GCC business outlook: Kingdom of Saudi Arabia

You think Western banks are scaling down their operations? Take the Big Two from Switzerland - UBS and Credit Suisse.

They are indeed cutting operations down in their home market and abroad after billions of dollars in losses due to the financial crisis.

On the other hand, both financial institutions are currently building up their operations in all fields of banking in Saudi Arabia. Both banks received approval from the Capital Market Authority in Riyadh, the Saudi regulator, in July and November 2008, respectively.

Capital reserves cushion impact

The two banks have good reason to expand in Riyadh, despite setbacks in the Saudi financial and industry sector due to the burst of the oil price boom.

Saudi Arabia's largest bank (related to shareholders equity) National Commercial Bank (NCB) for example, posted a fall in profits by two thirds in 2008, to $562m. Petrochemical bellwether Sabic posted a loss of $260m in Q1 2009, the first since Q1 2001. According to the International Monetary Fund (IMF), Saudi Arabia's economy will shrink by 0.9%, but will pick up by 2.9% in 2010.

Nevertheless, the government has started to transform the kingdom into a diversified global hub for new industries and services, using reserves amassed during the oil price boom from 2003 to 2008 in order to lay foundations for a more diversified economy.

A 2009 national budget of $126bn, which is 18% higher than the one in 2008, will finance Riyadh's ambitious goal. 'The public sector will be the driving force behind the Kingdom's recovery', says Mohammed Aljeraisy, Marketing Manager at Riyadh-based I(TS)2, a leading local IT security firm.

Business people from Dubai who travel to Saudi Arabia confirm that the GCC's biggest country (27.6m inhabitants) can afford to deal with the crisis with more patience than other states in the region. 'The GCC countries do see a large and growing market, resilience and prospects for doing business', says Masood Ahmed the IMF's Director of the Middle East and Central Asia Department.

Business support legislation

Since joining the World Trade Organization (WTO) in 2005, the Kingdom has been taking a number of legal steps order to spur business. In 2008 the Consultative Council (Majlis Al-Shura), the advisory body to the King, gave the green light for a new mortgage law.

This law will trigger a multi-billion dollar industry in a country where only one in five citizens owns a home. Innovations in this field followed quickly: Saudi Arabia's Sumou Holding and Geneva-based Encore Management have launched the first Islamic Real Estate Investment Trust (REIT) for the country.

There is an estimated $260bn worth of real estate projects in the Kingdom, where analysts have said that five million new homes will be needed in the coming years. REITs function as catalysts to bring private investors and real estate developers together.

The insurance sector is another example of how new rules trigger new opportunities. Meanwhile, the government is currently implementing a compulsory insurance for the seven million expatriates in the country and the nine million pilgrims to Mecca and Medina as well.

The result: 'In 2008, 30 new insurance operators entered the KSA market', says George Oommen. Saudi insurance firms listed at Riyadh's Tadawul exchange, such as SABB Takaful or Saudi United Cooperative Insurance Company, were the best performing securities in Q1 2009.

In tandem with the regulatory changes, Saudi women are more and more integrated into the economy, creating a new income class. Since May 5 2009, women are allowed to run their own business without a male agent or 'guardian'.

Real estate sector growth

The transformation of the kingdom is supported by new real estate projects, providing the kingdom of tomorrow with a world class infrastructure.

The King Abdullah Financial District (KAFD) is the Saudi answer to Dubai's DIFC and aims to gather financial intermediaries under one roof from 2009 onwards.

Located at the coast of the Red Sea, 100km north of Jeddah, the $80bn worth King Abdullah Economic City (KAEC) is a mixed-used industrial hub is designed as the nucleus of a newly diversified country and to be fully completed until 2020.

'Every year GCC countries see new opportunities or things they can do better', adds Ahmed. The Kingdom is open for business.