Saudi economic and investment outlook by Aljazira Capital

Ziad Tarek Abdullah Aba Al-Khail, Managing Director and CEO of AlJazira Capital talks about Saudi capital markets.

In your opinion, what is the outlook for the capital market in Saudi Arabia?

The outlook for the capital markets is bright. Several developments indicate that Saudi Arabia has diversified beyond just oil. The Kingdom has vast untapped reserves of minerals – companies like Ma’aden and other similar companies in the northern region have invested over SAR 130 billion in the mining sector. The sector could become one of the fastest growing sector in the economy. 

Moreover, the Kingdom is focusing on its insurance business; insurance represents 1% of GDP, which is low in comparison to developed countries. While some insurance companies remain unprofitable, many have started to become profitable. The insurance sector is poised to become one of the growth stories in the economy.

In addition, the new initiatives within the housing market in Saudi Arabia by the government will eventually create growth opportunities for cement, construction and real estate sectors.

Finally, the market saw the introduction of qualified foreign financial institutions (QFFIs) four months ago. After a slow start, we expect the activity to increase, and this is just the start of a wave of investments from outside the Kingdom that will come in preparation for the MSCI inclusion time frame of 2017-2018.

Can you describe the key challenges and opportunities associated with the current economic cycle?

The current valuations of listed companies are at historic lows. Of course, some of the players in the petrochemical and telecom sectors have declined in profitability, but Aljazira Capital believes that when this cycle turns and the market enters the next profit-growth cycle, there will be rapid increases in equity values. The most promising sectors are insurance and retail.

The country has a young population – about 60% of the population is under the age of 30. The late King Abdullah introduced the King Abdullah Foreign Scholarship Program, which has been continued by King Salman, so there are over 207,000 Saudis studying abroad. A lot of them have actually introduced new innovations and technologies around the world. When these students return to Saudi Arabia, a new wave of innovation and entrepreneurship will ensue in sectors that were not existent in the Kingdom before.

Public debt in Saudi Arabia is among the world’s lowest, with a gross Debt-to-GDP ratio of less than 2% in 2014 and is expected to be around 6% by the end of 2015. The transportation mega projects will lead to economic activity and growth, plus the hospitality projects around Mecca and Medina.

Experts predict that by 2020 the Umrah will generate more than SAR 47 billion – a very significant increase by a non-oil sector.

The challenges are numerous. Oil prices have had an impact on how Saudi Arabia structures the budget and fiscal policies. The geopolitical unrest around the Kingdom in neighboring countries continues to create uncertainty. The lack of income diversification in the Kingdom (something that the government is working on right now), and the weak private sector job creation are still in existence; however, these challenges have been under the eye of the government for the last few years. There are new laws and regulations that ensure more active private sector involvement.