecom equipment and parts (US$540 million, 58.8% of total, +6.7% YOY), computers (US$100 million, 10.9% of total, -7.2% YOY), engines & motors, non-electric, & parts (US$39 million, 4.3% of total, -62.1% YOY), watches and clocks (US$33 million, 3.6% of total, -6.8%), and other articles of apparel, of textile fabrics (US$27 million, 2.9% of total, -15.4%).
Hong Kong's imports from Saudi Arabia decreased by 16.7% to US$366 million in the first eleven months of 2017. Major imports in that period were hydrocarbons and their halogenated, sulphonated, nitrated or nitrosated derivatives (US$123 million, 33.5% of total, -19.9%), polymers of ethylene in primary forms (US$107 million, 29.2% of total, -5.4%), other plastics, in primary forms (US$52 million, 14.2% of total, +20%), engines & motors, non-electric & parts (US$20 million, 5.3% of total, -57%), telecom equipment & parts (US$16 million, 4.5% of total, -27.1%).
More information on the Belt and Road countries’ economic and investment environment, tax and other subjects that are important in considering investment and doing business are available in The Belt and Road Initiative: Country Business Guides.