Saudi Arabia – Why It’s Different to Dubai and Why It’s a Good Bet.

The oil rich state of Saudi Arabia is different in three significant ways. For a start – it’s big. Saudi has a huge land area of 2 million sq. km.  Compare this with UAE, which covers a modest 84,000 sq. km, or Qatar’s tiny 12,000 sq. km. 

Secondly, it houses both Makkah and Madinah, two of Islam’s religious cities.  In fact its origins are inextricably linked to Islam.  King Abdul-Aziz, who founded the modern state, did so with the support of its Islamic scholars and Islamic and cultural traditions influence business and political decisions today.

Thirdly, and importantly – demographics.   Qatar’s citizen population is just 300,000 while UAE’s is 950,000.  Saudi’s national population dwarfs its neighbors at 26 million citizens. Due to its large population, Saudi Arabia’s GDP per capita is below the average of the region.  The gulf region as a whole has a GDP per capita of $33,000 whilst Saudi Arabia’s is $24,000 (Qatar’s GDP per capita is $103,000, the UAE’s is $48,000 – approximately equal to that of the USA.)

The GINI index is a measure of income inequality.  A higher GINI index implies more income inequality. The USA has a GINI index of 0.38 and the UK 0.34.   Saudi has a GINI index of 0.32, Qatar 0.39 and the UAE 0.31.
Saudi and its neighbors are equally as effective in distributing their wealth. In Saudi however, proportionally there is less to go around.

Sovereign wealth funds are an important component of the regions financial future.  They are one of the ways the oil rich nations invest today’s oil dollars in the future growth of their economies. The Abu Dhabi Investment Authority is the largest of the gulf funds with assets in excess of $800bn.  Saudi Arabia’s fund has approximate assets of $400bn and Qatar $60bn.   This translates to the investment authority managing $15,000
per person in Saudi Arabia, $200,000 per person in Qatar and $890,000 per person in UAE.  Saudi’s neighbors can leverage their funds to contribute significantly to government spending. Saudi Arabia’s large population and
expanse of geography make this difficult. 

The Saudi government is creating the necessary conditions to develop domestic production and consumption as well as continuing to develop the nation’s petroleum and minerals export potential. Projects such as the flagship universities KAUST and Princess Nora University are important steps on the path to improving the Kingdom’s education systems.  The newly established economic cities near Jeddah, Jazan and Medina, KAEC, JEC and MKEC will drive diversification. The Ras Al Khair mineral city project is one the first steps to exporting raw materials other than oil based ones.

Saudi Arabia’s ascendency to the WTO, economical liberalization, deregulation and the establishment of the Saudi Investment Authority (SAGIA) open the door to foreign investment and increased competition. The problem of national unemployment is being addressed by the government’s Nitaqat program. Businesses that have grown used to minimal competition and hiring lower cost expatriate resources, instead of investing in training and development of Saudi employees will be challenged.

The Arab Spring makes all of this more important.  The Saudi government is reconciling long held political structures with the need for greater transparency, accountability and engagement.These characteristics represent both opportunities and risks.  As the Saudi government increases the pace of liberalization and addresses unemployment issues, so Saudi businesses will be forced to employ divergent strategies from their already liberalized but sparsely populated neighbors. Total Factor Productivity (TFP) is measure of an economy’s technological dynamism.  Saudi Arabia has the lowest growth in TFP in the region.  Saudi
businesses must innovate and lead the region; to avoid being a drag on it’s prosperity. How can this be achieved?

Saudi enterprises must make the case for change. Growth hides sins, but the underlying economy won’t continue to grow forever.  Government spending will eventually stop.  Saudi enterprises must develop more
efficient business practices.  They must leverage technology to drive standardization and to create a sustainable platform for future growth.  It’s also crucial that they develop succession plans to ensure expatriate
expertise is not lost when Saudi nationals assume senior positions in organizations.  A significant reduction in the expatriate labor force is inevitable.

Creating the right culture, organizational structures, systems and processes won’t be easy.  However, for the Saudi Arabian economy to continue to thrive and compete within the Gulf and worldwide, key strategic investments must continue to be made. The prize is significant.  Successful businesses will be those that leverage and market to, the country’s greatest asset – its people. With a market of 26 million consumers, the leanest and most agile Saudi businesses will be strongly positioned for dominance.

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