Monday 27, August 2018 by Banker Middle East

Adapting to a new era


Abdullah Al-Fozan, Chairman of KPMG MESA and KPMG Saudi Arabia, provides an exclusive commentary on the Kingdom’s business and economic landscape.

In July 2017 we issued our GCC Banking Report, in which one of the predictions was that because of the oil price fluctuation from $140 in 2014 to $30, as well as the wars in Yemen, Syria, and Iraq, everyone expected that the GCC region could witness an economic downturn. Fortunately, that prediction did not become a reality. Last year’s performance of the GCC region was better than the previous year because we did not see the slowdown that was talked about.

When the Kingdom of Saudi Arabia started pushing ahead with an economic overhaul aimed at ending what Crown Prince Mohammed bin Salman once called the country’s “addiction” to oil, many were of the opinion that it was the wrong time to invest in Saudi Arabia. This simply means that the entire business structure of Saudi Arabia was built on wrong ideas and formulas

Some businesses have no direct dealings with the government, but they enjoy protection. There are also businesses that complain and protest when the Government cuts its spending by just one per cent—they immediately come to the wrong conclusion that the economy is suffering.

Of course, when SABIC stops producing, or Aramco stops producing, then I will start worrying.

The message is that, just because the Government takes steps to conserve its resources, it does not automatically mean that there is anything wrong with the fundamentals of the economy. These wrong conclusions about the country’s economy are not fair because they cause panic and mislead the public.

Even for us at KPMG, as an advisory firm, when we see steps being taken by the government to rationalise its spending. We will try to provide solutions that businesses can use to adapt to the situation. We need to think of new ways to help businesses continue to grow and take advantage of the changing circumstances.

I am not against the private sector. However, the private sector cannot expect to be protected and subsidised by the government.

Some businesses may be affected by what is happening domestically, but they have the opportunity to go outside the country and promote their products and services abroad. The government cannot be expected to help them, but I strongly believe that in the long run the private sector will benefit from the policies being rolled out by the government.

Saudi Arabia is a land of opportunists. Enormous opportunities are being created in the fields of healthcare, education and housing sectors. Especially the housing sector, where there is a lull in the business and a lack of investments at the moment.

We are trying to create a sustainable industry, and there aren’t any players in the market that can do it. I believe the global players should come into the country and transform the housing sector, starting with a million or more units that will be required for the coming two years. The government could explore ways by which it can help with the financing and construction.

Of course, some sectors need adjusting to the changing environment, such as the cement sector. It has been benefitting from the growing economy for the last 30 years. If they have some years of hardship, that would be not be a bad thing. Over the years they have benefitted from a number of concessions such as free gas, free raw materials so they should get used to experiencing normal levels of profitability when these benefits are curtailed or the demand for cement is not as much as before due to slowdown in the housing sector. However, with the expected revival of the housing boom as a part of the vision for the country, they can expect to get back to their previous levels of profitability.

As for the construction sector, businesses that did not follow the industry standards had to pay the price. The construction sector is important, and they will find their way out of the downturn. The practice of spending even when there was no justification has stopped and this will hurt some players who profited from previous practices when money was freely available. There will also definitely be some consolidation for other sectors.

For anyone or any investors looking for opportunities in Saudi Arabia, there is still a lot of opportunities for mid-sized entrepreneurs and organisations. There are also some opportunities for big organisations. The government is doing everything it can to attract investors. Mid-sized companies in Europe, Brazil, India, and China, are perhaps faced with challenges due to the saturated markets they operate in, where they have fewer opportunities to grow; but they could benefit from the Saudi market, that promises to open up and offer huge opportunities to grow.

The Saudi economy is a real economy where there are real opportunities, purchasing power as well as a smart young population. And the government is doing its best to ensure sustainable economic growth.

Aramco itself will soon become a private sector company in the next year or two. There are opportunities in many sectors run and managed by the government. They will soon be opened up to a certain degree for the private sector to either run independently or jointly with the government.

In conclusion I must say that the actions being taken by the Saudi government to rationalise spending and reorganise itself will result in sustained benefits for the country’s economy. Pains felt by some businesses due to this are temporary in nature but there is enough and more opportunities for everyone to participate and benefit in the long run. So instead of complaining we must seize the enormous opportunities by adapting to the changes and moving with the times.

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