Saudi Aramco Oil Facility

Some may have seen recent news reports of Saudi Arabia targeting $100 oil. TradeFlow21 has tweeted (Jan 18th: “Saudi Arabia is not targeting $100 oil.“) a very helpful article on just the subject. Complementing the article, TF21 adds that triple-digit oil prices are not exactly in the Saudi’s or any oil exporting country’s best interest. Reason being is that often times when oil prices are high, they are accompanied by higher prices almost across the board. In volatile times like now, at home in the U.S. and in countries around the world, wages paid to employees that have not kept up with inflation are partially to blame for discontent. Thus, $100-plus oil is not helpful to Saudi Arabia if it in turn must pay higher prices for materials (and services) for the tens and hundreds of billions of dollars of real investments it’s making.

Some have called this movement the “Arab Spring” or the “Arab Movement,” however, the “Arab Renaissance” is more befitting since for the first time in generations the overwhelming majority is willing to question the powers of authority.  Respective peoples are no longer willing to stand idle and take direction from one ruler or one family of rulers.  For so many years the gap between the have and have-not has grown in the two regions by leaps and bounds, thus making it more difficult, if not impossible, for the average person or family to grow and enjoy the financial security that only a handful have monopolized.

There are two schools of thought dominating the events of the recent months in the region.  First are those who look at the series of events from a suspect point of view that the peoples’ movement could very easily be hijacked by “Radical Islamist” groups.  They point to the 1979 revolution in Iran and the adverse results which were, and to this day are still being felt around the world.  Although this is a valid concern and a sad reality, one has to keep in mind that in the past 32 years the world has been changed dramatically by information technology, and therefore, it seems unlikely that any such group could usurp and retain power.

Case and point, when the Iranian Revolution took place, technology did not play a significant role in it by any means.  Thirty two years ago the “internet” was known by only a very select few researchers and engineers, and no one could have envisioned the host of other IT advancements that we readily have available today.  Back then the youth did not enjoy instant access to the events taking place in their neighboring countries, let alone countries on the other side of the world, which made it easy for groups with ominous intentions to keep the public in the dark and thus capitalize on the dissatisfaction of the people and direct events to their own advantage.

Without getting into too much detail about the Iranian Revolution, we can fast forward to the events of late and the second school of thought, which pivots on the youth of today.  The Tunisian movement is the epitome of today’s “Youth Movement”.  With access to information covering every aspect of life imaginable, people can make better judgment calls and avoid pitfalls such as we have seen before.  No longer is the new generation willing to stand by and watch the quality of their lives deteriorate.  They see and understand how the rest of the world is moving forward with dizzying speed as they are losing any hope of a better future. Therefore, empowered by information technology and a willingness to sacrifice their lives if necessary, there is great hope among both the youth and the repressed masses of effecting drastic change and attaining a more promising future. Meanwhile, the oil-producing countries in the region are well aware of the fact that they possess finite amounts of oil that coupled with today’s rapid advancements in technology has put them between a rock and a hard place.  The situation is even direr in non-oil producing countries of the region.  In short, one can say that the writing is on the wall, and these governments are faced with the harsh reality that in today’s world ruling with an iron fist is no longer tolerated.

Hence, the beginning of the “Arab Renaissance” will lead to more “open” and more “democratic” systems to be put in place.  With the promises of financial aid from the G8/G20, nations of the Middle East and North Africa have a chance to bring themselves more in line with the rest of the developed world.  This will encourage virtuous influxes of capital, ideas, and businesses into the long suffering region.  An abundance of manpower desirous of gainful employment, in concert with available natural resources and a strategic geographic location, will prove to be a powerful combination which can only serve to enhance the prosperity and the stability of the region.

Special feature written by Simon Tash, an independent advisor to TradeFlow21.

“We are very optimistic about Iraq over the next three to five years.” It will have “considerable wealth” from its oil exports and is poised to invest in the oil and gas industry, power generation and housing to boost growth. “Over the last year, Iraq’s security situation has improved very steadily.” Over a longer period, Citigroup may have “branches, a consumer business, a middle- market business” as well as a “full-service bank in the country.”

See also: IMF: “Iraq has maintained macroeconomic stability under difficult external & internal circumstances…” and Foreigners can own 100% of Iraqi companies, pay 15% flat tax, & take all profits home.

Excerpts:

Business confidence in Saudi Arabia’s non-hydrocarbon sector has soared to an all-time high, buoyed by the high oil price, the stable economy, and King Abdullah’s social spending packages, according to new data. The Dun & Bradstreet business optimism index showed that the non-energy segment of the economy is expecting a rise in demand levels in the second quarter of this year. Respondents to the survey said that they were more optimistic about new orders, higher sales volumes, higher selling prices and higher net profits than in the previous quarter. Around 55 percent of respondents in the sector also said that they did not expect any negative factors to affect their operations in the second quarter.

However, shortage of skilled labour ranks as the most important concern (21 percent citing it), followed by availability of finance (14 percent) and inflation (5 percent). A total of 53 percent of companies in the non-hydrocarbon sector said they would invest in business expansion in the second quarter, up from 45 percent in the first. The index also showed that transport and communication is the most optimistic in terms of both future demand and profits.

In real terms:

• We forecast real GDP growth to increase from 3.8% in 2010 to 5.2% in 2011.
• For the Saudi non-oil private sector,
• We forecast growth to increase from 3.7 percent in 2010 to 5.2% in 2011.
• For the Saudi government budget, we forecast a SR97 billion surplus in 2011. Our spending forecast for 2011 is SR650 billion, a 3.7% increase over 2010 actual spending and 12% above the 2011 budget of SR580 billion, and our revenue forecast is SR746 billion (1.4% over 2010 actual).

We expect Saudi policy rates (SAMA repo and reverse repo rates) to continue mirroring US interest rates and remain essentially unchanged in 2011.

Globally, for the USA, we forecast a 3 percent growth in 2011, up from our previous forecast of 2.6%. For the Euro area, we foresee a 1.4% growth in 2011, compared to 1.6% in 2010. For Japan, we forecast growth to pick up slightly to 3.1% from 2.9% in 2010. For China, we forecast growth to slow down to 9.5% in 2011 from 10% in 2010. For India, the slowdown will be to 8% from 8.5%.

We see mainly downside risks to our growth scenario, primarily from the risk (albeit small) of another global EU-driven recession, greater slowdown in China, prospects of a global currency war.

Those interested in the full report can request a PDF copy from us.

Saudi Macro and Equity Market – Robust Steel Demand Continues into 2011

US Macro and Equity Market – 4Q, Prosperous Expectations

Commodity Markets – Copper Prices Push Forward

Global Macro – Slow and Steady Chinese Policy

FOREX Market – The Ebb and Flow of the USD

Global Equity Markets – Asian Mixed Results

You can request the full report from us.

The expected announcement of Iraq’s new government marks the culmination of a remarkable process. The former bully-boy of the Arab neighborhood has become its only functional democracy. What may be the world’s richest resource economy, once the closed shop of a murderous clique, is today wide open for business.

Driven by what many geologists consider the world’s largest oil reserves, Iraq will probably be the world’s biggest crude oil producer within a decade. The country currently ranks second to Saudi Arabia in official reserves, with 143 billion barrels. With much of Iraq’s exploration still to come after a three-decade hiatus, and with Saudi Arabia’s reserves substantially inflated and already in decline, Iraq could take the mantle as No. 1 in fairly short order.

Iraq last year signed 12 oil contracts that promise to take output from under two million barrels per day currently—less than Algeria—to over 12 million by 2016. This timeline is probably optimistic, but the contracts will likely see Iraq surpass Saudi Arabia’s 10 million to 11 million barrels per day within a decade. And these figures include no contributions from Iraqi Kurdistan, from natural gas reserves, or from new oil fields, with which the lightly-explored country is replete.

The Saudi comparison suggests that as Iraq’s oil production rises, its economy could grow approximately six-fold over the coming decade—gross domestic product is currently $66 billion—and add a mind-boggling $300 billion in annual GDP. This means one of the largest economic reconstruction and development booms in history.

The entire Iraqi economy is being rebuilt. The government’s electricity program has a $50 billion price tag. Baghdad has awarded the reconstruction of Sadr City to six Turkish companies at a cost of $11 billion. Nationwide, thousands of police stations, schools and clinics will be built. Airports, bridges, dams, railways and roads are being planned. The $20 billion Al Faw port project will create the leading port in the Persian Gulf. A modern army, air force and navy will be trained and armed. The investment programs of last year’s 12 oil deals alone add up to well more than $200 billion.

The holy cities of Najaf and Karbala currently receive more annual visitors than Mecca but have almost no hotel space or modern residential facilities. Iraq’s real-estate sector generally is warming up, with Abu Dhabi companies alone committing over $65 billion in the last year. New refineries, cement plants and steel mills are being financed across the country.

Iraq’s greatest resource is its famously resourceful, tough, educated and enterprising people. Whereas the capitals of the Gulf oil monarchies did not have paved streets a generation or two ago, Baghdad and Basra are ancient capitals of commerce, ideas and global finance.

Those interested in the full text can ask for it in our contact page.

Defining SMEs

In the Kingdom of Saudi Arabia, the Saudi Industrial Development Fund utilizes the following  criterion for defining small and medium enterprises: businesses whose annual sales do not exceed Rls 20 million (US$5.3 million) for financing purposes according to “Kafallah” program. Meanwhile, the World Bank has distributed a questionnaire to commercial banks to determine a universal definition for small and medium enterprises. The results show that there is a difference in banks’ definitions. However, it may be concluded that small enterprises are those with annual sales ranging from Rls 100 thousand (US$ 27,000) to Rls 5 million (US$ 1.3 million) and 2 to 49 employees. And medium enterprises are those with annual sales from Rls 5 million to 50 million (US$ 13.3 million) and 50 to 200 employees.

SME Growth and Contribution

Business enterprises in the Kingdom of Saudi Arabia have witnessed notable growth over the last years. The enterprises subscribing to the Social Insurance system have increased from 121.5 thousand to 218.4 thousand between 2005 and 2009, with an average annual growth of 16%. Individual enterprises represent 93.1%, limited partnership enterprises 4.7%, and joint enterprises 0.6% of total businesses registered. These enterprises’ economic activity is concentrated in three areas, namely, commerce with 34.3%, construction and building with 32.3%, and manufacturing industries with 14.6%. Small enterprises employing less than five persons have accounted for the bulk share, representing 45.5% of total enterprises at the end of 2009, those with 5–59 employees constitute 42%, while the remainder are enterprises with more than 60 employees. These data show that most enterprises in Saudi Arabia are small based on the number of employees.

Note that SME contribution to total GDP is relatively low when compared on an international basis. The share of private sector gross product, which SMEs are part of, is 33%, compared to 57% in Japan, 64.3% in Spain, 56% in France, 44% in Austria, 43% in Canada, 33% in Australia and more than 50% in the United States. The SME’s modest contribution to GDP in Saudi Arabia can be attributed to the immensity of the oil and public sectors, being the main catalysts for economic activity.

SME Financing

Small and medium enterprises are facing clear challenges to obtain the funding to meet their expansion needs because of several reasons; one of which is the lack of guarantees for granting credit. To overcome this problem in the Kingdom, the Ministry of Finance, in cooperation with Saudi banks, has established the “Kafalah Program” for financing small and medium enterprises. It is a program administered by the Saudi Industrial Development Fund with a capital of Rls 200 million (US$ 53 million) to cover a proportion of the risk of the funding entity in case the guaranteed enterprise fails to repay the loan or part thereof, and to encourage banks to finance viable small and medium enterprises, which cannot provide the necessary guarantees or accounting records that prove their eligibility for funding.

The program has been performing well since its inception in 2006. The number of guarantees approved during the period amounted to 1,668 with a total value of Rls 644 million (US$ 172 million) against loans to the tune of Rls1.6 billion (US$ 427 million) granted by banks under the umbrella of the program, which benefited about 1,113 small and medium enterprises. This is in addition to loans provided by the Saudi Credit and Savings Bank, for financing young people and small enterprises, as well as the Centennial Fund, and Abdul Latif Jameel’s “Finance Program” that provides material support for youth’s projects and training courses.

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Al Rio, contributing editor, and Steven Towns, founding partner