May 29, 2013 7:09 pm

Saudi Arabia: Spending power

Riyadh is channelling money into reforms but a cultural shift is also needed
Visitors look at a necklace during a Jewellery exhibition at Al Faisaliah hotel in Riyadh

Cash flows: shopaholics are one of the more visible signs of a boom

Women in traditional black abayas huddle at an entrance to the Granada Centre in north Riyadh; not even torrential rain can deter them from the “shopping extravaganza” promised within.

It is shutters-up time on a midweek evening and the crowd is swelling, eager to sample the mall’s myriad consumer goods stores, including seven lingerie shops and 22 jewellery and watch outlets.

“If you go out after 8.30 now, you see these hordes,” marvels one long-time Saudi resident of a ritual repeated nightly across the country’s desert capital. “It’s amazing what’s happening. They buy everything.”

The shopaholics are one of the more visible signs of an economic boom gripping Saudi Arabia. The world’s largest oil exporter is associated around the world with great wealth – and at the moment Riyadh is spending its money more freely than ever before. Cash is cascading into the tills and infrastructure of the Gulf’s dominant power, thanks to rising income from crude, a large government spending programme and sweeping measures to get nationals into work. Even those sceptical about the depth and sustainability of these trends agree that this deeply conservative country of 28m people is showing a radically new intent about shaking up its economy.

Saudi economy

Saudi economy

In a building programme predating the Arab spring but intensified by it, the kingdom has launched industrial projects ranging from the world’s largest aluminium smelter to a joint venture with China’s state-owned Sinopec to build a big refinery on the Red Sea coast. The country plans to build hundreds of thousands of new houses, while Saudis are starting to flood into the private sector, long dominated by expatriates. The women-only Princess Nora Bint Abdul Rahman University that sprawls along the airport road in Riyadh is the most noticeable example of a programme to build or improve dozens of higher-educational institutions, while the government has spent billions of dollars on educating an elite of tens of thousands of Saudis abroad.

“We are definitely on fire, thanks to the government, the economic situation and oil demand – and everything else in between,” says a Saudi businessman with extensive and prospering construction interests. In his office, a large banner advertises a new 2,400km rail project to link the country’s north and south.

The economic surge is of huge potential importance to the region and beyond. The size of the domestic market – the country has more people than its five fellow Gulf Cooperation Council members combined – makes it alluring to foreign companies, particularly those from ailing western economies. Saudi Arabia accounts for more of the overseas “high-value opportunities” targeted by the British government for investment than any other state except for China.

The kingdom’s efforts to transform itself from pre-eminent oil state to economic powerhouse are also a crucial part of the strategy to head off challenges to the al-Saud family, which rules as an absolute monarchy with the support of the conservative Wahhabi clerical establishment. While there have been no nationwide protests, Saudi Arabia has faced big demonstrations in the heavily Shia eastern province, jailed prominent human rights activists and sent troops to help put down an uprising in neighbouring Bahrain. Saudi Arabia’s leaders are aware of the role economic discontent played in triggering demonstrations in other Arab countries with growing populations, creaking infrastructure and shortages of job opportunities.

“The revolutions that took place were a lot of wake-up calls to many people in the region and Saudi Arabia also,” says Prince Alwaleed bin Talal, the Saudi investor and ruling family member. “They alerted us to the weaknesses we have.”

The main drivers of what some hope will be Saudi Arabia’s long-awaited economic awakening are record oil receipts and a $130bn spending programme – much of it still to be disbursed – unveiled by King Abdullah as uprisings exploded around the Arab world in early 2011. The International Monetary Fund estimates that non-oil private sector growth will reach 7.6 per cent this year, driven by areas such as construction, manufacturing and retail, while oil remains more or less flat. Offering a helpful cushion, Riyadh’s hard currency reserves are now estimated to stand at more than $500bn.

The Saudi government’s experienced finance technocrats – Ibrahim al-Assaf, the finance minister, has been in post since 1996 – are keen to play down talk of spending splurges, presenting themselves as steady hands seeking solid growth, tempered by the experience of past busts.

“I am old enough to have been around in the 1980s, when oil prices were very low and we had to resort to heavy borrowing to keep our economy going,” said Mohammed al-Jasser, economy and planning minister, at a financial conference organised by Euromoney in Riyadh this month.

Yet the size of the stimulus package speaks for itself – and for the problems looming over the country. For all its oil wealth, Saudi Arabia is a lot less rich than its smaller Gulf neighbours: its per capita gross domestic product last year was not even a third that of Qatar’s, while the kingdom’s population heaps pressure on infrastructure. Parts of Riyadh suffer from near gridlock every day, exacerbated by car imports estimated by people in the industry at somewhere between 700,000 and 1m vehicles annually.

Saudi Arabia also faces demographic hurdles far exceeding those of its Gulf neighbours. Saudi nationals account for more than two-thirds of the total population, creating a demand for jobs that does not exist in neighbouring countries, where citizens are a small minority.

Riyadh says it is now beginning to deliver on years of promises to get nationals into work by “Saudisation” of the private sector. Historically, immigrant workers have done low-paid jobs spurned by nationals who are coddled by housing benefits, consumer subsidies and high-salaried public sector jobs. That has begun to change as the government tries to curb its social spending and faces pressure to get more women into jobs – most famously after a consumer campaign to end an incongruous situation in which women’s underwear shops were staffed entirely by men.

Ministers and business people estimate the number of Saudis working outside the government has almost doubled to well over 1m since the programme began in September 2011, while the authorities have given companies until July to meet new quotas for employing nationals or have their licences revoked.

Now many urban Saudis are feeling flush, thanks to the combination of government stimulus spending and rising employment, says Abdul Karim Alagil, whose Jarir Bookstore paperbacks-to-electronics outlets are another popular nocturnal hang-out.

“This is a healthy boom – not bubbles,” insists Mr Alagil, who adds that his publishing business is flourishing thanks to top-selling titles ranging from the self-help book Don’t Sweat the Small Stuff to Agatha Christie’s high body-count novel And Then There Were None.

The revolutions that took place were a wake-up call to many people in the region. They alerted us to our weaknesses

- Prince Alwaleed bin Talal, Saudi investor and ruling family member

But Saudisation – like the wider economic programme – has its critics. Some companies claim that an influx of untrained and in some cases unmotivated Saudi workers who are guaranteed a minimum wage has damaged output and profit margins. While the programme has brought more women into work, the number is still small – and their prospects are hampered by still not having the right to drive.

More broadly, publicity around the still modest Saudisation process and wider government spending has also raised expectations and frustration from some of those still unemployed.

“All the people are seeing billions, but they can’t find a job,” says a Jeddah-based businessman. “We have to find them opportunities.”

Another big obstacle to Saudi Arabia’s ambitions is what government officials admit is a chronic lack of productivity, linked to generous subsidies in areas such as housing and fuel. The minister Mr al-Jasser says that handouts are “increasingly distorting” the economy. Critics say the oil-products subsidy, which has pegged petrol prices to below $0.50 a gallon, or less than $25 to fill a 50-litre tank, is one of the main reasons Riyadh is gobbling increasing amounts of its crude production to produce domestic electricity.

Another potential check is Saudi Arabia’s perceived unfriendliness to business compared with neighbours, some of which allow companies to operate without a local partner and offer a more liberal, and more alcohol-friendly, social life. One western executive who flies in and out of Riyadh says Saudi Arabia accounts for just 20 per cent of his company’s regional business, whereas the size of its economy meant it should represent closer to 50 per cent. “Here, you need a local sponsor,” he says. “And nobody wants to live here. It’s a horrible place.”

Other concerns are that the Saudi boom is too patchy and too concentrated in the cities, with – in a pattern familiar across the Gulf – projects rising quickly without the amenities to match. A corporate executive tells a story of how she spotted an old tutor of hers from the three-year-old King Abdullah Institute of Science and Technology shopping at a supermarket in Jeddah, 80km away, because he did not find the services near the campus good enough.

The observation plays to wider concern that the money flowing in Saudi Arabia will fuel more of the incompetent implementation, profiteering and corruption exposed from time to time in the country’s opaque governance system. “There are a lot of cynics who would say the government money comes and dribbles into the sand,” says one foreign government official who knows the kingdom well.

Riyadh’s slow march towards economic revolution is more nuanced – and significant – than a crude effort to match the glitz of Doha or Abu Dhabi. While some Saudis look wistfully at the pampered populations of Qatar and the United Arab Emirates, they also want to avoid what they feel is the sacrifice of social and economic identity that has resulted from the transplantation of foreign cultures to other Gulf states. Formed by force in 1932 by the al-Saud family, Saudi Arabia tends to make opportunistic international alliances – notably with the US – while otherwise looking inward and asserting the independence its wealth and size allow.

Many also acknowledge that Saudi Arabia’s economic plans are – like its social reforms – moving slowly and will require a big cultural shift to succeed. Most of all, the country needs to demonstrate this era of oil-backed plenty is doing more than fuelling retail frenzies at the Granada Centre and elsewhere.

“Still, people rely a lot on the government and rely a lot on oil revenue,” says one veteran Saudi official. “This is the question: how much will change and how long will it take to change enough?”

. . .

A heavyweight with a long game plan

Saudi Arabia’s engagement with the world is less flashy than Qatar’s, but the Riyadh monarchy also invests heavily in its international strategic goals of sustaining its allies and opposing its arch-enemies in Shia Muslim-ruled Iran, write Abeer Allam and Michael Peel.

The Saudi Sunni ruling family has armed Syrian rebels against Bashar
al-Assad’s Iranian-allied regime and sent troops to Bahrain to support the suppression of an uprising led by the country’s Shia majority. Riyadh is also a big financial supporter of friendly majority-Muslim states facing problems: it has promised or sent billions of dollars of aid to Oman and Yemen, while Pakistan is seeking a soft loan of between $4bn and $5bn.

Foreign policy is marked by the same pragmatism that underpins the domestic alliance between the ruling al-Saud family and the clerical establishment. While Riyadh is hostile to Tehran, it rarely attacks it directly. During protests that began in 2011 in Saudi Arabia’s eastern province, where many Shia live, Riyadh has referred to Iran only obliquely, as “foreign hands” allegedly causing trouble.

Riyadh is also flexible in its choice of allies. The security compact with the US is more than 50 years old, while Saudi Arabia remains a big buyer of western arms. Although it still proselytises heavily overseas, it sends less money to Islamic charities directly these days, for fear it could end up in the hands of jihadists such as those who carried out a series of deadly attacks back home during the mid-2000s. And while Riyadh initially condemned the uprising against former Egyptian President Hosni Mubarak, it then became the first country to receive his successor, President Mohamed Morsi, despite its traditional hostility to Mr Morsi’s Islamist Muslim Brotherhood.

In Syria, Saudi Arabia was at first less prominent in financing the rebels than Qatar, its wish to topple Mr Assad tempered by fears that the civil war could lead to his replacement by an Islamist regime. But as the conflict has progressed, Riyadh has begun to take an increasingly important role – suggesting that, as elsewhere in the world, Saudi Arabia is committed to the long strategic game.

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