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Business Environment: Saudi Arabia

Euromonitor International
11 August 2014

The key attractions for foreign investors in Saudi Arabia are its strong macroeconomic fundamentals, supportive
government policy towards developmental projects, simple tax structure, improved productivity and the on-going
economic diversification. However, political and social tensions, lack of transparent legal system, restrictive labour
and foreign exchange regulations and a shortage of skilled labour are the major challenges of carrying out business
in the country.

EXECUTIVE SUMMARY
Saudi Arabia ranked 26th out of 189 countries in the World Banks Ease of Doing Business (Doing Business)
2014 report, down four places compared with 22nd in Doing Business 2013 out of 185 countries, on the back of
a decline in its ranking for the Trading across Borders (69th), Starting a Business (84th), Getting Credit
(55th) and Enforcing Contracts (127th) categories of Doing Business 2014;
Business confidence in Saudi Arabia is high, as the government encourages partnership with the private sector
on development projects and spends heavily on social welfare. Additionally, the government maintains a strong
fiscal position, with a general government net budget surplus of 8.2% of total GDP and public debt of only 2.7%
of total GDP in 2013;
Saudi Arabias FDI inflows posted a total real decline of 81.1% from 2008 until 2013, as a result of the weaker
oil prices during the global economic downturn which began in 2008 and increased investor caution due to the
political instability brought by anti-government protests in the Middle East and North Africa (MENA) region in
2011. Its FDI intensity of 1.2% of total GDP in 2013 was accordingly the one of the lowest in the MENA
region, after Algerias 1.0% in 2013;
Businesses in Saudi Arabia face a total tax rate of 14.5% of total profits, according to Doing Business 2014,
which is higher than Qatars 11.3% total tax rate and only slightly lower than the UAEs 14.9%. In addition to
the 20.0% corporation tax, non-Saudi shareholders in Saudi Arabia are liable to pay a 5.0% withholding tax on
the dividends they receive;
The increased affordability and usage of information and communications technology (ICT) services among
individuals and the governments commitment towards e-commerce and e-governance helped Saudi Arabia
improve its ranking in the Networked Readiness Index (NRI) from 40th out of 134 countries in NRI 2009 to
32nd out of 148 economies in NRI 2014;
Productivity levels in Saudi Arabia (measured as GDP per person employed) improved from US$71,281 in 2008
to US$85,506 in 2013, as the role of private sector in the economy increases. This made Saudi Arabia the
second most productive country in the MENA region, after Qatars US$154,909 in 2013.
Chart 1

Overview of the Business Environment in Saudi Arabia 2014

Source:
Notes:

Euromonitor International from Doing Business, World Bank; Global Competitiveness Index, World Economic Forum
Regulations in Doing Business 2014 are measured from June 2012 until June 2013. The data for all sets of indicators
in Doing Business 2014 are from June 2012 until June 2013 (except for paying taxes data which refers to January
December 2012).
Doing Business presents quantitative indicators on business regulations and the protection of property rights that can be compared
across economies. A high ranking means the regulatory environment is conducive to the operation of business.
The Global Competitiveness Index measures the microeconomic and macroeconomic foundations of national competitiveness,
taking into account 12 subjects - Institutions, Infrastructure, Macroeconomic stability, Health and primary education,
Higher education and training, Goods market efficiency, Labour market efficiency, Financial market sophistication,
Technological readiness, Market size, Business sophistication and Innovation.

OPERATING ENVIRONMENT
Continued government spending keeps business confidence high in 2014
Ease of Doing Business
Saudi Arabia ranked 26th out of 189 countries in Doing Business 2014, down four places compared with 22nd
in Doing Business 2013 out of 185 countries. The deterioration comes on the back of a decline in its ranking for
six out of the ten categories that make up the Doing Business 2014 ranking. Amongst the MENA countries
however, it is the second highest ranked country in Doing Business 2014, after the United Arab Emirates
(UAE), which is ranked 23rd globally in Doing Business 2014. Bahrain ranked 46th, while Qatar ranked 48th in
Doing Business 2014.
Saudi Arabias best performing categories in Doing Business 2014 were Paying Taxes and Registering
Property, for which it ranked third and 14th respectively. Property registrations in Saudi Arabia take only 8.0
days and cost less than 0.1% of the property value, according to Doing Business 2014, compared with the 33.0
days and 5.9% of property value cost required on average in the MENA countries. Its other well-performing
categories were Getting Electricity (15th) and Dealing with Construction Permits (17th) in Doing Business
2014.
The biggest drop was seen in Trading across Borders, for which it ranking declined from 61st in Doing
Business 2013 to 69th in Doing Business 2014. Starting a Business (84th), Getting Credit (55th) and
Enforcing Contracts (127th) were categories for which its ranking declined by three places each between 2013
and 2014. Companies have to go through 9.0 procedures over 20.5 days to start a business in Saudi Arabia,

according to Doing Business 2014, compared with the average 5.0 procedures and 11.1 days required in the
OECD countries. Meanwhile, the complete absence of public registry coverage in Saudi Arabia pulled down its
ranking in the Getting Credit category of Doing Business 2014. Enforcing contracts in Saudi Arabia is also
complicated, requiring 40.0 procedures, significantly higher than the average 31.0 procedures required in the
OECD countries.
Resolving Insolvency (106th) and Enforcing Contracts (127th) were its worst performing categories in Doing
Business 2014. The average time it takes to resolve insolvencies in Saudi Arabia is 2.8 years, compared with 3.2
years on average in MENA countries, according to Doing Business 2014. Meanwhile, enforcing contracts in
Saudi Arabia costs 27.5% of claims, compared with the average 24.6% cost in MENA, according to Doing
Business 2014.
Government Finances, Inflation and Credit Availability
Annual inflation in Saudi Arabia increased from 2.9% in 2012 to 3.5% in 2013, but is way lower than the 9.9%
increase posted in 2008, when severe housing shortages led to an increase in rents. In 2014, inflation is expected
to move up further to 3.8%, on the back of an expected continued increase in food prices and housing costs.
Saudi Arabias dependence on oil revenue has enabled it to maintain a general government net budget surplus
from 2008 to 2013, with the exception of 2009, when it posted a general government net budget deficit of 4.1%
of total GDP owing to a significant drop in global fuel prices and the governments expansionary fiscal policy.
In 2013, Saudi Arabias general government net budget surplus stood at 8.2% of total GDP, falling from 14.6%
in 2012, as the government increased unemployment benefits and stepped up capital expenditure for the Real
Estate Development Fund and the Saudi Industrial Development Fund while oil production was down owing to
lower demand.
Saudi Arabias public debt levels progressively declined from 14.0% of total GDP in 2009 to 2.7% of total GDP
in 2013 the lowest from 2008 until 2013- as the government has used its surpluses to pay down its debt levels.
Thanks to continued high government spending and several partnerships with the private sector on a large
number of development projects, business confidence in the country is high.
The country has a developed and well-regulated banking sector, with 13 commercial banks dealing in retail and
corporate banking and investment services. There are also banks which provide Islamic banking services. In
addition, there are five specialised credit institutions - the Saudi Industrial Development Fund (SIDF), the Saudi
Arabian Agricultural Bank (SAAB), the Real Estate Development Fund, the Public Investment Fund and the
Saudi Credit Bank, which are tasked with the provision of loans to Saudi citizens for development projects in
agriculture, industry and construction sectors. Given that the banking sector was fairly resilient to the global
economic downturn which began in 2008, it has a small non-performing loans ratio. In 2013, the proportion of
non-performing loans to total gross loans stood at 1.3% in 2013, improving significantly from 3.3% in 2009. At
this level, Saudi Arabia had the lowest proportion of nonperforming loans in the MENA region in 2013 and
much lower than the UAEs 8.4% non-performing loans ratio during the same year.
Political Stability and Regulatory Quality
Saudi Arabia ranked 135th (out of 203 countries) in the World Banks Political Stability and Absence of
Violence Index 2012 (latest data available), improving from 139th (out of 204 countries) in 2011 and 145th
ranking (out of 202 countries) in 2009. Although Saudi Arabias absolute monarchy gives little power to Saudi
citizens, the countrys strong recovery from the 2009 economic weakening (with real GDP growth increasing
from 1.8% in 2009 to 5.8% in 2012 and 3.8% in 2013) helped it improve its ranking between 2009 and 2012.
Additionally, the country was able to contain anti-government protests planned by the country's Shia minority in
2011 by announcing SR250 billion (US$66.7 billion) of spending towards housing and public health. The
country however continues to lag behind Qatar and the UAE, with respective rankings of 15th and 50th
respectively in 2012.
In the World Banks Regulatory Quality Index, Saudi Arabias ranking improved from 95th (out of 202
economies) in 2011 to 91st (out of 202 countries) in 2012 (latest data available), as a result of deterioration in
the rankings of some countries such as Kuwait (97th) and Brazil (92nd) in the 2012 rankings. However, the
country lacks a transparent and comprehensive legal system to deal with commercial disputes, as a result of
which it ranks behind Qatar (50th) and the UAE (53rd) in the 2012 rankings.
Chart 2

Corruption Perceptions Index: 2013

Ranking out of 177 countries

Source:
Notes:

Euromonitor International from Transparency International


The index measures perceptions of the degree of corruption as seen by business people and country analysts, and
ranges between 10 (highly clean) and 0 (highly corrupt).

Global Competitiveness Index


In the Global Competitiveness Index (GCI) 2013 published by the World Economic Forum, Saudi Arabia
ranked 20th out of 148 countries, down from 18th in the GCI 2012 rankings out of 144 countries, owing to its
poorer performance for Institutions (20th) and Higher education and training (48th) sub-categories of GCI
2013. The country ranked fourth globally for Macroeconomic environment, which stood as its best-performing
category, while its worst performing categories were Labour market efficiency (70th) and Health and primary
education (53rd) in GCI 2013.
Corruption
Saudi Arabias ranked 63rd out of 177 countries in Transparency Internationals Corruption Perceptions Index
2013 improving from 66th out of 176 countries in the 2012, as the rankings for countries such as Cuba (63rd)
and Jordan (66th) deteriorated in the 2013 ranking. However, there are few laws aimed at dealing with
corruption in the country and there have been only few cases where government officials or citizens have been
tried on corruption charges. Although the National Authority for Combating Corruption was reconstituted in
2011, concrete actions in terms of curbing corruption have been few. On the brighter side, Saudi Arabia ratified
the United Nations Convention Against Corruption (UNCAC) in 2013, which signals the governments intent
towards greater transparency and accountability in the country. Among the MENA countries, Saudi Arabia
lagged significantly behind the UAE (26th) and Qatar (28th), and is slightly ahead of Kuwait (69th) in the 2013
rankings.

GOVERNMENT REGULATION AND TRADING ACROSS BORDERS


Saudi Arabia had the second lowest FDI intensity among MENA countries in 2013
Government Attitude to FDI
Saudi Arabia considers foreign investment as an important part of its broader aim to reduce over-dependence on
hydrocarbons and promote youth employment. The countrys FDI law (Royal Decree No. M/1, April 2000)
allows foreign companies to invest in all sectors of the economy, barring those in the negative list, which
include but not limited to exploration and production of petroleum substances, manufacturing of military
equipment and explosives for civilian use and real-estate broking services. The sectors which the government is
particularly keen on promoting include transportation, education, health, ICT and energy. The Saudi Arabian
General Investment Authority (SAGIA), set up in 2000, works towards fostering investment in these sectors by
providing information to investors and streamlining foreign investment procedures. Foreign companies setting
up manufacturing in the cities of Jizan, Hail, and Tabuk are provided with incentives and better loan terms.
On the negative side, the Saudi government places several restrictions on foreign companies, in terms of the
composition of workforce, the percentage of output that can be exported and access to foreign exchange.
Additionally, Saudi Arabia has failed to conduct reforms to facilitate international trade, resulting in a drop in its
ranking for Trading across Borders from 61st in Doing Business 2013 to 69th in Doing Business 2014. Its

export and import times of 13.0 days and 17.0 days respectively, according to Doing Business 2014, are higher
than the average 11.0 days and 10.0 days it takes to export and import respectively in the OECD countries.
Saudi Arabia became a member of the World Trade Organization (WTO) from December 2005. Its membership
of the Gulf Cooperation Council (GCC) provides foreign investors with special trade and investment privileges
with the other five member states Bahrain, Kuwait, Oman, Qatar, and the UAE.
Trends in FDI Flows
Saudi Arabias FDI inflows progressively declined from SAR148 billion (US$39.5 billion) in 2008 to SAR34.9
billion (US$9.3 billion) in 2013, marking a total real decline of 81.1% from 2008 until 2013. The decline was
partly a result of the weaker oil prices during global economic downturn which began in 2008 and partly owing
to increased investor caution due to the political instability brought by anti-government protests in the MENA
region in 2011. Its FDI intensity accordingly reduced from 7.6% of total GDP in 2008 to 1.2% in 2013, standing
as one of the lowest in the MENA region, after Algerias 1.0% in 2013. In comparison, the UAE had FDI
intensity levels of 2.6% in 2013.
On the other hand, FDI outflows from Saudi Arabia dropped from SAR13.1 billion (US$3.5 billion) in 2008 to
SAR8.2 billion (US$2.2 billion) in 2009, but bounced back strongly thereafter to reach SAR18.5 billion
(US$4.9 billion) in 2013, as domestic businesses stepped up their investments overseas. In real terms, this
marked a total growth of 13.3% from 2008 until 2013.
Infrastructure
Saudi Arabia ranked 22nd globally (out of 148 countries) in Quality of overall infrastructure of GCI 2013
report. Its best-performing categories are Mobile telephone subscriptions/100 population and Quality of
roads, for which it ranked fifth and 17th respectively in GCI 2013. Meanwhile its lowest ranking for
infrastructure components was in Quality of railroad infrastructure and Quality of air transport infrastructure
with respective ranking of 47th and 38th. However, in view of the fact that government places strong emphasis
on the development of infrastructure in the country, the sector is set for robust growth. Investments are being
poured into the railway, education and health sectors as a part of the governments five-year development plan
announced in August 2010 with a total spending of SR1.4 trillion (US$373 billion).
Chart 3

Trading Across Borders Time and Cost to Import/ Export: 2013

US$/ days

Source:

World Bank Groups Doing Business 2014

TAX ENVIRONMENT
Foreign companies in Saudi Arabia face higher taxes than domestic
Ease of Paying Taxes
Saudi Arabias straight-forward tax procedure for domestic firms helped it rank third (out of 189 countries) in
the Paying Taxes category in Doing Business 2014, unchanged from its ranking out of 185 countries in Doing
Business 2013 and standing as its best-performing category in Doing Business 2014. In comparison, the UAE

ranked first, while Kuwait ranked 11th globally in the Paying Taxes category in Doing Business 2014.
Businesses in Saudi Arabia spend only 72.0 hours per year to prepare, file, pay or withhold their taxes and
contributions, according to Doing Business 2014, markedly lower than the OECD average of 175 hours per
year.
In the absence of any taxes for local businesses, Saudi Arabia has a very small informal economy. Small
businesses, however, dealing in unregistered transactions in goods and services, operate in the informal sector
but primarily do so in order to avoid the slow business-registration procedures and restrictions on hiring nonSaudi employees.
Tax rates
The corporation tax in Saudi Arabia is applicable only to non-Saudi shareholders and stands at 20.0% in 2014,
unchanged from 2013. In addition to the corporation tax, non-resident shareholders are also liable to pay a 5.0%
withholding tax on the dividends they receive. Meanwhile, businesses owned by Saudi and the Gulf Cooperation
Council (GCC) nationals or companies are liable to pay a religious tax, called Zakat, which stands at 2.5%. In
comparison Bahrain is a tax-free country, while Qatar has a corporate income tax rate of 10.0% in 2014.
The total tax rate in Saudi Arabia stands at of 14.5% of total profits, according to Doing Business 2014, higher
than Qatars 11.3% total tax rate and only slightly lower than the UAEs 14.9% total tax rate. Similarly, the
Saudi Arabias labour tax of 12.4% of total profits, according to Doing Business 2014, is higher than Qatars
11.3% but lower than the UAEs 14.1% labour tax rate. As of July 2014, Saudi Arabia does not have a VAT, but
is considering introducing VAT in the future.
Chart 4

Total Tax Rate and Number of Hours to Prepare, File Returns and Pay Taxes in Selected
Countries 2012

% of total profits/ hours per year

Source:

World Bank Ease of Doing Business Reports

INNOVATION AND TECHNOLOGY


Saudi Arabia ranked 32nd in NRI 2014
Uptake of Technology
Liberalisation of the telecoms sector in Saudi Arabia has increased competition in the sector and also helped
increase ICT penetration in the country. In 2013, its mobile phone possession rate stood at 97.5% of total
households, compared with 94.0% in 2008, but remained shy of the UAEs 99.6% and Qatars 99.7% in 2013.
Meanwhile, the proportion of the population using the Internet in Saudi Arabia increased from 36.0% of total
population in 2008 to 57.4% in 2013, driven by the popularity of instant messaging services and Voice-overInternet Protocol (VoIP) services among the young population. The country, however, remains significantly
behind Qatars 90.9% and the UAEs 90.3% in 2013, reflecting the high levels of Internet censorship in the
country.

Networked Readiness Index


In the Networked Readiness Index (NRI) 2014, Saudi Arabia ranked 32nd out of 148 economies, down one
place compared with 31st (out of 144 countries) in the NRI 2013 rankings but better than its 40th ranking out of
134 countries in NRI 2009. The improvement comes on the back of a fall in ICT costs in the country, increased
ICT usage among individuals and the governments continued commitment towards e-commerce and egovernance. Despite the improvement, Saudi Arabia continues to lag behind Qatar and the UAE, which ranked
23rd and 24th respectively in the NRI 2014 rankings.
Research and Development
Saudi Arabias total overall expenditure on research and development (R&D) decreased from SAR1.0 billion
(US$278 million) in 2008 to SAR980 million (US$ 261 million) in 2010, but grew thereafter to reach SAR2.1
billion (US$ 551 million) in 2013. In real terms, this marks a total growth of 58.7% from 2008 until 2013.
However, as a proportion of total GDP, its total overall R&D expenditure remained stable at 0.1% in 2012 and
2013- standing on a par with Kuwaits 0.1% but the lowest in the MENA region in 2013. Foreign companies are
eligible to participate in the government-financed R&D programme or benefit from the subsidies provided for
such projects. The government provides finance and research grants for R&D projects related to life sciences,
pharmaceuticals, medical devices and agrochemicals through institutions such as the King Abdulaziz City for
Science and Technology (KACST) and the King Abdullah University for Science and Technology (KAUST).
Patent Numbers, Protection and Targets
Saudi Arabias patent grants by the United States Patent and Trademark Office (USPTO) increased from 37.5
patents in 2008 to 261 in 2013, while those at the National Patent Office increased slightly from 205 in 2008 to
264 patents in 2013. Meanwhile, its patent grants by the European Patent Office (EPO) increased from 7.5
patents in 2008 to 39.2 in 2013. The strong increase in Saudi Arabias patent grants can be attributed to the
governments efforts to improve intellectual property rights in the country and bring them in line with the Trade
Related Aspects of Intellectual Property Rights (TRIPs). The country currently grants patents which are usually
valid for 20.0 years.
Chart 5

Networked Readiness Index in Selected Countries: 2014

Ranking out of 144 countries

Source:

Euromonitor International from World Economic Forum

LABOUR MARKET AND POPULATION SKILL SET


High labour productivity supported by a well-educated workforce
Education Standards
The adult literacy rate in Saudi Arabia improved from 86.4% of the adult population aged 15 and above in 2008
to 94.4% in 2013, thanks to the efforts of the General Secretariat for Adult Education. The government uses
religious organisations, such as local mosques and local religious institutions such as Quranic schools, to operate
21.0 adult education centres and has set up a number of night, intermediate and secondary schools to educate the
section of its population which could not complete their school education.

However, there remains a significant gap in male-female adult literacy in Saudi Arabia, as religious and cultural
norms in the country discourage female education. The female adult literacy rate in Saudi Arabia stood at 91.4%
of the total female population aged 15 and over in 2013, compared with 82.9% in 2008. Meanwhile, the male
adult literacy rate reached 96.5% of total male population aged 15 and over in 2013, up from 90.0% in 2008.
With the view to promote female adult literacy, the government operates 72.0 adult women literacy centres
across the country.
Higher Education and Skills Shortages
In 2013, only 11.7% of the Saudi population aged 15 and above had a higher education degree, increasing
slightly from 11.1% in 2008, but lower than the average 12.3% higher education attainment in MENA and much
lower than the UAEs 14.7% in 2013. This is a result of the fact that universities in Saudi Arabia do not offer
degrees in all disciplines, which often discourages potential students from pursuing higher education degrees of
their interest. Additionally, certain disciplines are open only to males or only to females. Moreover, there is
little incentive for Saudi nationals to pursue higher education, as a great majority is employed in the public
sector and given priority over non-Saudis.
In the absence of a large number of local graduates and the ongoing diversification of the economy to non-oil
sectors, companies operating in engineering, IT, education, health-care and construction sector face a shortage
of skilled graduates in these professions.
Humanities and Arts had the highest proportion of total graduates at 27.7% in 2013, as it facilities employment
in public sector. Meanwhile, Agriculture and Services attracted the smallest proportion of graduates, at 0.3%
and 0.7% of total graduates respectively during 2013, as neither of these are dominant sectors in the country.
Chart 6

Graduates by Discipline 2013

% of total

Source:

Euromonitor International from Eurostat/OECD/UNESCO

Brain drain is not a major problem in Saudi Arabia. Due to the shortage of skilled local graduates, Saudi Arabia
relies on high-quality professionals from abroad to meet the demands of the labour market. The country
accordingly ranked 14th globally for Capacity to attract talent and 18th for Capacity to retain talent subcategories of GCI 2013.
Chart 7

Unemployment Rate and Youth Unemployment Rate 2008-2013

% of economically active population / % of economically active population aged 15-24

Source:

Euromonitor International from UNESCO/national statistics/ International Labour Organisation (ILO)/OECD/Trade


Sources

Labour Market Landscape


Due to the Saudi culture, which discourages women from participating in the workforce, there remain
significant gender inequalities in terms of work force participation. The female participation rate in Saudi
Arabia worsened from 15.2% of the working age (15-64) female population in 2008 to 13.1% in 2013, owing to
increased unemployment among the non-Saudi women population. Meanwhile the male employment rate
declined from 68.7% of the working age (15-64) male population in 2008 to 67.2% in 2013, in line with the
increase in overall unemployment rate in the country. The overall unemployment rate in Saudi Arabia increased
from 5.1% of economically active population in 2008 to 5.6% in 2013.
The Manufacturing sector posted the biggest decline in its share of total employment, from 6.4% in 2008 to
5.5% in 2013, due to a production shift to countries with lower wage costs. Meanwhile, the proportion of the
total employed population engaged in the Trade, Motor Vehicles, Motorcycles, Personal and Household Goods
Repair sector moved up the most from 19.3% in 2008 to 20.7% in 2013, as discretionary spending in the country
increases and the importance of services to the economy rises.
Saudi Arabia has a relatively rigid labour market. The government poses restrictions on the number of nonSaudi workers that private sector companies can hire. Meanwhile, redundancy costs in the country are high,
standing at 15.2 salary weeks on average, according to Doing Business 2014. The country accordingly ranked
94th in Redundancy costs, weeks of salary sub-category of GCI2013.
Wages and Productivity
The wage per hour in Saudi Arabia stood at SR24.6 (US$6.6) in 2013, up from SR20.8 (US$5.5) in 2009 but
marking a total real decline of 0.3% from 2009 until 2013. This is higher than Bahrains US$4.6 and Jordans
US$1.8 hourly wage in 2013.
Saudi Arabias labour productivity levels, measured as GDP per person employed, reached US$85,506 in 2013,
up from US$71,281 in 2008, as a result of increased employment in the private sector, which is more productive
compared with the public sector. At this level, Saudi Arabia stood as the second most productive country in the
MENA region, after Qatars US$154,909 in 2013. Saudi Arabias high productivity is a major attraction for
foreign investors, particularly as the country seeks to diversify to non-oil sectors.
Chart 8

Employment by Industry 2013

% of total

Source:
Note:

Euromonitor International from International Labour Organisation


Undefined Sectors refers to activities not adequately defined elsewhere in the other categories

Definitions:
Political Stability and Absence of Violence: measures the perceptions of the likelihood that the government will be
destabilised or overthrown by unconstitutional or violent means
Regulatory Quality Index: measures perceptions of the ability of the government to formulate and implement sound
policies that permit and promote private sector development
Networked Readiness Index: measures the propensity for countries to exploit the opportunities offered by
information and communications technology