Hamad Al-Sayari: Economic and structural policy reforms in Saudi
Arabia
Speech by His Excellency Hamad Al-Sayari, Governor of the Saudi Arabian Monetary
Agency, at the Institute of International Finance, INC MENA Regional Economic Forum,
Riyadh, 7 November 2007.
* * *
It is a great pleasure for me to welcome you at this important gathering organized by the
Institute of International Finance and hosted by the National Commercial Bank.
I would like to thank the organizers for inviting me to speak to this distinguished audience. I
understand that for the next two days, the participants will be deliberating on the state of the
global economy in general and the opportunities and challenges facing the Middle East and
North Africa (MENA) economies in particular.
The Gulf Cooperation Council Countries (GCC) are an important constituent of the MENA
region, a marketplace that is undergoing significant transformation where the member
countries are opening up their markets and significant structural policy reforms are taking
place.
Let me begin by providing you with an overview of the ongoing economic liberalization and
structural policy reforms currently underway in the Kingdom. Since the discovery of oil in the
early 1930s, the oil sector has remained the linchpin of Saudi Arabian economy.
Nevertheless over the past three decades, a strategic decision was made to diversify and
expand the base of our economy. Towards this goal, a series of wide ranging reforms and
policies were implemented in order to improve the investment climate and to attract greater
private sector participation in the economy as well as facilitating inflow of foreign direct
investment into the country.
In the last decade, significant progress has been made and the Kingdom has enacted and
implemented forty-two new trade-related laws and regulations; nineteen of them were
required for our WTO accession in 2005. The last and most important of these initiatives was
the reform of the Judicial System. In addition, to stimulate economic activities and attract
foreign investment, the rate of corporate taxation has been reduced from 45 percent to a flat
20 percent, and the requirements for minimum start-up capital were abolished. The negative
list of investment was also revised and now allows foreign investment in vital sectors like
insurance services, wholesale and retail trade, air and train transport, and communication
services. The Government has set itself an objective to place Saudi Arabia amongst the
world's top ten most investor friendly economies by 2010 and, therefore, the opening up of
new economic sectors to FDI is in line with the ongoing economic reforms with the aim of
improving the Kingdom's investment climate.
The Kingdom's efforts towards economic reforms in order to attract foreign investment have
come to fruition. According to a recent report of the United Nations Conference on Trade and
Development (UNCTAD), Saudi Arabia emerged as the largest recipient of foreign direct
investment (FDI) in the Arab world in 2006, attracting $18 billion in FDI, an increase of 51
percent over 2005. The global rating agencies Standards & Poors and Fitch have also raised
the sovereign credit ratings of the Kingdom to A+. Also, Saudi Arabia has been upgraded
according to the World Bank's Ease of Doing Business Index from 38th place to 23rd place in
2007.
The Government has encouraged the establishment and growth of value-added industries in
areas where the Kingdom has competitive advantages, namely, cheaper energy, strategic
locations and availability of raw materials. King Abdullah has recently launched four
megaeconomic cities in Rabigh, Hail, Al-Madinah and Jazan, which are expected to draw almost
SR 300 billion in investment and create more than a million jobs. It is worthy to note that
these economic zones are located in the less developed cities and in areas away from the
existing economically developed regions and are specifically selected to ensure that
development and employment opportunities are spread around the Kingdom.
An important indicator of progress made in diversifying the economy is provided by the trend
in our non-oil exports. Such exports were insignificant in early eighties, but they have been
rising sharply in recent years. Since 2000, they have risen continuously. The non-oil sector
exports were valued at about $21 billion in 2006 and constituted almost 6.0 percent of total
GDP and 13.2 percent of non-oil GDP.
During 2006, the national economy continued its remarkable growth for the fourth
consecutive year, especially in the non-oil sector which grew by 6.2 percent following its
growth rate of 5.2 percent in 2005. The non-oil industrial sector was the fastest growing
sector of the economy recording a robust growth of 10.1 percent during the preceding year.
The sector has continued its robust growth during the current year.
Due to higher economic growth and receipt of higher than anticipated revenues, the fiscal
position of the government has improved substantially in recent years. The budget surpluses
since 2003 have enabled the government to reduce its domestic debt sharply and increase
its expenditure on infrastructure and social sectors. The ratio of domestic debt to GDP has
declined from 82 percent in 2003 to 27.9 percent in 2006 which was reflected positively on
our public finance and macroeconomic stability. These trends are likely to continue against
the oil revenue cushion and fiscal discipline along with continuous expansion of the
economy.
The foregoing policy initiatives, combined with the recent budgetary surpluses have enabled
us to launch a number of key development projects that are designed to develop the county's
physical and social infrastructure, especially spending on education and training, diversifying
the economy, creating jobs and enhancing growth prospects. A key facet of the economic
reforms has been the active participation of the private sector in all aspects of the economy
particularly in the manufacturing, construction and services sectors.
Now turning to the Kingdom's goals and aspirations for the next decades. We have a clear
vision that Saudi Arabia will represent an industrial hub among the region's countries,
leveraging off on its strategic location, competitive supply of energy, size of the local market,
ease of access to global markets, and the growing partnerships between the public and
private sectors. This strategy fulfils our State's goal of diversifying our economic production
base away from Oil. For this purpose, we have encouraged and will continue to encourage
the private sector by providing attractive incentives, including the setting up of industrial
zones in various parts of the country, equipping them with various infrastructural facilities and
by increasing the capital base of specialized credit institutions to provide long-term loans to
entrepreneurs.
Nevertheless, the Saudi economy is facing a number of challenges the most important of
which is the increasing rate of inflation. Although inflation was less than 1 percent on average
in the last two decades, it rose to 2.2 percent in 2006 and it continued to increase during the
last months, exceeding 4 percent in last August according to the Central Department of
Statistics and Information. Our concern is that factors that caused accelerating inflation are
still in existence. These include external ones such as higher prices of foodstuffs and
commodities, and internal factors such as the remarkable rise in rents in the main cities due
to the economic expansion, increasing demand for housing and offices resulting from an
increase in spending on investment, and the expansion of services sector especially in the
financial and construction sectors.
Although the inflation rate in the Kingdome is less than that in most countries of the region
due to the size of domestic production base and due to the availability of directly and
indirectly subsidized goods and services such as flour, fuel, water, electricity, and some
foodstuffs, the continuing increase in inflation requires SAMA to keep a close watch on it and
adopt all possible policies to confront this challenge.
Dear audience,
The banking system's performance has continued to strengthen over the years with proactive
monitoring and guidance from SAMA. Saudi banks achieved good profits, such as the
average Return on Equity and average Return on assets. They have not been affected by
turmoil in global markets. The banks also have average Basel Capital Adequacy Ratios of
over 21 percent well above the mandated international standard of 8 percent. To ensure the
continuation of this trend, we continue to accord high priority to appropriate prudential
regulations and close supervision of banks. During 2005, SAMA rolled out a risk based
approach to bank supervision with on site and off site risk assessments undertaken on an
ongoing basis. All Saudi Banks are on target to implement all 3 Pillars of the Basle II Capital
Adequacy by January 2008, using the standardized approach.
During the past decade, Saudi banks have made tremendous progress in terms of offering
innovative products and services, introducing sophisticated technological delivery channels
including ATMs, Internet and Phone Banking. In cooperation with SAMA, banks have set up
advanced payment and settlement systems, including Automated Clearing Houses and real
time gross value electronic funds transfer systems such as SPAN and SARIE. The
introduction of technologically advanced systems has resulted in significantly improving the
level and quality of customer service, a reduction in transactional costs and increase in
efficiencies and strengthening controls.
Regarding the capital market, a number of measures have been taken by the Capital Market
Authority to deepen and broaden the market which will enhance its role in the development
of the economy. The Capital Market Authority has been issuing licenses for setting up
specialized companies devoted exclusively to conducting securities business in the Kingdom.
So far, it has issued 70 licenses for the purpose.
Our financial system is continuing to develop and grow in strength and sophistication. The
insurance sector is being reorganized under the Cooperative Insurance Law of 2003, which
has entrusted SAMA with the responsibility of supervising insurance business in the country.
At the time of the enactment of the Law, there was only one licensed company namely
National Cooperative Company for Insurance (NCCI) operating in the country. Other
companies were unlicensed. Several companies have applied, and Royal Decrees were
issued approving the establishment of 21 insurance companies. Approvals were issued by
SAMA for 50 offices to provide insurance related services such as brokerage, loss
assessment and insurance consultations. Some offices completed necessary procedures to
obtain commercial registrations and others are about to finalize necessary procedures. More
licenses are expected to be issued soon.
The banking system is also being expanded by allowing foreign banks to open branches in
the Kingdom. So far ten licenses have been issued for that purpose to 5 GCC banks and to 5
banks from other countries. All of them have already established their branches in the
Kingdom, or are likely to open their branches in the very near future.
Also, in March 2006 the Council of Ministers approved the foundation of a Saudi joint-stock
company under the name "Alinm'a Bank" with a capital of SR 15 billion to carry out normal
banking business and investment. This bank is likely to become operational in the near
future.
Saudi Arabia has one of the youngest populations in the world. This means that one of the
challenges facing the national economy is to continue creating jobs for our young people to
enter the labour market. This involves development of education and training to qualify the
youth and prepare it to meet the requirements of the labour market. This subject is being
given a high priority in the State's plans which envisage expansion in the establishment of
more universities, specialized colleges, training centers and encouraging the private sector to
contribute to the effort in that direction. Notable progress has been made in providing most
government jobs to Saudis. A major achievement of the Saudi Banking system has been in
areas of human resources, where banks have continued to increase the use of Saudi
citizens. I am therefore pleased to note that in this regard the Banking sector is ahead of all
other industrial sectors and currently a level of about 80 percent Saudization has been
achieved. The employment of Saudis at senior executive level has reached 70 percent.
However, one of the most important challenges currently facing the financial sector is the
great increase in the need for qualified skills due to the expansion by banks in their business
and establishment of financial services institutions and insurance companies and insurance
related services and free professions. This will result in a great pressure on available
technical skills in these fields. This has been noted recently in the high rise in the wages for
such specialized skills and competition by financial institutions to attract such skills. I hope
that exaggeration in this competition will not increase the rotation of the manpower in this
sector in a manner that would affect work in its institutions.
The next stage in the Saudization policy is to increase the proportion of Saudis in the new
jobs that are being created by our expanding economy. The government has recently
launched a program to support small-and-medium-size enterprises which will also create
employment opportunities for Saudis.
The forthcoming stage of the Saudiization policy will focus on increasing the share of Saudis
in new posts created by economic growth. The Government has recently launched a
programme for supporting small and medium size companies, thereby, new jobs will be
available for Saudis.
There are also a number of challenges in deepening and broadening the financial sector with
significant implications for the economy. These include the creation of a viable and vibrant
mortgage industry, which would have significant impacts on housing, construction, durable
goods and other ancillary sectors. Also, there are initiatives in place to establish sound
insurance and leasing industries. These initiatives are also aimed at enlarging the
institutional investors' base that can channel resources in developing a pool of expertise,
professional skills and technical knowledge in the financial sector.
I wish to conclude with the observation that Saudi Arabia's economy is currently undergoing
through a stage of accelerated growth in all sectors of the economy at a level and pace
unprecedented in the past. The Government is spearheading this dynamic growth with its
avowed policy of structural reforms and liberalization in the economy, as evidenced by its
success in attracting the private sector and foreign direct investment into primarily the non-oil
sectors of the economy.
The Saudi economy is an integral part of the global economy and is thus susceptible to
systemic risks, although Saudi Arabia did not feel the financial turmoil and liquidity crisis
experienced by the rest of the world as a result of the recent sub-prime crisis, we are,
nonetheless, vigilant in our efforts to continually monitor the domestic market and to ensure
continuation and stability of policies and regulations.
I wish all success to your forum and a good stay in the Kingdom.
Thank you for your attention.