Exploring the Saudi Economic Landscape: A Conversation with John Sfakianakis

Published: September 9, 2013

Editor’s Note:

The 3rd US-Saudi Business Opportunities Forum in Los Angeles, just a week away, will highlight the historic trade relationship between the countries and foster new partnerships. Saudi Arabia is the largest economy in the region, and remains a strong and stable place for US business investment and trade.  The Los Angeles Forum will introduce American business people to the extraordinary economic boom underway in the Kingdom, which was recently characterized in an IMF assessment. It reported the Kingdom’s economy was in very good shape, “The fiscal condition is very strong.”

“Saudi Arabia has been one of the best performing economies of the G-20 in recent years, with the average rate of real GDP growth during 2008-12 third behind China and India. The fiscal position is also very strong with the lowest debt-to-GDP ratio and the highest fiscal balance among the G-20 economies. The outlook is positive. According to the IMF, the non-oil private sector of the economy is projected to grow by 7.6 percent in 2013, continuing the strong growth seen in recent years. Overall GDP growth is expected at 4.4 percent.”

The commercial relationship is just one element of the ties between Americans and Saudis as Eng. Omar Bahlaiwa, Secretary General of the Committee for International Trade recently told SUSRIS, “Saudi Arabia is a key strategic partner of the United States in the Middle East in many spheres, not just in business. Both sides have always valued the strength of the relationship.”

To explain what’s going on in the Saudi economic expansion, the second “boom,” SUSRIS called Dr. John Sfakianakis, Chief Investment Strategist of MASIC, a distinguished investment company based in Riyadh, Saudi Arabia. Today we are pleased to provide our conversation about the Saudi economic landscape and the possibilities for American business people in the Kingdom and at the Forum.

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Exploring the Saudi Economic Landscape: A Conversation with John Sfakianakis

[SUSRIS] Thank you for taking time to talk with us about the Saudi economy and issues that may be of interest at the US-Saudi Business Opportunities Forum in Los Angeles this month. The gathering is focused on providing entree into the Saudi market, in the words of the organizers, “to participate in the extraordinary growth and economic boom in the Kingdom.” They say the massive public investment, rapid private-sector growth and new sector initiatives are driving an expansion projected to offer more than $1 trillion in trade and investment opportunities over the next decade.

How do you explain to newcomers what’s going on in the Saudi market?

People John Sfakianakis[John Sfakianakis] The Forum will be a great introduction to the opportunities in Saudi Arabia. For business people who are interested I would say Saudi Arabia has an economy that is advancing, modernizing, expanding, and offering tremendous opportunities to those who are willing to take the trip, make the effort, and understand a different culture.

Saudi Arabia has shown tremendous strength over the last ten years and it is not just oil. Saudi Arabia’s economy has expanded beyond oil. In fact, its GDP is mostly non-oil, and that has been part of the transformative efforts over the last four decades to make it into an economy that is not just oil.

American business people should know this is an economy that is now above $720 billion. It’s a country of thirty million people. It’s a member of the G20 – a founding member of the G20. It has tremendous potential for business people to get involved, as long as they are willing to take the trip and learn about the culture. Many American business people are willing to go all the way to Asia and Europe to make connections and Saudi Arabia is not very far away from either. In fact, it’s at the crossroads between Africa and Asia nearby to Europe, only three hours away from the closest European destination.

Often business people who do not know much about the region think that it is an extension of Dubai perhaps. They should know Saudi Arabia is a very large country, the size of Western Europe. It is very different than what you see in other parts of the Middle East. Saudi Arabia is the largest economy of the Middle East by far, and one of the largest in the world.

Some American business people often ask about security and my answer is that if I didn’t feel secure I wouldn’t be in the country. In fact, Saudi Arabia is the country I consider home, not just for my mind but also for my heart. It’s where I started a family and of course if I felt insecure my family would not be there. I would say it is one of the most secure places in the world.

So this, in terms of introduction, is what I think Saudi Arabia offers to U.S. investors and others.

[SUSRIS] King Abdullah and the leadership in Saudi finance and commerce have been working on economic reforms for over a decade – accession to the World Trade Organization, diversification, expansion of the labor market, boosting small and medium enterprises, and many more developments.

Can you talk about how Saudi Arabia has reshaped the commercial environment and what people are calling the second boom?

[Sfakianakis] Sure. These are very good observations in terms of the economic landscape. Saudi Arabia has indeed transformed itself and its relationship with the global economy. As you said quite correctly, its accession to the WTO in 2005 was transformative to Saudi Arabia not because it was a closed economy before, but because it showed that everybody else accepted Saudi Arabia being a very competitive and open economy. I would say the trading boundaries are wide open and no one is favored over another in doing business in Saudi Arabia. There is a level playing field. There are certain areas that are restricted to government and semi-government entities, naturally, but I would say 99 percent of the economy is open to doing business with foreigners. Naturally, hydrocarbons is the prerogative of the national oil company, which is Saudi Aramco.

In terms of global commerce Saudi Arabia has continually expanded. The U.S. is a very important trading partner, but it’s not the only important trading partner. China has risen from a very low position to a top spot in terms of trade with Saudi Arabia. The country’s trading partners in Europe, as well, are important to Saudi Arabia and vice versa.

As you said, King Abdullah has embarked on a transformative initiative that has changed not only the economic and commercial landscape, but also the social landscape. In many ways he is a true reformer. Saudi Arabia has enacted a number of laws that are important to the business community, one of them being the commercial court system. The commercial courts are very important for a country that wants to be open to doing business, and it makes foreigners feel at ease when they have recourse to a court if they have differences. They can depend on a judicial system that is open to hear their interests. And the rule of law is very important in this country.

Things Riyadh Metro Rail
An artist’s conception of the Riyadh metro project.

The rule of law is something that defines the country, and in fact over the last several years the World Bank has ranked Saudi Arabia as one of the top reforming and open to do business countries in the world. It was among the top fifteen for the last four years. This is very important for business people. At the same time it has given the private sector the opening to be part of the second boom as you have quite correctly called it. The second boom is all about opportunities for the private sector. Right now, for instance, you have development of metro rail lines, both in Riyadh and Jeddah, taking shape. These are private individuals, private companies that are bidding – U.S. companies, European companies – and they have a tremendous opportunity and potential to participate in infrastructure projects. Riyadh and Jeddah seem to be transformed every year. In the case of Riyadh, it is a very different city than when I first arrived ten years ago.

[SUSRIS] The developments in railroads, not just the urban metro systems you mentioned, but the construction of nationwide rail links has been an impressive part of the infrastructure expansion. For years there has been a rail connection from Riyadh to Dammam, but now there are long stretches of rail for moving minerals from the north to the ports, and containers across the Arabian Peninsula from the Red Sea to the Persian Gulf. Talk a little about the infrastructure investment like this and returns from projects like the rail system, construction of industrial enclaves and economic cities.

Map Saudi Railroad SRO
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[Sfakianakis] You’re absolutely right. The country didn’t really have a railroad connection besides the Riyadh-Dammam one, and now in a few years the country is going to be totally connected with the railroads from east to west and from the north to the south.

Not only that, airports are being reconstructed, refurbished, expanded all the time, and the national air carrier is adding new planes because they’re expecting more people, more visitors, more of course pilgrims coming to the country, more business people. The prospects are enormous in terms of what Saudi Arabia is doing.

We have all been getting a glimpse of the expansion over the last few years. There are the King Abdullah Financial Center, the King Abdullah Economic City, and the different economic cities. Some of them are advancing faster than others, but still they’re moving.

There’s also continuous expansion at Saudi Aramco, for example, in terms of its refining capacity, in terms of its plants. You’re seeing SABIC expanding. You’re seeing other parts of the infrastructure of the country like new roads. Saudi Arabia needs those new roads because the economy has been growing by more than six percent over the last few years in real terms. You have more demand. This is a very young country. Sixty-five percent of its population is below the age of 29. And when you have a young country you have a lot of demand, a lot of movement, and a lot dynamism. All of the expansion is required.

[SUSRIS] You recently wrote about the energy market in a Foreign Policy article ["Oil Kingdom"], addressing the question of global oil projections in light of what you called the “much-hyped impending American energy boom.” What do US energy developments mean for Saudi Arabia? You also talked about the problem of galloping increases in domestic energy consumption in the Kingdom and the equilibrium between breakeven oil prices and government budgets. Can you give us a snapshot of how these affect the Saudi economy down the road? And can you talk about the developments in bringing nuclear and solar energy to aid in domestic demand?

[Sfakianakis] The U.S. energy scene is going through a remarkable evolution. The new commercial reserves from shale, or tight oil as some people refer to it, are very much transformative for the U.S. energy industry. This is very good news for everybody – for Saudi Arabia, for the world, for the U.S. It’s helping sustain the U.S. economy in many ways – creating jobs, opportunities and growth at a time when those things have been difficult. I hope these resources will add depth and bring greater stability to global oil markets. I believe these new reserves will lead the U.S. into a deeper engagement in the world energy market which would be very good news.

industrial-plant copySaudi Arabia continues to play its role, a commitment it took many years ago, to provide additional oil whenever the world demands it. Saudi Arabia’s spare capacity continues to be at a level of two and a half to three and a half million barrels. That is enough whenever there is a global crisis affecting supplies.

There is no doubt consumption within Saudi Arabia has been increasing over the last few years at a relatively high pace. This is important and Saudi Arabia needs to address it and they are addressing it. Certainly Saudi Arabia would be entering a difficult patch over the next twenty years if they didn’t but I believe they are applying the right commitment.

And what do I mean by that? The right commitment is expanding alternative sources of energy like solar power. A country like Saudi Arabia should be adopting solar technology and they are doing it. The initiatives of the King Abdullah City for Atomic and Renewable Energy, called KA-CARE, and other entities like the Saudi Center for Energy Efficiency, as well as Saudi Aramco are transforming the energy environment of Saudi Arabia.

There are other things that can be done about the climbing domestic energy consumption rates. The subsidy system has to be rethought because it’s not creating the right incentives. Certainly conservation measures have to be taken into account in order to address these issues. So I think that’s where we are right now.

[SUSRIS]  There is a major transition in the labor market in Saudi Arabia and you recently said the government was serious about getting Saudis into the workplace. What is the impact on the economy?

[Sfakianakis]  The government is very committed in this area of transforming the private sector from heavily dependent on expatriates to one where more Saudis are given the opportunity to participate. There is no solution except what they are doing. They need to hire more Saudis who are better skilled. They will be better skilled over the next decade because of the government’s incredible investment in education. Many students are being immersed into foreign culture and foreign education through the King Abdullah Scholarship Program. The local universities are changing and adding to the prospects of having better educated talent.

So the government knows very well that the private sector is the solution to the labor challenge, and the labor challenge is very simple. The private sector has predominantly expatriates working in it, and the public sector predominantly hires Saudis. In fact it’s more than ninety-five percent. So the public sector cannot continue to hire the entire labor pool that will be coming onto the market over the next ten to fifteen years. The government needs to address these imbalances. So I think that through Nitaqat and other policies they will be pushing ahead with the issue of Saudization, which is very important.

[SUSRIS] You have a role in the US-Saudi Business Forum on the “Opportunities for Finance and Investment” panel with a handful of distinguished business professionals. Without stealing your thunder in advance, share with us some of the key points we should know about the finance and investment environment in Saudi Arabia.

[Sfakianakis]  What I want to talk about is the business environment, the finance base, and the financial system. On the investment side there are great opportunities, not just one sided. Often enough Saudi Arabia is seen as an exporter of capital. That’s fine because it is an exporter of capital, be it in the form of remittances or in the form of investments, both public and private. But Saudi Arabia also wants and desires – rightly so – to attract capital. It is not just in terms of pure FDI, not just in terms of the capital that goes into different industries, but into the investment industry. It offers a lot of opportunities in terms of investment collaboration. Saudi Arabia has, for instance, many family offices that are now into the transformative phase between the second and the third generation. They have matured and are now very well run, very institutionalized, professional places. And I think that a bridge has to be found between the two. Let me say that I work in a family office. In fact it’s one of the oldest, just a year younger than the modern Kingdom of Saudi Arabia. It was founded in 1933. So I would say that it offers – because the landscape is so blessed with opportunities – it offers this kind of bridging between the two sides – between institutions and between investment houses, family offices – where we can attract capital into Saudi Arabia rather than just exporting capital.

[SUSRIS] The US-Saudi Business Opportunities Forum in Los Angeles is going to be the largest event of its kind, covering a very wide spectrum of business sectors and presenting an incredible collection of officials, business leaders and others. That sends an obvious signal about the importance of the US-Saudi business relationship. What do you see as being special about the commercial ties between Americans and Saudis?

[Sfakianakis]  Well there is the fact that it’s a historic relationship, and many have described it as a strategic relationship, one that goes back many decades.

If you look anywhere across the Saudi landscape you see something American. Look at cars or look at roads for example. The roads in Saudi Arabia in many ways reflect how U.S. roads are built. You look at cars and a lot of cars are from the U.S. You look at the business flow between the two countries, and a lot of it is from the U.S. The U.S. offers important technologies to Saudi Arabia, important know-how. The commercial relationship is vital to both countries and I see that the relationship is getting stronger and stronger.

[SUSRIS]  The flip side of the coin on the special commercial relationship, if it can be called special, between the United States and Saudi Arabia in the business environment is the fact that the United States is not alone in competing for the Saudi market. Can you comment on the expansion of the international suitors for Saudi business and investment?

[Sfakianakis]  I’m very glad you asked that because I think Saudi Arabia is at a point where it has a lot of options. If, for instance, U.S. products are not considered suitable or there’s a disadvantage in terms of price and quality then it can turn to other outlets. The world is full of competition. That’s why I think that the value-added side, the contribution to the local economy and talent could offer an advantage to U.S. products and goods. That’s the right framework for U.S. commercial ties. As you said quite correctly the United States is not the only option. For instance, China back in 2005 was practically a non-existent challenge as a commercial partner and today it’s up there with the U.S. The same goes for the others. It doesn’t mean that Saudi Arabia is bound by one or two commercial strategic partnerships.

For example there was the Spanish company that won the Haramain High Speed Rail Project connecting Mecca, Jeddah and Medina. It was a surprise to a lot of people who wondered why a Spanish company would win such a project. It shows that Saudi Arabia has a lot of options. The world has become a very competitive place.

I think that the relationship will continue to be strategic for different reasons, but Saudi Arabia will have other commercial options.

[SUSRIS]  Any last thoughts that you’d like to share with American business people specifically at the forum, and others who might be interested in exploring the potential in the Saudi market about the current economic environment in the Kingdom and the road ahead?

[Sfakianakis]  Definitely. What I would say is people interested in the opportunities in Saudi Arabia need to visit. That’s the first thing. They need to do away with the stereotypes they have, because Saudi Arabia is a very different place than what the media describes it to be. Saudi Arabia is open for business, and Saudi Arabia offers a lot of opportunities that people who do not visit will miss out.

Finally I would say that picking the right partners is very important and that attending conferences such as the Los Angeles Forum is the right beginning.

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John Sfakianakis

People John SfakianakisHe is the Chief Investment Strategist of MASIC, an eighty year-old investment company based in Riyadh, Saudi Arabia and he’s a member of the firm’s investment committee. Being one of the oldest family firms in Saudi Arabia, its interests vary from finance, banking, real estate, petrochemicals, energy, aqua-culture, public and private equities. Previously he served as the Chief Economic Advisor to the Saudi Minister of Finance. He also held various banking posts including, Group General Manager and Chief Economist of Banque Saudi Fransi and Chief Economist, Middle East North Africa region for Credit Agricole C.I.B. He was the Chief Economist of The Saudi British Bank (SABB/HSBC) in Riyadh and also worked for Samba Financial Group as its Chief Regional Economist. He also worked as an advisor at the Ministry of Economy and Planning in Saudi Arabia. He writes frequently on Saudi and international economic affairs and issued the first business confidence index report and the first real estate price index report by a Saudi bank. He worked for the United Nations (UNDP) and the World Bank as an economist. He holds a doctorate degree in economics from Harvard University.

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