Saudi Arabia kicks off two-year market upgrade cycle

SOURCE:Arab News

Time: April 08,2018

The Saudi stock market (known as the Tadawul) is large enough that its rapid inclusion could potentially destabilize other EM constituents. So it will instead join the FTSE Emerging Index in several stages between March and December 2019.
Over the years, Crown Prince Mohammed bin Salman and the Kingdom’s Capital Market Authority have made substantial modifications to Saudi Arabia’s equity market infrastructure. Developments include introducing a two-day settlement cycle for trades, requirements for cash payments to be made on delivery of shares (delivery versus payment), proper failed trade management, the introduction of short selling, and securities borrowing and lending facilities.
So it comes as no surprise that these steps to make the Tadawul exchange compliant with international trading standards are now being recognized by the EM investment community.
As the largest economy in the Middle East, Saudi Arabia will make up approximately 2.7 percent of the FTSE Emerging Index, which could potentially bring in billions of dollars in passive inflows.
And with the state-owned Saudi Aramco oil company set to be privatized, Saudi’s weight in the FTSE Emerging Index may increase to about 5 percent over time.
In our view, this is testament to Saudi’s ambitious capital market reform agenda. Now that the bulk of fiscal reforms have taken shape, coupled with higher oil prices and the anticipation of the Kingdom’s inclusion into the MSCI EM Index (widely anticipated to be announced in June this year), we expect investors’ appetite for Saudi stocks could likely increase.
Saudi Arabia remains a reform story on many levels; capital-market reform has culminated in FTSE Russell’s decision to classify it as an emerging market. In our view, it’s encouraging that the bold fiscal reforms we’ve seen will likely put Saudi’s economy on a more sustainable footing over the long term, as Saudi Arabia has already taken steps to reduce its reliance on oil revenues and to diversify its economy. While challenges persist, we think the overall macroeconomic fundamentals are on an improving trajectory.

The Saudi stock market’s classification last week to secondary Emerging Market (EM) status within the FTSE Russell Global Equity Index Series sends a strong signal to investors that the country has made significant progress in opening up its capital markets and has improved its levels of corporate governance and transparency.

Bassel Khatoun

Finally, social reforms continue unabated. The lifting of the ban on women driving and the introduction of new forms of entertainment will create additional investment opportunities. As a result, we remain constructive on equity market sectors where valuations do not capture this long-term potential. In particular, we believe the Saudi banking sector has growth potential through improving margins in a rising interest rate environment, as Saudi banks take largely non-interest bearing deposits. Banks are also generally well-padded against non-performing loans, and have capitalization levels above regulators’ stringent requirements. On the other hand, we also think stocks in insurance, health care, education and consumer staples industries look attractive, as the government implements policies to unlock their potential.
Looking further ahead, Saudi’s inclusion on the MSCI EM watchlist means it could also be promoted to EM status in June this year— though nomination is by no means a guarantee.
Pakistan’s upgrade to EM status in May 2017 came after just one year on the watchlist. We anticipate Saudi Arabia could follow a similar fast pace of index inclusion.
An MSCI consultation with asset owners, asset managers and those on the sell side will determine Saudi’s upgrade to EM status. So far, investor feedback has been positive. We’d expect Saudi Arabia’s journey through the MSCI process to likely play out as follows: inclusion in the MSCI EM Index to be announced June 2018, with a phased-index implementation starting in May 2019.
On current standing, Saudi Arabia would have a potential weight of 2.3 percent of the MSCI EM Index, and could almost double with the IPO of Saudi Aramco (the exact weight will depend on Aramco’s valuation and free-float).
Of course, there are risks to the Saudi market, including a potential oil-price decline. The Saudi Aramco IPO is its crown jewel, so there is a vested interest in higher oil prices. Increased “Saudization” — the removal of subsidies and imposition of levies — will likely also pressure some sectors, in particular those that are heavily reliant on expats or expat work-forces.
However, the FTSE Russell announcement marks the start of a two-year upgrade cycle for Saudi Arabia. With plans from the Saudi government to increase the number of listed companies in the Tadawul from 170 to 250 by 2022, we think this is just the tip of the iceberg.

  • Bassel Khatoun is managing director for frontier and MENA at Franklin Templeton Emerging Markets Equity.

Saudi Arabia’s credit rating affirmed by S&P

SOURCE: Arabian Business

Time: 07 April 2018

 

Saudi Arabia’s credit rating was affirmed by S&P Global Ratings as its heir to the throne, Crown Prince Mohammed bin Salman, is on a three-week tour of the US in search of deals that would diversify his country’s oil-dependent economy.

S&P affirmed Saudi Arabia’s rating at A- and kept the outlook stable. “We expect Saudi Arabia will experience modest economic growth from 2018, supported by rising government investment and, later in our forecast period, a gradual increase in oil production,” the agency said in a statement.

Saudi Arabia’s economy contracted 0.5 percent last year after lower oil prices led to a ballooning budget deficit and shrinking reserves. The Crown Prince’s ambitious development plan – Vision 2030 – seeks to wean the country off oil while privatising state-owned companies, including the sale of a stake of up to 5 percent in oil giant Aramco.

S&P last altered its Saudi rating in February 2016, downgrading it to A- as the country wrestled with the rout in oil prices. The kingdom is rated A1 by Moody’s Investors Service and A+ by Fitch Ratings.

Saudi Arabia plans to borrow about $31 billion this year to bridge an expected budget deficit of $52 billion and fund its growth plans. It raised about $36 billion in 2017, $14 billion of which was from domestic bonds and $22 billion from international debt markets. Authorities have so far struggled to raise non-oil revenue.

Saudi dollar bonds were the worst-performing among the 190-member Bloomberg Barclays GCC Credit Index in the first quarter, even as oil prices rallied to their highest level since late-2014.

The kingdom’s bonds due 2046 fell 5.22 percent, while those due 2047 dropped 4.92 percent. That compared with an average fall of 2.35 percent in total returns for sovereign bonds.

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S&P affirms Saudi Arabia’s credit rating on growth prospects, spending boost

SOURCE:The National

Time: April 07,2018

The rating agency estimates kingdom’s economy to grow 2 per cent in 2018

S&P Global Ratings affirmed Saudi Arabia’s credit rating with a stable outlook on the expectation that economic growth will accelerate in 2018 as the world’s biggest oil exporter continues to boost spending.

“The stable outlook is based on our expectation that economic growth will accelerate moderately in 2018, supported by rising government investment,” Benjamin Young and Trevor Cullinan, Dubai-based analysts at S&P Global Ratings, said in a report.

Saudi Arabia’s economy is expected to grow 2 per cent this year after contracting 0.7 per cent last year.

The A-/A-2 foreign and local currency credit ratings puts Saudi Arabia firmly in the investment grade category, suggesting that it’s unlikely the government would default on its financial obligations. The ratings are particularly watched by bond holders as a way to measure the risk on credit sold by the government and corporations.

While Saudi Arabia hasn’t been traditionally active in the international bond market as a seller, in recent years it has stepped up sales of conventional and sharia-compliant bonds to help plug a budget deficit caused by the three-year slump in oil prices that began in 2014.

The Saudi Arabian government sold US$17.5 billion in bonds in its first international sale in 2016. The kingdom plans to borrow about $31bn this year to bridge an expected budget deficit of $52bn and fund its growth plans, according to Bloomberg News. It raised about $36bn in 2017, $14bn of which was from domestic bonds and $22bn from international debt capital markets.

Cuts in some of the state subsidies and levying of 5 per cent VAT in January to generate much needed non-oil revenues are some of the other measures Riyadh has taken to bring stability to state finances,

“Saudi Arabia has articulated an ambitious strategy to reduce the economy’s dependence on oil and imported labour to transform the domestic education and job market and to consolidate the budget,” the S&P report said.

“Saudi Arabia will partly fund its ambitious economic reform programme using the large fiscal and external buffers that it amassed during the pre-2015 era of twin balance of payment and budgetary surpluses.”

S&P said that its forecast of oil prices stabilising at an average of $60 per barrel from 2018 to 2021 would help the government keep its finances in order. The kingdom, Opec’s biggest oil producer, is expected to produce 10 million barrels a day in 2018, in line with Opec’s 2016 decision to reduce supply. Next year, it’s expected that there will only be a gradual increase in production, S&P noted.

With stability in finances, the annual increase in government debt is expected to stay steady at 3 per cent from 2018 to 2021. Although, the budget deficit remains large, the government has strong external and fiscal stock positions. The country’s liquid assets as a ratio of GDP stand at 94.3 per cent while debt to GDP is 21.2 per cent, according to S&P.

Risks that might prompt a downgrade in the kingdom’s ratings include a deterioration in the country’s fiscal position or an escalation in regional geopolitical tensions.

“We could lower our ratings if we observed a reversal in the trend of fiscal consolidation, or a sharp deterioration of the sovereign’s external position,” the analysts said. “An unexpected materialisation of contingent liabilities or a build-up of arrears could also place additional pressure on expenditures.

Economy & Global Trade

SOURCE: Saudi Embassy

Time: April 4, 2018

Saudi Arabia’s free market economy has undergone remarkable changes in a relatively short period of time. It has evolved from a basic agricultural society into a regional and global economic power with a modern infrastructure.

Petroleum is an integral part of the Saudi economy; Saudi Arabia is the world’s largest producer and exporter of oil. In recent decades the Kingdom has increasingly diversified its economy, and today produces and exports a variety of industrial goods all over the globe.

The government has an essential role in industrial and economic development. The Ministry of Economy and Planning formulates economic and social development plans that set long-term economic goals. Additional sectors of the economy are overseen by individual ministries, such as agriculture, energy, transportation, communications and finance.

The private sector is playing an increasingly larger role in the Saudi economy – it now accounts for 48 percent of the gross domestic product (GDP). The sector is expected to continue growing, especially as Saudi Arabia opens its doors further to foreign investment.

In December 2005, Saudi Arabia joined the World Trade Organization (WTO), a significant development that gives Saudi products greater access to global markets, creates jobs and encourages foreign investment.

Building a modern economy

When the modern Kingdom was established in 1932, the Arabian Peninsula was an agricultural society that depended on farming and commerce – especially date exports and trade generated by pilgrims coming to Makkah and Madinah. It lacked the infrastructure needed to support the kind of economic growth envisioned by its founder, King Abdulaziz bin Abdulrahman Al-Saud.

The discovery of oil in commercial quantities in 1938 changed that. Soon after World War II, steady oil exports provided the funds to build a basic infrastructure of roads, airports, seaports, schools and hospitals.

In 1970, Saudi Arabia introduced the first of a series of ongoing five-year development plans to build a modern economy capable of producing consumer and industrial goods that previously had been imported. The country’s infrastructure was expanded, allowing industry and commerce to flourish.

At the same time, the national oil company, Aramco, invested in new production facilities, pipelines, plants and shipping facilities and continued exploring for new deposits to maximize earnings from the oil sector, which were needed to fund further growth.

The result has been a steady economic transformation of the country. Today, Saudi Arabia is one of the fastest developing countries in the world.

Industrial Cities

While Saudi Arabia’s economic base continues to be dominated by oil, the Kingdom has taken steps to diversify the economy.

Today, industrial products make up more than 90 percent of the Kingdom’s non-oil exports. Saudi Arabia exports petrochemicals, plastics, metal goods, construction materials and electrical appliances to some 90 countries.

Petrochemical and other oil-based industries are concentrated at industrial cities in major urban centers. These plants use natural gas and natural gas liquids that were previously flared, as well as refined products from the oil industry to manufacture products that would in turn feed non-oil industries.

Concentration on industrial plants in specific areas also facilitates the provision of vital support services, such as water, power and transportation.

The Jubail Industrial City on the Arabian Gulf has dozens of factories and industrial facilities, including a desalination plant, a seaport, a vocational training institute and a college.

The Yanbu Industrial City on the Red Sea has a modern port, refineries, a petrochemical complex and many manufacturing and support enterprises.

The government offered incentives for the establishment of private companies at the industrial cities. The Saudi Arabian Basic Industries Corporation (SABIC), created in 1976, set up non-oil industrial facilities that use as feedstock natural gas and natural gas liquids manufactured by the oil industry.

SABIC is owned 70 percent by the Saudi government and 30 percent by shareholders from the six Gulf Cooperation Council (GCC) countries. SABIC quicly became the backbone of Saudi Arabia’s successful industrialization. By 1994, it had 15 major plants operating in Jubail, Yanbu, and Jeddah, with an annual production of 13 million metric tons. By 2002, total production was 40.6 million tons of basic and intermediate chemicals, polymers, plastics, industrial gases, fertilizers, steel and other metals; this figure is expected to exceed 48 million tons by 2010.

One of the most ambitious economic projects to date is the massive King Abdullah Economic City near Jeddah, which broke ground in December 2005. The residential and commercial megaproject will include a dedicated port, an industrial park, a residential and hotel complex, and educational facilities.

In 2006, Custodian of the Two Holy Mosques King Abdullah launched similar economic cities in Rabigh, Hail and Madinah. Plans are also underway for an economic city in Makkah.

Development Plans

By the 1960s, Saudi Arabia had made major advances in many areas. Roads were established, a modern educational system introduced, health care improved, agriculture expanded and factories built.

Although the economy largely depended on oil revenues, Saudi leaders resolved to bring about basic improvements in the country’s economic structure. The objective was to diversify the economy away from oil into other fields.

Achievement of such an economic transformation required deliberate planning and careful implementation of a development program with clearly defined objectives. The quest for economic development and growth began in earnest with the introduction of the First Development Plan in 1970. This began a series of five-year plans that continues today.

The first phase of this process was to establish an infrastructure that could support a modern economic base. The next was to develop the human resources necessary to help bring about the planned economic transformation. Finally, the focus could shift to economic diversification, including expansion of the industrial, agricultural and other sectors, an expansion that is now well advanced.

The establishment of the physical infrastructure was accomplished in stages during the first three development plans. As the infrastructure was taking shape, the government launched a major effort to expand the industrial base. This was done along two separate, but parallel, courses. One aimed at the expansion of the country’s oil industry and the other at establishing a modern non-oil industrial sector.

In addition to optimizing revenues from Saudi oil production, the modern oil industry plays an equally important role in the development of the non-oil industrial sector by providing the raw materials and feedstock that facilitates this growth.

By 1985, with most of the physical infrastructure in place, attention shifted to diversifying economic sources.

The Fourth (1985-89), Fifth (1990-94), Sixth (1995-99) and Seventh (2000-04) Plans all emphasized strengthening the growing private sector and increasing the efficiency of the industrial sector. The Eighth Five-Year Development Plan (2005-09) was devised with a focus on increasing foreign as well as national investment, and on developing human resources.

Throughout the course of the development plans, Saudi Arabia’s steady but dramatic industrial and economic transformation has been accomplished through the careful guidance and active support of the government. To judge the success of this effort one need only consider that in the 25 years from 1970 to 1995, the non-oil sector’s share of GDP increased from 46 percent to just over 70 percent, and that this GDP tripled, to 125.1 billion U.S. dollars, reflecting a growth rate of 8.6 percent in current prices. By 2002, the GDP had reached 186 billion dollars.

Government Support for the Private Sector

The government plays an essential role in industrial and economic development.

The Ministry of Economy and Planning assists in formulating the five-year development plans that set long-term economic goals.

The Ministry of Finance supervises implementation of the nation’s economic policies. The Saudi Arabian Monetary Agency (SAMA), the nation’s central bank, oversees the country’s fiscal policy.

To facilitate the expansion of the private sector’s role in the national economy, the government established five specialized credit institutions, which provide economic opportunities to many Saudis who were previously unable to compete in the marketplace. These financial institutions have provided loans to citizens for development projects in agriculture, industry and construction.

In 1974, the Saudi Industrial Development Fund (SIDF) was the first government agency set up to provide interest-free soft loans to enable Saudi businessmen to establish industrial plants. These loans can be used to finance up to 50 percent of the capital for a new factory. SIDF loans have helped launch thousands of new factories and expand hundreds of existing facilities.

Since it was founded in 1963, the Saudi Arabian Agricultural Bank (SAAB) has provided loans for agricultural projects, farm machinery and production requirements. The Real Estate Development Fund has been financing residential and commercial construction since 1974, with a unique program that provides interest-free loans repayable in 25 years. Launched in 1971, the Public Investment Fund offers credit to public and semi-public corporations. The Saudi Credit Bank was founded in 1973 to provide personal loans for home repair, as well as vocational and crafts training.

In addition to the specialized credit institutions, the government offers an array of incentives to the private sector. A sweeping reduction in utility and public service fees, implemented in early 1992, lowered operating and production costs for private companies, making their products more competitive with foreign goods.

Private entrepreneurs are also given access to government information systems specifically created to help local manufacturers target the best market for their products. Government agencies such as the Saudi Consulting House, replaced in April 2000 by the broader Saudi Arabian General Investment Authority (SAGIA), provide free consulting and support services and publish lists of investment opportunities for the production of goods in demand in Saudi Arabia. In September 2000 SAGIA opened service centers in Jeddah and Dammam in addition to its headquarters in Riyadh.

Government tenders also give priority to locally manufactured products and to Saudi companies. Saudi industries are exempted from paying customs duties on the import of machinery and supplies used in the production of goods domestically.

To facilitate the transfer of technology and expand the operations of the private sector, the government also provides various incentives to foreign companies that enter into joint ventures with Saudi firms. Far-reaching new investment regulations in 2000, including removal of the need for sponsorship, gave further encouragement to foreign investors.

Banking

Saudi Arabia has a modern banking industry with 13 commercial banks. Saudi banks provide retail and corporate banking, investment services, brokerage facilities, and derivative transactions in addition to credit cards, ATMs and point-of-sale transactions.

There are also banks in the Kingdom that provide Islamic banking services. Islamic banking is a system of banking that is consistent with the principles of Islamic law (Shari’ah). It prohibits usury, the collection and payment of interest and trading in financial risk.

Saudi Arabia also has a thriving stock market. The total value of shares traded annually is some SR 60 billion [US $16 billion]. The Tadawul All-Share Index (TASI) of the Saudi stock market is one of the most highly capitalized stock exchanges in the Arab world. TASI was also one of the first exchanges globally to set up a full electronic clearing and settlement system with immediate transfer of ownership.

The banking and finance sector is overseen by several government agencies. The Ministry of Finance supervises economic policies. The Saudi Arabian Monetary Association (SAMA) manages fiscal policy, issues the country’s currency, the Saudi Riyal and oversees the nation’s commercial banks.

The government has also established five specialized credit institutions to provide loans to citizens for development projects in agriculture, industry and construction – the Saudi Industrial Development Fund (SIDF), the Saudi Arabian Agricultural Bank (SAAB), the Real Estate Development Fund, the Public Investment Fund and the Saudi Credit Bank.

Trade

Saudi Arabia is the 19th largest exporter and the 20th largest import market in the world. Exports now represent all economic sectors. Topping the list of exports to some 90 countries are petrochemicals, plastics, metal goods, construction materials, and electrical appliances.

Saudi Arabia’s commercial sector is growing rapidly. This is mainly due to generous government incentives such as the provision of long-term interest-free loans and support services and facilities. In addition, chambers of commerce and industry in the major cities and regions promote commercial ventures.

There are some 584,000 licensed firms involved in commercial activities in the Kingdom. Their total invested capital is estimated at more than $54 billion.

The sector is overseen by the Saudi Arabian General Investment Authority (SAGIA), which offers private entrepreneurs free consulting and support services and publishes lists of investment opportunities. In November 2005, SAGIA announced plans to open offices abroad, including in China, the United States, Britain and Germany to attract investment in infrastructure projects.

The role of the private sector in commerce is substantial – private companies account for some 48 percent of the nation’s GDP of $248.82 billion. They manufacture, distribute and sell domestic products.

Private companies also handle most imports of consumer and industrial goods and the bulk of the exports of non-oil products. Saudi Arabia is among the top 20 export and import markets in the world, and exports of non-oil products to some 90 countries average around six billion dollars per year.

Foreign investment is also growing in the Kingdom. Investors from all over the world are joining Saudi partners to set up ventures, attracted by the Kingdom’s political, economic and social stability, modern infrastructure, inexpensive energy supplies and strategic geographic location.

On April 11, 2000 Saudi Arabia made it easier for foreign investors in the Kingdom by introducing a new law giving foreign investors the right to the same benefits, incentives and guarantees offered to Saudi individuals and companies. It also allows foreign investors to own property and real estate.

The future of the commercial sector is promising. Saudi Arabia’s membership in the WTO boosts commercial activity and provides Saudi products with more opportunities in global markets. Another positive development is the formation of free-trade zones that Saudi Arabia has undertaken with several neighboring countries.

Saudi fiscal reforms likely to bring oil break-even price below $55 per barrel by 2021

SOURCE: The National

Time: April 4, 2018

Saudi Arabia, the world’s biggest oil exporter, is likely to lower its budget break-even oil price to below $55 per barrel by 2021 as the biggest Arab economy continues to implement economic and fiscal reforms, according to a new report.

After slashing nominal government expenditures by a fifth, cutting subsidies, introducing new taxes and raising non-oil revenues, the kingdom has lowered its break-even oil price to $74.4 per barrel in 2018, down 29 per cent from $105.7 in 2014, Japanese lender MUFG Bank said in a report released on Wednesday. In 2019, break-even oil prices are likely to remain at $69.3 per barrel as the kingdom shifts its strategy of deficit reduction and austerity to focusing on economic stimulus, it noted.

“All in all, a direct consequence of fiscal and economic reform is that Saudi Arabia will be in a stronger position over the medium term …. with greater independence from the oil price,” Ehsan Khoman, the head of research for the Middle East and North Africa said in The Mena Focus Report.

“Our econometric models suggest a fiscal break-even oil price of $54.8 per barrel in 2021 to balance the budget, and assume total revenues at $267.9 billion (36.2 per cent of GDP), against a slightly larger total expenditure at $289.6bn.”

Saudi Arabia, Opec’s top crude producer, is implementing a raft of fiscal and economic reforms under its Vision 2030 plan to cut its dependence on oil revenues and fuel growth. The kingdom plans to sell stakes in state-owned entities including Saudi Aramco, which could raise an estimated $100bn in non-oil revenues for Riyadh in what is billed to be the world’s biggest-ever share sale.

 

Other measures include developing the country’s industries, bolstering the private sector and luring investments through projects such as $500bn Neom development.

Development of non-oil based sectors, such as tourism and technology, and a significant ramp-up in large-scale infrastructure investments will be essential for Riyadh to meet its ambitions for the non-oil economy. As these sectors grow in importance, the size and magnitude of the non-oil revenue generated from these industries will rise, lowering the break-even price, MUFG noted.

Higher non-oil revenues, predominantly, through privatisation and implementation of VAT, will also help the country to raise its non-oil revenues to $68.3bn, about 10 per cent of the GDP in 2017 to over $100bn by 2020. The Japanese lender estimated that revenue generation through VAT will range between $8bn to $17bn, approximately 3.2 per cent to 6.7 per cent of total government revenues each year.

“From 2020, we view that non-oil revenues are likely to rise noticeably, which will reduce fiscal break-even oil prices markedly,” according to the report which projected break-even oil price to come down to $61.7 per barrel in 2020.

Increasing the share of nuclear, solar and renewables in the energy mix relative to oil and investment in crude production capacity will also help in achieving the objective of bringing down the break-even price, it said.

“The road ahead requires reforming the country to build a sustainable economy that can more comfortably deal with the cyclical nature of commodities by being less dependent on them,” Mr Khoman said.

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Green energy drive will boost KSA employment: Saudi Arabia’s renewable energy chief

Source: Arab News

April 04,2018

  • Turki Mohammed Al-Shehri, head of Saudi Arabia’s Renewable Energy Project Development Office speaks to Arab News
  • Crown Prince Mohammed bin Salman unveiled plans to develop the world’s biggest solar power project for $200 billion
London: In an exclusive interview with Arab News, Turki Mohammed Al-Shehri explains how an expanding renewables industry will boost employment as well as pave the way for a greener future.
A massive investment drive in green energy projects across Saudi Arabia is about creating jobs as well as diversifying the energy mix away from oil, according to the Kingdom’s renewables chief.
Last week Saudi Arabia revealed ambitious plans to produce 200 gigawatts of solar power by 2030, helping the country become a leading exporter of sustainable energy.
In an exclusive interview with Arab News, Turki Mohammed Al-Shehri, head of Saudi Arabia’s Renewable Energy Project Development Office (Repdo), said jobs and “local content” are guiding principles of the Kingdom’s renewables program.
“A fundamental cornerstone of these projects will be local content. Local content is key — it is being stipulated in tenders,” said Al-Shehri in an interview in London.
He said: “The idea is that the products and components that are used in these farms (turbines, panels, hoists and other parts) are brought in from local factories, and the idea is to grow the industry organically; we want local factories to also export outside the Kingdom, ensuring the creation of jobs, and this will make sure that everything that is built in the Kingdom will be on a competitive global basis.”
Al-Shehri told Bloomberg in January that eight renewables tenders would be issued this year for 4.125 gigawatts of capacity at a cost of between $5 billion and $7 billion.
Asked by Arab News if the Kingdom would also need foreign investment to develop the sector, Al-Shehri replied: “Due to the size of the projects, we do need foreign investment experience and know-how, yes.”
In terms of the nuts and bolts of how renewable tenders would work, he pointed to the example of Riyadh-based Acwa Power, which recently won the contract to build the Kingdom’s first utility-scale solar photovoltaic plant.
“As long as they meet our local content requirement of 30 percent as well as other stipulations, where and how they source the technology is up to them,” he said. “The objective is to have an economic energy mix, driven by low-cost energy, and to ensure that local competitive industry is created in the Kingdom.”
By building up solar and wind-power generation, KSA will free up oil reserves for export, strengthening the country’s balance sheet.
Last week Crown Prince Mohammed bin Salman unveiled plans to develop the world’s biggest solar power project for $200 billion in partnership with Japan’s SoftBank.
The memorandum of understanding aims to produce up to 200 gigawatts of power by 2030 — about 100 times the capacity of the current biggest projects.
If built on one site, the solar farm would cover an area twice the size of Hong Kong, according to a Bloomberg News calculation.
Acwa Power CEO Paddy Padmanathan, who along with Al-Shehri attended London’s recent Saudi-UK CEO Forum, said: “Personally, I think they (renewables) could make up 40 percent of the (KSA) energy mix in 2030.”
Turning to his company’s success in February of being awarded the 300-megawatt PV solar project in Sakaka, Padmanathan said: “The tender was a rigorous, transparent process at a new world-record tariff and will set the foundation for a robust and competitive market for renewable energy in the Kingdom.”
The 25-year Sakaka power purchase contract was awarded to Acwa at a new world-record tariff of 8.781 halala/kWh (per kilowatt hour) (2.3417 cents/kWh). Middle Eastern oil producers are looking to renewables to meet growing domestic consumption and would rather export as much oil as possible to generate income to meet internationally recognized green energy standards, such as those in the Paris climate accord, while also reducing reliance on fossil fuels.
Saudi Arabia wants to deploy more natural gas, as well as solar and wind, to reduce its dependence on oil-based power generation. Developing a renewable energy industry is a key plank of Saudi Vision 2030.
The Sakaka plant, which Acwa has already started constructing in Al-Jawf province, is backed by a 25-year power purchase agreement with the Saudi Power Procurement Company.
Last year the Kingdom also tendered a 400 megawatt wind project — its first — at Dumat Al-Jandal, for which Repdo prequalified a number of companies in 2017.
In a recent interview with Arab News, Adnan Amin, director-general of the International Renewable Agency, said renewables were incredibly cheap now. “The latest bids for Saudi solar projects are around 2.5 US cents per kWh, which is about a quarter of the cost of oil,” he said.
Victoria Cuming, head of policy covering Europe, Middle East and Africa for Bloomberg New Energy Finance (BNEF), told Arab News: “Looking at the MENA region as a whole, renewables should both replace fossil fuel and add to the mix, as electricity demand will double by 2040, according to BNEF forecasts.”
She expected the region to see a significant shift in the capacity mix, from being 93 percent fossil fuels today to just under half renewables in 2040, according to BNEF’s New Energy Outlook 2017.
Cuming said: “In the near term, this will be mainly driven by incentives such as auctions, but in less than a decade the shift will be driven by the economics. Utility-scale PV plants are already cheaper than combined-cycle gas plants in net importing countries such as Egypt.”
Provided governments continue to phase out fossil-fuel subsidies, “this will be the case across MENA by 2025. Ten years later, onshore wind farms will be cheaper than gas,” said Cuming

Saudi government approves domestic government bond exchanges

SOURCE: Arabian Business

Time: April 02, 2018

Saudi Arabia’s securities regulator has approved the listing of local currency government bonds on the Saudi Stock Exchange, the Capital Market Authority (CMA) announced on Sunday.

According to the CMA, the move is part of larger efforts to introduce the financial instruments that serve the needs of different investor categories.

In a statement, the CMA said that more than $54.5 billion of riyal bonds would be available to trade, including floating and fixed-rate bonds and Islamic instruments.

No date has been set for the beginning of trading, but local media reports that trading usually begins within weeks of the CMA approving an instrument.

Authorities believe that the exchange-based trading of government debt will allow ownership to extend to insurers, mutual funds and private investors, as well as help the government finance its budget deficit.

The Saudi government began trading currency bonds in monthly auctions in 2015, but suspended them in 2016 after the government began to borrow abroad. It later initiated monthly sukuk issues in mid-2017.

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Kingdom’s boost of female workforce may cause ripples at first

SOURCE: The National

Push likely to lead to some sectors feeling an initial pinch before economy begins to benefit

While increasing women’s economic participation is undoubtedly a long overdue and necessary change, it also means some sectors will experience initial turbulence, analysts say.

The Dubai-based ride-hailer Careem, for example, which has a growing presence in the kingdom, expects a 5 to 10 per cent decline in its female customers after the driving ban lifts in June as more women choose to drive their own vehicles. This may be offset to an extent by the increase in female Careem drivers, meaning more women taking rides with female drivers – whom they feel more comfortable with, says Abdulla Elyas, Careem co-founder and chief people officer.

Jeff Schuster, analyst at LMC Automative, says: “We expect to see downward pressure on car services as more women choose to drive for themselves. This could limit growth or even contract service population.”

Meanwhile, hundreds of thousands of male chauffeurs, both company and privately employed, who were hired to drive women around are at risk of losing their jobs. An exodus of drivers to their home countries could impact domestic Saudi consumer demand, which is already pressured by low oil prices.

With its efforts to combat unemployment among Saudi Arabians, the very nature of the Saudi job market is likely to change as the government introduces fees to make hiring expats more expensive and announces certain jobs off-limits to expats.

“With the strong push for Saudisation and introduction of the VAT, we believe the expat population could fall moderately this year,” says Monica Malik

Saudi women will also gradually replace more expats in retail, services, hospitality and finance sector, says Nasser Saidi, consultant and former chief economist of Dubai’s DIFC.

As part of its National Transformation Plan, the kingdom is also planning to increase the small and medium business sector’s contribution to non-oil GDP, job creation and access to funding. But although the SME sector is another area where women can add value, further reforms are required to ease business set-up procedures and access to credit for female entrepreneurs, analysts say.

“In a slow-growth environment where unemployment remains high, it will take some time to really build momentum,” says Ms Malik. “It’s going to be challenging regardless of gender. You need to have a growing economy and job availability” for Saudi Arabia’s targets of female participation in the workforce to be met.

One support factor, Ms Malik says, is the transfer of existing jobs to nationals.

“Social change is a key area of progress in the transformation plan but a boost in economic activity and diversification is limited so far,” she says.

“There’s Saudisation at this [time] more than new job creation.”

Saudi Arabia pushes ahead with diversification agenda, pursues deals from tech to energy in US

SOURCE: The National

Time: April 01, 2018

Three weeks into a cross-country visit to the US, Saudi crown prince Mohammed bin Salman sealed a number of agreements from tech to energy aimed at overhauling the kingdom’s oil-dependent economy and beefing up the private sector.

A pact between Boeing and Saudi’s defence manufacturing company for a joint venture to develop the country’s nascent military industry was the latest accord reached during the visit. The venture, signed March 30 during the crown prince’s visit of the US planemaker’s facilities in Seattle, will localise more than half of the maintenance services for fixed and rotary-wing military jets in the kingdom, transfer technology and produce spare parts domestically. “It’s a great opportunity, Saudis have to move from simple manufacturing of food and perishable goods to something more high-tech,” said Mustafa Alani, senior advisor and director of security and defence at Gulf Research Centre. “We’ve put it on the shelf for so long.”

The crown prince held a flurry of meetings as part of his first official visit to the US since becoming heir to the throne last year. Beyond military deals, 36 memorandums of understanding worth $20 billion were signed at the Saudi-US CEO Forum. Deals included partnerships in sectors spanning healthcare, manufacturing, education and technology. During his visit the crown prince signed an MoU to build a $200bn solar power development, the world’s largest project, with Japan’s Softbank Group in New York.

Developing industries, including defense manufacturing, is part of the kingdom’s Vision 2030 transformation plan that seeks to diversify the economy beyond oil revenues, create jobs for young Saudis and expand the role of the private sector. It also features allowing greater participation of women in the workforce.

 

Building a home-grown military industry is one of the key goals of the kingdom’s economic reform plan. With that in mind, the country’s sovereign wealth fund established Saudi Arabian Military Industries, or SAMI, in May. It plans to manufacture equipment and provide MRO services. The ultimate goal is ambitious: Half of Saudi’s military procurement must be done locally by 2030, up from about two per cent currently. Saudi Arabia has earmarked $56bn for military spending this year, the biggest item on its budget.

SAMI’s target includes contributing $3.7bn to the Saudi economy by 2030, creating 40,000 jobs and investing $1.6bn in research and development, according to its website. The venture with Boeing is expected to generate revenues exceeding $22bn and create 6,000 jobs by 2030, according to a company statement.

It will likely take Saudi another five years to build a viable domestic military industry and up to 20 years to transfer knowledge and train a generation of engineers, according to security analysts.

Building a military industry from scratch means Saudi Arabia could potentially look to expand its market beyond local requirements.

“No doubt the decision behind indigenous defense industry is aimed at sale to regional neighbours and perhaps beyond,” Theodore Karasik, senior advisor to Washington-based Gulf State Analytics, said.

Saudi to join FTSE emerging index from next March, attract billions

SOURCE: Saudi Gazette

Time: April 01, 2018

 

DUBAI/NEW YORK (Reuters) – The Saudi Arabian stock market will join FTSE Russell’s emerging market index starting in March next year, the company said on Wednesday, a move expected to draw billions of dollars of fresh foreign portfolio investment to the kingdom.

Many equity funds around the world benchmark themselves against the index, and they will need to buy Saudi stocks when the change takes effect. With a capitalisation of about $500 billion, Saudi Arabia is the Arab world’s largest equity market.

The decision is a boost to reforms launched by Crown Prince Mohammed bin Salman, who wants foreign investment to create jobs and diversify the economy, which has been hit hard by low oil prices, beyond energy exports.

“Saudi Arabia’s inclusion in the FTSE benchmark is the largest event in the emerging markets since 2001, and an important development for global investors,” Mark Makepeace, chief executive of FTSE Russell, told a press conference in New York, referring to the expansion of FTSE’s coverage following its purchase of Barings Emerging Market Index the previous year.

To prevent Saudi Arabia’s large size from destabilising other markets as funds shift money to Riyadh, the kingdom will enter the index in several stages starting in March 2019 and ending in December 2019, FTSE said.

The kingdom is projected to have a weight of 2.7 percent in the index, which could rise to about 4.6 percent because of the government’s proposed public offer of 5 percent of the shares of state oil giant Saudi Aramco, FTSE added.

Saudi authorities worked for years to meet criteria to enter the index, tightening rules on corporate governance, modernising the market’s settlement system and easing – though not completely removing – restrictions on foreign ownership of stocks.

“This development will further diversify the investor base of the Saudi market, and a more diverse investor base often leads to a more mature and less volatile capital market,” Mohammed ElKuwaiz, the chairman of the Saudi Capital Market Authority, said at the New York event.

The FTSE decision would likely add almost $5.5 billion (£3.9 billion) of cash from “passive,” index-linked funds to the Saudi market, according to Makepeace.

Regional investment bank EFG Hermes has estimated Saudi Arabia will attract about $5 billion of “passive”, index-linked funds because of FTSE’s decision.

In addition, rival index firm MSCI will decide in June whether to include Saudi Arabia in its own emerging market benchmark. A positive decision, which many fund managers expect, could produce around $10 billion of passive inflows.

Such numbers may only be the tip of the iceberg; a lot more new money could come from “active” funds, which have more discretion to move between countries.

All told, Saudi Arabia could see a total of $30 billion to $45 billion of inflows in the next two years if it reaches the foreign ownership levels of markets in the neighbouring United Arab Emirates and Qatar, EFG Hermes thinks. Reaching the levels of Mexico and Russia would mean $90 billion of inflows.

“Saudi inclusion is a milestone event in the development of the region’s equity capital markets,” said Salah Shamma, head of regional equity investment at Franklin Templeton Investments, which manages some $745 billion of assets globally.

“It opens up the region to a dedicated investment pool otherwise unavailable.” Shamma added that the Saudi banking, insurance, healthcare, education and consumer staples sectors were potentially attractive.

Reforms may create new investment opportunities. A ban on women driving is to be lifted in a few months, which should aid auto-related sectors, and the kingdom plans to develop non-religious tourism for the first time.

ARAMCO

By increasing the presence of foreign portfolio investors in Saudi Arabia, entry into the FTSE and MSCI indexes may facilitate authorities’ plan to list shares in Aramco and reinvest the proceeds in new industries.

The government says it aims to sell about 5 percent of Aramco as soon as this year, listing it in Riyadh and possibly one or more foreign markets in what would probably be the world’s biggest IPO.

Prince Mohammed has predicted the sale will raise at least $100 billion. Many private analysts consider that too optimistic, but Riyadh’s market is still likely to need the participation of foreign investors to help absorb the huge IPO.

At present, foreign investors of all types own less 5 percent of Saudi Arabia’s market. Expectations for this ratio to rise have lifted the Saudi stock index over 9 percent this year.

Exchange data show foreigners have already begun buying more stocks, purchasing a net $1.64 billion year-to-date.

It is not clear, however, whether the market’s uptrend will continue in the coming months. The Saudi economy is still struggling with low oil prices, and at a valuation of over 16 times last year’s earnings, the market is not cheap compared to MSCI’s emerging market index at about 15.5 times.

Riyad Capital, a major Saudi investment bank, said in a report this week that the index had now hit its target for 2018 and while a further rise was possible, it might need triggers such as improvement in the corporate earnings outlook.

“We … would avoid jumping on the speculative bandwagon,” it said.

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