Austerity Economics in Saudi Arabia

Published in Forbes Middle East, 15 November 2016

The Saudi central bank has had to step in as the country’s banks deal with a slowing economy, shrinking deposits and tighter liquidity.

Evidence of the strain the Saudi economy is under is coming thick and fast these days. On 26 September, 2016 the government ordered sharp pay cuts for officials in its latest effort to keep its fiscal position under control. A major bond issue is planned to help plug the large budget deficit, which is expected to be around 15% of GDP this year according to local bank Samba.

The country’s banks have been unable to avoid the fallout from the wider economic difficulties. Deposits have been dropping and demand for credit has been rising, leading to a liquidity squeeze. To try and alleviate some of their pain, on 25 September 2016 the central bank, the Saudi Arabian Monetary Agency (SAMA), said it would deposit SR20bn($5.3bn) with the country’s banks to support “the stability of [the] domestic financial condition”.

It was not the first such move by SAMA. The central bank has already offered around SR12bn in deposits and short-term loans to Saudi banks to ease short-term liquidity pressure. The latest move was both expected and welcomed by observers.

“It was clear that the banks had some stress and needed dollars. It’s just a reflection of the low oil price, the low amount of petro-dollars. The Saudis continue to act in a reasonable fashion and continue to provide liquidity support for the banking system,” says Peter Kinsella, head of emerging markets economic and foreign exchange research at Germany’s Commerzbank.

The problems facing the Saudi banks, and indeed the economy as a whole, stem from the low oil price Kinsella mentions. With far lower hydrocarbons revenues, the government has had to draw down some of its deposits and raise more debt to cover its spending commitments. The authorities have been trying to reduce expenditure too. Subsidies have been cut, projects put on hold, and payments to contractors delayed. With less government money in the system, private sector firms have had to turn to the banks for more credit to cover their short-term needs.

All this adds up to a difficult set of circumstances. “The Saudi banking system has faced a new challenging environment since mid-2014 when the oil price correction led to a considerable tightening of domestic liquidity,” said Brahim Razgallah, an economist at U.S. bank JP Morgan, in a research note issued on 2 September, 2016. “Despite the common shock across GCC countries, the kingdom has been one of the most affected, with pressure on interbank rates being the highest.”

What is more, the speed of change has been fairly rapid. According to SAMA, government deposits had fallen from SR1.6 trillion in August 2014 to SR1.06 trillion by August 2016, a drop of some 35% in just two years. Although the rate of withdrawals has slowed in recent months, the government will continue to use up its savings for the foreseeable future. Private sector deposits may be more reliable, but they aren’t able to offset the government’s withdrawals.

Saudi banks are not used to seeing deposits drop—total account balances have grown in an unbroken run since the early 1990s. In the 10 years to 2015, deposits grew by 10.5% a year, according to the local AlJazira Capital. In contrast, Samba thinks the banking sector will see deposits shrink by 0.5% this year, while private sector credit will grow by 9%.

That will lead to further rises in the loan-to-deposit ratio, which has already increased from 80% to 88% in the 12 months to the end of June this year. Acknowledging the situation, SAMA increased the limit on banks’ loan-to-deposit ratios from 85% to 90% in February 2016. However, the ratio has continued to grow since then, reaching above 90% in July according to some measures. That in turn is increasing the pressure on banks to compete strongly for deposits and to look elsewhere for funding. Moody’s Investors Service says more expensive wholesale market funding has increased from 6.1% of the overall bank funding in December last year to 7.9% by June 2016. The recent support from SAMA will help to relieve the pressure in this area. SAMA has also started to provide seven and 28-day repurchase agreements alongside its existing one-day repos, which will allow banks to access short-term borrowing at a lower and more stable cost than in the wholesale markets.

Even so, the situation is far from resolved. “We believe the deterioration of liquidity in the Saudi banking sector has slowed down. However, it has yet to stabilise as much as in some other GCC markets,” says Redmond Ramsdale, senior director for financial institutions at Fitch Ratings.

A good indicator of the pressure on the sector is the main interbank lending rate, the three-month Saibor. It has risen from 1.33% at the turn of the year to reach 2.27% in August, its highest level since December 2008.

And banks can’t escape from the gloomy outlook for the economy, which analysts suggest will only grow by between 0.6% and 1.7% this year. That may well include periods of contraction, although perhaps not a full-scale recession.

“Our GDP tracker, which is constructed from monthly activity data, suggests that the slump in Saudi Arabia’s economy has deepened, with output falling by around 2.3% year-on-year in June,” says Jason Tuvey, Middle East economist at London-based Capital Economics. “Over the second quarter as a whole, we estimate that output fell by 2% year-on-year. If our tracker is correct, this would be the first contraction in the Saudi economy since 2009. A recovery is likely to get underway over the rest of this year and in 2017-18, but it is likely to be slow-going.”

Despite all this, the banks are still in a fairly healthy position. Non-performing loans make up just 1.2% of the sector’s total loan book and most of the larger banks continue to report liquidity coverage ratios (LCRs)—a measure of their ability to meet short-term liquidity demands—well above 100%, even if these too have been falling.

And even if their use of market funding has been on the rise, banks can still rely on customer deposits to provide most of their funding needs at a cheap rate. According to Fitch, customer deposits represented 93% of total non-equity funding as of December 2015. Two-thirds of those deposits are in demand accounts that don’t pay any interest. In some cases the figure is far higher—for Al Rajhi Bank and National Commercial Bank (NCB) it is 99% and 82% of deposits respectively. This does make banks vulnerable to changes in customer attitude—as seen with the drop in government deposits over the past two years—but the benefits of low-cost funding are also clear.

In this environment, it’s unsurprising to find that the recent financial performance of banks has been rather mixed. According to data compiled by financial website Argaam, overall profits barely rose in the first half of 2016, reaching SR23.3bn compared to SR23.1bn in the first half of 2015. However, the second quarter of 2016 saw a year-on-year decline in profits for the first time in at least five years.

Of the country’s 12 local banks, six posted a rise in first-half profits, with the larger banks tending to do best. The country’s largest bank, National Commercial Bank, posted a 2% gain to SR5.1bn, while its closest rival Al Rajhi booked an 18% rise in profits to SR4.1bn. The far smaller Alinma Bank saw profits rise 13% to SR800m. Others posting gains included SABB, Bank Saudi Fransi and Riyad Bank. Among the rest, the steepest falls were at the Bank AlJazira, which saw profits slump 42% to SR558.8m, and Saudi Investment Bank, where they dropped 29% to SR532.4m. Others posting lower profits included Saudi Hollandi Bank, Arab National Bank, Samba and Bank Albilad.

“The overall liquidity of the large banks is becoming increasingly stretched, but they are managing this well,” said Fitch Ratings in a report issued on 26 September 2016, after the latest SAMA funding had emerged. However, the tough market conditions are unlikely to ease substantially for some time. That means that the recent intervention by SAMA may yet need to be followed up with more assistance before long.

MERS: Going Viral in Saudi Arabia

Published in Forbes Middle East, 24 October 2016

On 6 June 2016, a 59-year-old man from Tabuk in the north west of Saudi Arabia was admitted to hospital. Two days later he was diagnosed with Middle East Respiratory Syndrome and four days after that he passed away. Unfortunately, he will not be the last to die of MERS, as the disease is more commonly known.

The disease, which is caused by a coronavirus, was first identified in Saudi Arabia in 2012 and has since spread to 26 other countries. The World Health Organisation (WHO) says it has been notified of 1,769 confirmed cases to date and at least 630 deaths. The vast majority of these have been in Saudi Arabia, although there was a significant outbreak in South Korea in mid-2015 and there have been cases reported from the US to France to Malaysia.

There has been some criticism of the way in which the Saudi authorities handled the issue at first and how quickly it shared information with the rest of the world. This is not in itself unusual, as Dr. Keiji Fukuda, assistant director general for health security and environment at WHO, noted when talking in June 2015 about the slow response of the South Korean authorities to the outbreak there.

“In my experience in dealing with outbreaks for the last few decades, what’s true is that whenever they occur, particularly when we have new viruses and new diseases, they invariably take everybody by surprise,” he said. “They take the country by surprise, the responders and the government and there is always a period of time in which you have to get organised to deal with the outbreak… There is always a learning curve in the beginning of these outbreaks.”

It may not have helped that the Ministry of Health has been led by seven different people in the four years since the MERS outbreak began. At least some ministers or acting ministers have been dismissed due to their handling of the response to MERS, including Abdullah Al-Rabiah who lost the job in April 2014. Hospital managers have also been in the firing line. In May 2014, the then acting Minister of Health Adel Faqih replaced the director and deputy director of King Fahd Hospital. The official Saudi Press Agency said the changes were made “to better fight the corona virus,” as the disease is often known in the country.

In one sense at least, things have been getting better. In the early days of the disease, the fatality rate was running at around 60%, but it is now close to 36%. Even so, the problem is far from solved and new patients are diagnosed with the disease most weeks. Between mid-May and mid-June, five other people in Saudi Arabia were diagnosed with the condition, in addition to the 59-year-old from Tabuk, and one of them is in a critical condition. Between 16 and 20 June the numbers shot up, with 28 more cases in the country, the majority of them occurring in a hospital in Riyadh.

Most cases have been attributed to human-to-human infections, particularly in hospitals and other healthcare settings where poor hygiene standards and other problems are to blame. One recent case highlights the risks: a 49 year-old woman was admitted to a hospital in Riyadh on 10 June with symptoms unrelated to MERS and kept in a multi-bed ward. During that time, at least 50 healthcare workers and patients were exposed and at least 20 of them have since tested positive for MERS.

It is widely suspected, although not proven, that infected camels are the original source of the disease and many others who have been diagnosed with the disease have had a history of close contact with camels. As a result, WHO says people should avoid drinking raw camel milk or eating camel meat that has not been properly cooked.

MERS is a tricky condition to diagnose at first. As with other respiratory infections, the early symptoms are non-specific, including fever, coughing and shortness of breath, but some carriers of the disease are asymptomatic. Patients can go on to suffer pneumonia and organ failure, especially of the kidneys. Older people, those with chronic diseases such as diabetes, cancer and chronic lung disease, and those with weakened immune systems, are all at higher risk.

No vaccine has yet been discovered for the disease. However, moves are afoot to develop one. In the U.S., the National Institute of Allergy and Infectious Diseases reported some promising results in tests of a vaccine on mice, rhesus macaques and camels in 2015.

In December that year, a team of Dutch, Spanish and German scientists revealed, in a paper published in the journal Science, that they had developed a vaccine that makes infected camels excrete less virus, something which could help to prevent transmission to humans. “It is possible that the risk of outbreaks among humans can be minimized by vaccinating camels,” said Bart Haagmans, leader of the study and a virologist at the Erasmus Medical Center, based in Rotterdam in the Netherlands. At the time, the Erasmus Medical Center said the new vaccine could also be used to vaccinate humans, and that a fresh study was being undertaken to determine this. As yet, no results have been announced from that study.

Along with the human cost of the disease, there is also an economic cost to be borne, although to date it has not been as bad in Saudi Arabia as some may have feared. The government has placed some restrictions on travel during the Haj in recent years, which reduces the number of the most vulnerable coming to the country. The Command and Control Centre of the Ministry of Health advises that people over 65, pregnant women, children under 12, and those suffering immunodeficiency or chronic ailments should postpone their trip this year.

Even so, the amount of international visitors to the kingdom has continued to climb most years, from 16 million in 2012 and 2013 to 18 million in 2014 and 19 million in 2015, according to data from the country’s central bank, the Saudi Arabian Monetary Agency (Sama).

The Saudi economy has taken a hit in recent years, but mainly because of the fall in oil prices since 2014, and it is hard to separate out any impact that MERS might have had on the economy overall. However, while Saudi Arabia appears to have escaped any major economic impact so far, the same could not be said of South Korea, which saw its growth rate sharply dip in 2015 when it suffered a large outbreak of the disease. The problem was traced back to a businessman who had been infected on a visit to Saudi Arabia and then returned home.

The way Saudi Arabia and South Korea struggled to deal with the initial incidences points to a wider issue about the preparedness of the world for such outbreaks. MERS was not the first big disease to hit the headlines in recent years, nor the last. Others have included the severe acute respiratory syndrome (SARS) in Asia in 2003, Ebola in West Africa in 2014 and, most recently, the Zika virus in Brazil in 2015. On each occasion, medical authorities have struggled to cope and there has been a global scramble to deal with the problem.

That has prompted some to advocate a new approach. Speaking about the outbreak of the Zika virus, Marion Koopmans, head of the department of virology at the Erasmus Medical Center, told Dutch current affairs programme NOS Nieuwsuur in May that “We are surprised every time. There are again no vaccines or diagnostic tests and we are again one step behind.”

Koopmans suggested that a global fund should be set up to ensure there are sufficient financial resources to fund vaccines and diagnostic tests for viruses in the future, whether they are completely new or simply new strains of existing viruses. While the world waits for that to happen and for a vaccine to be discovered, visitors to Saudi Arabia would do well to follow the suggested precautions.

Kingdom sends mixed messages to tourism industry

Published in MEED, 27 September 2016

A sharp rise in visa fees will make it harder for Saudi Arabia to achieve its visitor targets

Riyadh has big plans for the Saudi tourism market in the coming years. The government wants to increase the number of umrah pilgrims from 8 million today to 15 million by 2020 and 30 million by 2030. It also wants to raise the total number of visitors to the country from 64.5 million to 81.9 million by 2020.

But another increase that is already in the pipeline may undermine those ambitions. In mid-August, the authorities announced that visa fees for non-GCC nationals would increase sharply from 2 October. A one-time entry visa will now cost SR2,000 ($533), while multiple-entry visas will cost between SR3,000 and SR8,000, depending on the length of time covered. Previously, visas cost between $55 and $140. In addition, airline passengers in transit will have to pay a SR300 transit visa and anyone leaving and returning will be charged SR200 for an exit/re-entry visa. First-time pilgrims will see their fee waived, but everyone else will have to pay up.

Such a policy is hardly conducive to a vibrant tourism industry. “It is symptomatic of the fact that within Saudi Arabia there is a large proportion of people who don’t want tourists,” says one industry analyst, who has worked in the kingdom. “It isn’t a good recipe for rapid development of tourism.”

The Saudi tourism industry has always been an unusual one. People wanting to visit historical sites such as the Nabataean ruins at Madain Saleh or ancient rock paintings at Jabal Umm Sanman are not encouraged any more than someone wanting to sunbath is. Instead, most visitors come for religious or work reasons. Yet the potential for tourism to provide a source of income and jobs means the sector cannot be entirely ignored, especially at a time when the government is desperate to find new revenue streams.

According to the Saudi Arabian Monetary Agency (Sama), the country’s central bank, inbound tourists spent SR81.5bn in the kingdom last year. The largest share came from religious visitors, who spent SR33.5bn. Business visitors accounted for a further SR12.7bn and those coming to visit friends and relatives spent SR11.2bn. Just 13 per cent of the total, SR10.7bn, was spent by people coming on holiday or for shopping.

Most visitors come from within the region, with GCC nationals accounting for 8.6 million of the 19 million trips to Saudi Arabia last year, and people from other parts of the Middle East a further 3.2 million trips. Some 3.3 million trips were from South Asia, another region of the world with a large Muslim population.

“[Really, they] are only interested in attracting Muslim markets, although exceptions are made for business visitors,” says Roger Goodacre, a tourism development adviser with Roger Goodacre Associates. “They would like to persuade the wealthier hajj and umrah pilgrims to extend their stay, and spend some time and money in Jeddah and other ‘leisure’ destinations.”

Attracting locals

The country’s tourism industry would also benefit if it could persuade more locals to take holidays at home. Last year there were 51,000 domestic tourism trips, involving an average stay of less than five days and spending of SR47bn. By contrast, the 21,521 outbound trips had an average length of 11.5 days and involved total spending of some SR78bn. The main destinations mirror the inbound tourism market, with 58 per cent of trips to other parts of the GCC, 20 per cent to the rest of the Middle East and 11 per cent to South Asia.

“The reason why so many Saudis take their holidays outside the country, in Egypt, the Gulf, Malaysia and so on, is that the religious restrictions are too tight to allow them to relax fully [at home],” says Goodacre. “The major cities can offer super-luxury hotels and luxury shopping malls, but they still struggle to compete with the rest of the Gulf because of the social restrictions.”

The authorities are at least trying to give locals more reasons to take a holiday at home and to offer visitors something more to do. The government’s National Transformation Programme sets out a series of targets for the Saudi Commission for Tourism & National Heritage (SCTH) to achieve by 2020. These include increasing the number of museums from 155 to 241 and the number of Unesco World Heritage sites from four to 10.

The government hopes such developments will help the tourism industry’s contribution to GDP to rise from 2.9 per cent today to 3.1 per cent by 2020. That looks ambitious, however. The UK-headquartered World Travel & Tourism Council suggests the direct contribution of travel and tourism to the Saudi economy was 2.5 per cent in 2015 and only expects it to reach 2.8 per cent by 2026.

The investment that will be needed to meet all the targets has been estimated at SR10.5bn for the SCTH alone. This includes several large schemes, such as SR861m for the Okaz City development in Taif and SR1.1bn for the development of the Farasan Islands in the Red Sea. In addition, the government will invest SR334m via the Ministry of Haj and Umra to develop facilities for pilgrims.

Important market

The Okaz City project highlights one important potential market for the tourism industry. The first phase of the scheme will include a conference centre alongside a mix of hotels, art galleries and a museum. Business visitors are a more straightforward proposition for the Saudi market than regular holidaymakers and, given the size of the economy, there is untapped potential for conferences and exhibitions.

“Saudi Arabia has the largest economy in the region so it holds a strong proposition in terms of business tourism,” says the industry analyst. “They are starting to realise the potential for building business tourism, based on exhibitions and conferences. People outside Saudi Arabia, particularly from the rest of the GCC, want to access the Saudi market.”

Other sites earmarked for development include the $7bn Al-Ogair project, but it is moving very slowly. Royal approval for the scheme was given in 2008, but it is still only at the initial planning stage. The project covers an area of 100 square kilometres, along a 24km stretch of coastline, and will include several archaeological sites as well as hotels, shops, entertainment centres and sport facilities. A tender for the main contract is not expected until April 2017, according to regional projects tracker MEED Projects.

Some private developments are also emerging. US theme park operator Six Flags is thinking of setting up a park in the kingdom. In late June, it said it had begun discussions with the government, following talks with Deputy Crown Prince Mohammed bin Salman during his tour of the US earlier that month. Such a development would be one way of encouraging more nationals to holiday closer to home, rather than going to the UAE or further afield.

Lack of support

However, the country’s track record of support for tourism projects in the past raises questions about how effective the government will be with its latest plans. Last year, the Switzerland-based World Economic Forum (WEF) ranked Saudi Arabia 133 out of 141 countries when it comes to tourism spending as a percentage of the government budget. In August, Prince Sultan bin Salman, president of the SCTH, acknowledged the sector had suffered from a lack of government support in the past.

“There is a criticism we received about the accommodation prices in some tourist destinations. It is true these destinations are experiencing low supply and high demand. If the funding programme was there in place, then the situation would have been different,” the prince said, on a visit to the Asir province on 9 August. “I would like to say, enough for the delay on our tourism development… enough of the old ways, we need our citizens to find good services at moderate prices to enjoy tourism within [their] homeland.”

But it is not just a question of money. A more deep-seated problem is the country’s approach to outside influences in general. The WEF ranks Saudi Arabia at 138 out of 141 countries for its openness to the world, ahead of only Yemen, Gabon and Angola. And in terms of visa requirements, it is joint last with Angola. The latest steep rise in visa fees suggests that, despite the ambitious nature of the country’s plans, the tourism industry is unlikely to grow at anywhere near the pace that some would like in the years ahead.

Military ambitions seen as unrealistic

Published in MEED, 27 September 2016

Riyadh’s target of directing half its military budget to local firms by 2030 is unfeasible, but it will help to develop the sector

By the end of this year, a new aircraft should take to the skies above Saudi Arabia. The Antonov AN-132 is designed to be able to take up to 9.2 tonnes of cargo on short and medium-haul journeys. It will also be able to make mid-air drops of cargo and paratroopers. In aviation terms, it is not breaking any important new ground; it is really just an updated version of the existing AN-32 aircraft, but it still represents an important development for the kingdom.

The AN-132 is being developed by a joint venture of Ukraine’s Antonov Company and two Saudi partners, Taqnia Aeronautics Company and King Abdulaziz City for Science & Technology. It is part of a small defence industry in Saudi Arabia, but it may be a sign of things to come.

Under the recently launched economic masterplan, Vision 2030, the government plans to spend more than half its military procurement budget inside the kingdom by 2030, up from just 2 per cent today. There are many reasons for thinking that is an unrealistic aim, but even if that target is missed the local defence industry is still likely to grow in ambition and ability.

“A host of issues such as corruption, secrecy and exclusionism will challenge Riyadh to advance military industrialisation at a fast pace; technological limitations and a population lacking the necessary skills will also undermine its plans,” says Giorgio Cafiero, CEO of US-based consultancy Gulf State Analytics. “It is more realistic to expect the kingdom to take decades to build a strong defence industry.”

The local industry dates back to 1949, when King Abdulaziz al-Saud issued a decree to set up a weapons and artillery plant. Production began four years later. Despite that heritage of almost 70 years, the government says the defence sector today comprises just seven companies and two research centres.

Their capabilities are limited. The state-owned Military Industries Corporation produces ammunition, bombs and light weapons. It also owns the Armored Vehicles & Heavy Equipment Factory, which manufactures the Al-Shibl light armoured vehicle. Another company, Abdallah Al-Faris Company for Heavy Industries, makes the Al-Fahd armoured vehicle.

Others such as Advanced Electronics Company and International Systems Engineering Company provide information technology (IT) and related services. Like many local defence companies, they were set up under the economic offset programme, in which international firms help to develop local capabilities as part of their awards for defence contracts.

Maintenance is another area where there is some activity. Riyadh-based Middle East Propulsion Company was recently certified to maintain Rolls-Royce T56 turboprop engines, which are used by the Royal Saudi Air Force on its fleet of Lockheed C-130 Hercules transport aircraft. Alsalam Aircraft Company provides maintenance for the Eurofighter Typhoon and another firm, Aircraft Accessories & Components Company, services aircraft components.

The limited extent of the domestic industry along with long-running regional instability means Saudi Arabia spends a vast amount with international defence firms. Riyadh is the third-biggest spender on defence equipment globally, according to the UK-headquartered International Institute for Strategic Studies, with an outlay of $81.9bn in 2015.

Potential benefits

Developing the local defence industry will provide several potential benefits, not least in reducing the amount of overseas spending at a time of lower oil revenues. It also fits in with the wider aims to diversify the economy and create more high-value jobs for locals.

There are even some important strategic security benefits. Having a local manufacturing capability would offer Saudi Arabia some insurance against the potential for its current allies to suspend or cancel orders. Arms sales are intensely political affairs and it is not hard to envisage circumstances in which US or European arms companies are prevented from selling some weapons to a country that is regularly accused of human rights abuses in Yemen and indeed against its own citizens.

For a sign of what is possible, Riyadh only needs to consider how a series of multibillion-dollar deals to sell Boeing F-15 fighter jets to Qatar, Boeing F/A-18E/F Super Hornets to Kuwait and Lockheed Martin F-16 Fighting Falcons to Bahrain have been stalled for more than a year due to political machinations in Washington.

Slim chances

However, the chances of the country meeting its 50 per cent localisation target by 2030 are slim to non-existent, according to analysts. “It’s not going to happen,” says Matthew Hedges, an independent defence analyst. “They don’t have the capabilities in terms of manpower, there isn’t the infrastructure and there isn’t the R&D [research and development] that would enable them to stay ahead of developments. It won’t even get to half of that.”

He suggests the country may be able to localise 10-15 per cent of spending if it focuses on developing its maintenance, repair and overhaul capabilities, and on lower-tech areas such as munitions and light arms. “These are the easiest things to produce and it’s also a way to reduce costs. They’re things they use every day,” adds Hedges.

If Saudi Arabia wants to develop more advanced systems, there will be other stumbling blocks. There are big question marks about how willing other countries will be to share the more advanced technology with Riyadh. In particular, much of the Saudi equipment comes from the US, which is committed to ensuring Israel always has a qualitative edge over its regional enemies.

“Warfare is not getting less complicated,” says another defence industry analyst. “They’ll really struggle to do the complex stuff. The high-end military kit is really expensive, it’s complicated and takes astonishing amounts of R&D. The big-ticket items for the foreseeable future are unlikely to come from Saudi Arabia.”

Saudi military ambitions seen as unrealistic

Published in MEED, 27 September 2016

Riyadh’s target of directing half its military budget to local firms by 2030 is unfeasible, but it will help to develop the sector

By the end of this year, a new aircraft should take to the skies above Saudi Arabia. The Antonov AN-132 is designed to be able to take up to 9.2 tonnes of cargo on short and medium-haul journeys. It will also be able to make mid-air drops of cargo and paratroopers. In aviation terms, it is not breaking any important new ground; it is really just an updated version of the existing AN-32 aircraft, but it still represents an important development for the kingdom.

The AN-132 is being developed by a joint venture of Ukraine’s Antonov Company and two Saudi partners, Taqnia Aeronautics Company and King Abdulaziz City for Science & Technology. It is part of a small defence industry in Saudi Arabia, but it may be a sign of things to come.

Under the recently launched economic masterplan, Vision 2030, the government plans to spend more than half its military procurement budget inside the kingdom by 2030, up from just 2 per cent today. There are many reasons for thinking that is an unrealistic aim, but even if that target is missed the local defence industry is still likely to grow in ambition and ability.

“A host of issues such as corruption, secrecy and exclusionism will challenge Riyadh to advance military industrialisation at a fast pace; technological limitations and a population lacking the necessary skills will also undermine its plans,” says Giorgio Cafiero, CEO of US-based consultancy Gulf State Analytics. “It is more realistic to expect the kingdom to take decades to build a strong defence industry.”

The local industry dates back to 1949, when King Abdulaziz al-Saud issued a decree to set up a weapons and artillery plant. Production began four years later. Despite that heritage of almost 70 years, the government says the defence sector today comprises just seven companies and two research centres.

Their capabilities are limited. The state-owned Military Industries Corporation produces ammunition, bombs and light weapons. It also owns the Armored Vehicles & Heavy Equipment Factory, which manufactures the Al-Shibl light armoured vehicle. Another company, Abdallah Al-Faris Company for Heavy Industries, makes the Al-Fahd armoured vehicle.

Others such as Advanced Electronics Company and International Systems Engineering Company provide information technology (IT) and related services. Like many local defence companies, they were set up under the economic offset programme, in which international firms help to develop local capabilities as part of their awards for defence contracts.

Maintenance is another area where there is some activity. Riyadh-based Middle East Propulsion Company was recently certified to maintain Rolls-Royce T56 turboprop engines, which are used by the Royal Saudi Air Force on its fleet of Lockheed C-130 Hercules transport aircraft. Alsalam Aircraft Company provides maintenance for the Eurofighter Typhoon and another firm, Aircraft Accessories & Components Company, services aircraft components.

The limited extent of the domestic industry along with long-running regional instability means Saudi Arabia spends a vast amount with international defence firms. Riyadh is the third-biggest spender on defence equipment globally, according to the UK-headquartered International Institute for Strategic Studies, with an outlay of $81.9bn in 2015.

Developing the local defence industry will provide several potential benefits, not least in reducing the amount of overseas spending at a time of lower oil revenues. It also fits in with the wider aims to diversify the economy and create more high-value jobs for locals.

There are even some important strategic security benefits. Having a local manufacturing capability would offer Saudi Arabia some insurance against the potential for its current allies to suspend or cancel orders. Arms sales are intensely political affairs and it is not hard to envisage circumstances in which US or European arms companies are prevented from selling some weapons to a country that is regularly accused of human rights abuses in Yemen and indeed against its own citizens.

For a sign of what is possible, Riyadh only needs to consider how a series of multibillion-dollar deals to sell Boeing F-15 fighter jets to Qatar, Boeing F/A-18E/F Super Hornets to Kuwait and Lockheed Martin F-16 Fighting Falcons to Bahrain have been stalled for more than a year due to political machinations in Washington.

Slim chances

However, the chances of the country meeting its 50 per cent localisation target by 2030 are slim to non-existent, according to analysts. “It’s not going to happen,” says Matthew Hedges, an independent defence analyst. “They don’t have the capabilities in terms of manpower, there isn’t the infrastructure and there isn’t the R&D [research and development] that would enable them to stay ahead of developments. It won’t even get to half of that.”

He suggests the country may be able to localise 10-15 per cent of spending if it focuses on developing its maintenance, repair and overhaul capabilities, and on lower-tech areas such as munitions and light arms. “These are the easiest things to produce and it’s also a way to reduce costs. They’re things they use every day,” adds Hedges.

If Saudi Arabia wants to develop more advanced systems, there will be other stumbling blocks. There are big question marks about how willing other countries will be to share the more advanced technology with Riyadh. In particular, much of the Saudi equipment comes from the US, which is committed to ensuring Israel always has a qualitative edge over its regional enemies.

“Warfare is not getting less complicated,” says another defence industry analyst. “They’ll really struggle to do the complex stuff. The high-end military kit is really expensive, it’s complicated and takes astonishing amounts of R&D. The big-ticket items for the foreseeable future are unlikely to come from Saudi Arabia.”

Training students to be realistic

Published in MEED, 26 July 2016

Saudi Arabia has committed itself to major reforms of its school curriculum, but it also needs to change the outlook of students if it is to achieve its goals

There was a time when a young Saudi could, if they wanted to, look forward to coasting through school, perhaps opt for an unchallenging humanities course at university and then settle for a well-paid but undemanding public sector job. That is no longer the case. With the government determined to reduce the inefficient state sector, young nationals are under pressure to acquire marketable skills so they can find decent private sector jobs. But the education system has a poor record of giving them the skills they need.

In international benchmarks such as the Trends in International Mathematics & Science Study (TIMSS) and the Progress in International Reading Literacy Study (PIRLS), both run by the International Association for the Evaluation of Educational Achievement, Saudi Arabia performs badly. In the most recent results, 12 per cent of Saudi students reached the high benchmark in science, 8 per cent in reading and 7 per cent in maths, while just 2 per cent reached it in all three subjects. Contrast that with the best performing country, Singapore, where 54 per cent of students reached the high benchmark in all three subjects.

Big problems

There is clearly a lot of ground to make up. Two big problems are the reliance Saudi schools place on rote learning and the large amount of time devoted to religious instruction. Addressing these issues requires a fundamental rethink for the authorities and pushing through reforms that carry such social and political significance will not be easy.

But changes are afoot. Reform of the school curriculum is one of many areas included in the Saudi government’s wide-ranging Vision 2030 strategy. Riyadh has vowed to “invest particularly in developing early childhood education, refining our national curriculum and training our teachers and educational leaders. We will also redouble efforts to ensure the outcomes of our education system are in line with market needs”.

The government fleshed out these ideas in its National Transformation Plan (NTP), which covers the first five years of the wider strategy. The Education Ministry has been tasked with improving TIMSS and PIRLS results, as well as 36 other goals, from improving the quality of primary education to developing core life and employability skills.

Such moves are in line with what other countries are doing. “Governments all around the world are trying to move away from the more traditional focus on mastering facts to having a curriculum that is more about learning to learn, learning to ask the right questions,” says Ashwin Assomull, managing director of Parthenon EY, a UK-based education consultancy. “I think that’s what Saudi Arabia’s going to do.”

Long way behind

The problems with the Saudi education system are echoed around the Gulf. In Qatar, for example, 4 per cent of students reached the high benchmark across the three TIMSS and PIRLS subjects. The UAE was slightly better, with 6 per cent. While these are better than the Saudi results, they are still a long way behind the best performers.

Ali bin Abdulkhaliq al-Karni, director-general of the Riyadh-based Arab Bureau of Education for the Gulf States, acknowledged the problems in a speech at the UN Educational, Scientific & Cultural Organisation (Unesco) in Paris in May. “In my part of the world… our countries have spent huge amounts of money to develop education, but with little success,” he said.

While it may be a region-wide issue, the problem is more serious in Saudi Arabia due to its larger population. Assomull suggests one way to improve the situation would be to increase the proportion of students attending private schools with international curriculums. “What the kingdom needs to do is to encourage more private sector participation,” he says. “In Dubai, about 90 per cent of children go to a private school and most of them are international curriculum schools. In Saudi Arabia, less than 10 per cent are going to private international schools.”

The government appears keen on this too. The Education Ministry is aiming to increase the percentage of students in private higher education from 6 per cent of the total to 15 per cent by 2020. But previous attempts in this area have not always gone well. In 2012, the government launched its Colleges of Excellence programme to get international operators to run 100 colleges, with a focus on vocational courses. However, some of those involved have reportedly run into financial difficulties and some have pulled out. Observers say some operators have struggled to recruit students in sufficient numbers, partly because of a stigma associated with vocational education. Recruiting teachers to work in Saudi Arabia is also a big challenge.

Colleges of Excellence

Despite the difficulties, however, the scheme has its supporters. “The concept behind the Colleges of Excellence is fantastic,” says Richard Bennett, a former teacher and now leader for education and skills in the Middle East at US consultancy Deloitte. “Bringing in global expertise in a way that rewards success makes absolute sense to me. Some of the colleges have struggled to recruit, but others haven’t; some have done very well. The model, broadly speaking, is right. It’s still at its early stages, it’ll continue to develop, but the direction of travel is very positive.”

Bennett says one difficulty is persuading young Saudis that a vocational course leading to a private sector job is the best option for them. “I don’t think the issue is so much around the colleges, it’s around the relative attractiveness of jobs in the public sector,” he says. “It’s all about changing that generational mindset. Once a cadre has been through the system and been seen by their peers to have done well it becomes a much easier argument.”

Such issues are fundamental to the position that Saudi society finds itself in. In the coming years young nationals will be entering an economy in a state of flux as the government tries to pivot the country away from a reliance on oil and expand the private sector. That means the type of jobs they can expect to land once they are out of education will be different. For the government, the task is not just to change the curriculum, but also the expectations of its population. Whether it is up to the task remains to be seen. Some are sceptical.

“In Saudi Arabia, there’s always a great plan in place and then something throws it off,” says one analyst. “I hope [education reform] happens quickly and effectively, but I haven’t seen much evidence of that in the past.”