DR. ABDULLAH AL FOZAN,THE CHAIRMAN OF KPMG IN SAUDI ARABIA
Share your views on the progress of Saudi Arabia’s economy.
Saudi Arabia has launched an ambitious reform programme with Vision 2030—a long-term strategy to bolster the country’s fiscal position and diversify its economy in a world of low oil prices. The strategy provides international firms with the opportunity to invest in the country, particularly in its non-oil sectors.
There is no doubt that the Government of Saudi Arabia is moving forward, driven by its ambitious vision to diversify the economy away from oil. The government has succeeded in keeping the reform implementation on track, in terms of fiscal consolidation, growth stimulation, improving the investment environment and increasing the private sector’s participation in the economy. We expect political support for this trend to be maintained.
The government has maintained its expansionary fiscal policy for 2019, with an expenditure budget of SAR 1,106 billion, supported by the recent trends in oil prices and production. We, at KPMG, view Saudi Arabia’s all-time largest budget as a reflection of the leadership’s commitment to continue the implementation of Vision 2030 programmes to achieve fiscal, social and economic targets.
Although the Saudi economy, as well as most of the regional economies, face challenges due to oil price fluctuation, there is still a positive view that the government would launch several programmes and initiatives to diversify the economy and reduce oil dependence.
Such optimism— though somewhat wary—emphasises that Saudi Arabia is currently the most growing, competitive and diversified economy in the region, given the continuous efforts exerted for economic diversification and reduction of the size of activities relevant depending on the oil sector. In fact, the World Bank expects the local economy to grow by 2.1 per cent in 2019 and 2.2 per cent in 2020.
Consequently, it is important in this phase to continue the execution of reforms without being hesitant after the improvement in oil prices in certain specific periods and to work upon making the most precise use of savings and human resources. Furthermore, companies that have not entered transformation paths yet will have to be swift in adapting to changes.
Transformation becomes an inevitable necessity that would lead many of the businesses that do not have transformation plans to exit the markets. In this stage, the focus shall not be on returns on investments but on linking those investments with long-term plans.
Finally, we are optimistic that the Kingdom’s economy will continue to gain momentum thanks to the latest strategic procedures and decisions that aim to stimulate economic activity, facilitate investment procedures and reduce red tape in a way that would contribute to an increase in trust levels of the national economy.
How does KPMG fit into Saudi Arabia’s transformation initiative?
The Kingdom is currently undergoing a major economic and structural transformation within the context of Vision 2030 and its realisation programmes. This puts the Kingdom at the centre of the world’s attention because of what is possibly described as the region’s most significant public sector transformation journey.
KPMG seeks to play an active role in achieving the objectives of the Kingdom’s Vision 2030 by developing impact-driven relationships with its clients in government institutions to capitalise on the best international practises and adapt them to the Saudi context.
Our main driver for prioritising our efforts and investments stems from our belief in the criticality of achieving Vision 2030 and our national commitment as a firm to support its objectives at this critical stage. We plan to do so by building a long-term partnership with the public sector, and adopting what suits the Kingdom in terms of successful international experiences.
What distinguishes KPMG in Saudi Arabia is our team mix of talented professionals and experienced functional consultants in the Saudi market. The team also includes global experts in most of the priority sectors.
Both local and global teams, have passion and reliance on innovative solutions based on global best practises to help improve the efficiency, effectiveness, and meet the demands of our clients who are aspiring for transformation and growth in such a dynamic environment.
KPMG holds a leading position among consulting firms operating in the Kingdom of Saudi Arabia and is a highly-trusted advisor for governmental bodies ranging from ministries and authorities to private sector organisations.
In light of the above, where do you foresee challenges and how would you address them?
There is no doubt that the Kingdom was demonstrating great mobility as it rapidly develops and modernises the country’s investment systems and procedures, a process that will enhance its position on the international investment map and increase the competitiveness of the Saudi economy.
The reforms had also advanced the country’s investment environment and generated positive expectations by the International Monetary Fund on the Saudi economy and its growth rates over the next few years.
The primary challenges for the government are to sustain the implementation of reforms, improve the efficiency of government services, strengthen the participation of youth and women in the labour market and achieve the fiscal targets it has set, and resist the temptation to re-expand government spending in line with higher oil prices.
How do you see the kingdom’s MSCI upgrade and inclusion into the JP Morgan emerging market bond index boosting the domestic market?
Such upgrade will greatly benefit the Kingdom in many aspects. The most direct benefit is increased capital inflows. The MSCI EM Index has $1.9 trillion worth of assets benchmarked against it. Inclusion in the index would not only increase the exposure of Saudi stocks to international investors, but also will lead to passive inflows from funds that follow its progress.
Capital inflows with an MSCI listing will substantially boost liquidity in the economy. Moreover, the inclusion will increase trading volumes by reducing the equity risk premium and so draw in new investors from around the world. Total inflow reached SAR 5.9 billion in 2018 and has crossed over SAR 7 billion in 2019 YTD.
That said, the Capital Market Authority (CMA) and Saudi Stock Exchange (Tadawul) are estimating passive inflows of $45 billion on MSCI inclusion, which will take place in two tranches (May and August) this year. The inclusion represents a major milestone not just for the Kingdom, but for the entire Middle East and one that demands a great deal of attention from institutional investors globally.
Inclusion in the index helps to reduce financing costs and opens up Saudi Arabia to a much bigger pool of investors. This upgrade is a quantum leap forward in the Kingdom’s position in the global capital markets, and enhances confidence in the Saudi economy and its financial position, within the framework of the strategy of the Financial Sector Development programme, one of the Kingdom’s Vision 2030 programmes, with a main concern over increasing liquidity and access to capital in the global markets.
In terms of investment opportunities, in which sectors do you see the most potential?
Saudi Arabia has some ambitious economic goals which, if realised, would create spectacular business opportunities and propel the Kingdom to become one of the fastest growing and dynamic economies. But to take advantage of these opportunities, businesses will have to closely monitor the reforms being put in place and adapt their business plans to the changing economic and social landscape.
The Kingdom of Saudi Arabia has identified the primary priority sectors based on their high potential for development and their alignment with Vision 2030’s objectives. These include healthcare, transportation, tourism, entertainment, housing, ICT, energy and renewable energy as well as manufacturing, are amongst the top sectors which have some huge potential for attracting investors.
Do you expect to see more capital market transactions throughout the year?
The local capital market offers huge growth potential given strong economic and financial fundamentals. As the Saudi economy is expected to growth further this year and after, we see a lot of interest and activity in the marketplace in the recent months, particularly in the IPO space.
It is essentially encouraging to witness that private businesses across various sectors including information technology, engineering, finance, and logistic are pursuing their initial public listings in the near future. The successful listings of these businesses, I believe, will motivate a large number of other private businesses for their potential public listings in the future.
Likewise, we expect initial public offering of state-owned enterprises (SoEs) on the domestic stock market as part of privatisation and capital market development initiatives in line with Vision 2030 in the coming times. In my view, listing of large SoEs, in particular, will be a huge boost to domestic stock market. For instance, stock market capitalisation will increase immensely that in turn will place it in the league of leading stock markets of the world.
What are your views on the wave of merger and consolidation announcements within the Gulf?
A flurry of merger and acquisition activity across the Gulf region has emerged in recent months, and this is credit positive for the region’s banks. Despite integration challenges in the early stages, merged banks will gain market share and benefit from greater pricing power and cost synergies.
It will also contribute to stronger capital positions, reducing costs, transferring knowledge, more strategic investment in risk management and increasing competitiveness. For the wider economy, the benefit should come through greater capacity to finance large projects. In February, this month, Saudi Arabian Monetary Authority Governor Ahmed Al-Kholifey, said he does not see more bank mergers for now other than those already announced.
Last March, Saudi British Bank and Alawwal Bank announced their merger to create Saudi Arabia’s third-biggest lender with assets of SAR 268 billion followed by the National Commercial Bank initiating talks with Riyad Bank for a possible merger, creating the Kingdom’s largest lender with SAR 685 billion in assets.
In Saudi Arabia, we toe the same line and we do not see more bank mergers for the time being beyond those already announced. Even in cases where mergers appear to make sense, negotiations can be protracted and difficult.
Are you looking at local expansion and hiring more Saudi talent?
At KPMG, we plan to create more than 700 jobs over the next five years for Saudi nationals in line with the government’s Saudisation policy. That said, we have moved into our new, spacious offices in Jeddah and Khobar and have signed a lease agreement for a new office complex in Riyadh.
The new headquarters at the Business Front project was chosen to fulfil KPMG’s future needs in the medium- and long-term and provide the appropriate mechanism for future expansion. The new headquarters, covering an expanse of more than 11,000 square metres, will contribute to the creation of a unique work environment with the purpose of improving performance as well as enhance the level of customer experience.
We expect to move to the new headquarters during the second quarter of this year. Our employee strength in Riyadh currently stands at around 800 and we aim to increase this number to 1,500 employees over the next five years. Total staff strength in the first quarter of this year reached around 1,200 employees, which includes 500 Saudis, who provide a number of services in the fields of auditing, advisory, Zakat and tax.
What is your outlook on the Kingdom for the rest of the year?
The economy of Saudi Arabia is characterised by a number of special features, the most important of which is that it is the biggest economy in the Middle East. In my opinion, the initial expectations of the Saudi economy for upcoming years are optimistic due to several factors, mainly, the leadership’s determination to implement the announced vision realisation programmes that include the restructuring of many economic sectors.
An important proof of the serious will to implement the programme is the latest appointments over leadership positions in critical finance and administration roles. That comes in addition to the issuance of austerity decisions that further assure to transform the economy into an organised structural one.
Authorities, such as the General Authority of Zakat & Tax, will also have a key role and will give impetus to find resources to the State treasury department, such as VAT, seen here as an important part of the restructuring process. Another growth driver we see here is the increasing attention given to other economic sectors as well as the development of partnerships with world-class partners in major sectors such as energy, gas and mining, among others, which will all contribute to raising the level of economic performance and most importantly, increasing the role of the private sector by means of privatisation of projects and promoting ‘public private partnerships’.
The private sector is seen to definitely have a major role in re-pumping a portion of the money into projects and bring in more confidence. SME’s are also to contribute particularly after the establishment of the General Authority of Small and Medium Enterprises to guide and help structure overall businesses.
The considerable progress was being made to improve the business climate. Recent efforts had focused on the legal system and business licencing and regulation. Saudi Arabia’s “ambitious” reform programme is set to accelerate the Kingdom’s economic growth during upcoming years.
The introduction of value-added tax was a “milestone achievement” in strengthening the tax culture and tax administration of the country. Energy price reforms and the introduction of citizens’ accounts to compensate the less well off for higher energy/VAT costs were also welcomed. Reforms to strengthen the budget process and the fiscal framework, increase fiscal transparency, and develop macro-fiscal analysis are making good progress.