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If you’re considering exporting to Saudi Arabia you should read this first

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If you’re considering exporting to Saudi Arabia you should read this first article image

The ongoing political turmoil in the Middle East is a challenge for the Saudi rulers, with major security problems due to the current situations in neighbouring Iraq and Yemen.

Saudi Arabia feels increasingly challenged by growing Iranian influence, its traditional rival in the Gulf region. Therefore, Saudi foreign policy has turned to become more assertive, mainly to counter Iranian influence.

Earlier this year, Prince Mohammed bin Salman was appointed heir to the throne, and is known to support comprehensive economic reforms.

Saudi Arabia has an oil-dependent economy with strong government controls over all major economic activities. The sharp oil price decrease since 2014 had an especially negative impact on exports and state revenues.

The share of oil in exports and in state revenue declined from about 85 per cent in 2014 to 60 per cent in 2016. Economic growth is expected to contract 0.5 per cent in 2017, on the back of fiscal austerity, declining investment and a bigger-than-expected cut in oil production, following the agreement made at an OPEC meeting in November 2016, before recovering to a range of about two per cent in the medium-term.

Tighter liquidity

Support for economic activity comes from ongoing large investments in infrastructure and new industrial projects. The banking sector is still sound and well capitalised, but the lower oil price has affected the financial sector through tighter liquidity.

Credit growth has decelerated and banks’ balance sheets have deteriorated somewhat, but the level of non-performing loans is still low. 

In 2015, the budget deficit increased to about 15 per cent of GDP and remained at a double-digit rate in 2016 despite the imposition of austerity measures (including petrol price increases and comprehensive subsidy cuts), but is expected to decrease to 7.3 per cent in 2017.

Public sector pay cuts imposed in September 2016 were reversed in April 2017, probably to avoid public discontent because two-thirds of the Saudi workforce is employed in the public sector.

Tight grip on spending

This turnaround will keep the deficit at an elevated level, given that salaries and allowances account for about 45 per cent of government spending.

With the oil price well below its fiscal break-even level of around US$78 in 2017, the government still faces the challenge of keeping a tight grip on spending.

The current account turned from high surpluses in previous years to a deficit of 8.7 per cent in 2015 and 3.8 per cent in 2016.

That said, due to its very large international reserves, low public debt (22.3 per cent of GDP in 2016) and easy access to international debt markets, Saudi Arabia can easily fund those deficits. Import cover has decreased (from 34 months in 2014 to 25 months in 2017) but is still high.

The external financing requirement was only 19 per cent of foreign reserves in 2016.

Far-reaching reform goals

While Saudi Arabia can sustain high spending for some years, a structural shift to a long-term period of lower oil prices would eventually pose a risk for the economy. Therefore, a comprehensive diversification of the economy away from oil dependency is high on the political agenda.

In 2016 the government announced far-reaching reform goals in a Saudi Vision 2030 plan, and has implemented a National Transformation Programme (NTP) accordingly.

The aim is to transform the economy over the next 15 years to diversify growth, reduce the dependence on oil, assure the long-term sustainability of public finances, increase the role of the private sector, and create more jobs.

At the same time, it is planned to privatise a five per cent-stake in the state oil company, Aramco, in 2018 to fund a sovereign wealth fund, which will manage part of its investments abroad. It remains to be seen if the political willingness to implement those far-reaching economic reforms will persist.

Australian companies planning to establish business relationships in Saudi Arabia are advised to thoroughly investigate the market for any issues and obtain professional advice where appropriate.

Knowledge of business and social etiquette is also of utmost importance when doing business with Saudi Arabia.

Mark Hoppe is managing director, ANZ, Atradius, a leader in risk management and credit insurance www.atradius.com.au

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