Several sectors in Saudi Arabia are emerging as attractive goals for local and foreign investors, as they are key contributors and as enablers to achieving the country's Vision 2030.
The education system is being reshaped in an effort to improve its quality and outcome. The country is focusing on developing early childhood education, refining national curriculum and training its teachers and educational leaders. In addition, it is reforming the regulations paving the way for investors and the private sectors.
In a rapidly growing & young population as KSA, the government recognizes the importance of Housing sector to its citizens and took completely different approach to realize its commitments: by adopting new technologies like 3D printing, using more prefabricated buildings, leveraging robots for construction, providing many incentives for private sector players like funding and risk sharing.
The Kingdom's financial sector comprises banking, capital markets, insurance, fin-tech and others. The Kingdom's regulatory system matches the international standards for banking supervision. Moreover, the newly introduced capital markets law allows for brokerages, asset managers, and other non-bank financial intermediaries to operate in the country. These large efforts are making the Saudi Arabian financial sector even more stable and very integrated with all main international markets and banking systems.
Facts & Figures
Emerging Sectors Value Proposition
The Kingdom of Saudi Arabia (KSA) has assumed a prominent position in the world for its gratifying hospitality and its warm welcome towards all Muslim visitors from across the globe. It is the objective of KSA to carve a special place in the hearts of pilgrims and faithful visiting Muslims as they enter the Kingdom to participate in the greatest experience of their lifetimes. As the Muslim community of the world becomes increasingly mobile, KSA anticipates a significant increase in the number of Hajj and Umrah visitors and the consequential challenges placed on its current touristic services and infrastructure. KSA is conscious of the necessity to further develop this sector and to maintain and improve the quality of services available to Hajj and Umrah visitors. Various projects are already underway, including an extension to The Grand Mosque, the introduction of railway and metro services, airport expansions, luxury hotel projects and so forth. KSA is committed to unlocking this sector and creating a new era for private enterprises as they seek to benefit from the exciting new investment opportunities available within the burgeoning Hajj and Umrah tourism sector.
Top Destination for the Muslim World
The Kingdom of Saudi Arabia is the number one destination for all 1.6 Billion Muslims around the world, all of whom carry a duty to fulfill the Hajj and Umrah pilgrimage within their lifetime. Pilgrims from over 80 different nationalities visit KSA each year, with Makkah and Madinah being the two main cities prominent for Hajj and Umrah:
Regarded as the holiest city in Islam, Makkah sits at the center of the three Abrahamic faiths. It contains the first house built for the worship of Allah and houses the site of Prophet Muhammad’s first revelation of the Quran. Makkah is home to the great mosque ‘Masjid Alharam’, which circumambulates the Kaabah. This location is by majority description both Islam's holiest site and the fixed direction of Muslim prayer. Located 66ft East of the Kaabah lies the Zamzam Well, discovered thousands of years ago by Hajar, Abraham's wife; a place where Millions of pilgrims continue to visit for prayer and to drink holy Zamzam water. The city is renowned for its rich historical trade routes, having sat at the crossroads of ancient global commerce for centuries.
Madinah is the second-holiest city in Islam after Makkah and is considered the first capital of the Muslim world, serving as the key destination of Prophet Hijrah (migration) from Makkah. Madinah is also known as the home to the Holy mosque ‘Masjid Al Nabawi’, which is the burial place of the Prophet Muhammad, Abu Baker Alsadiq (first caliphate) and Omar Bin Khattab (second caliphate). Madinah is the site of key Islamic historical events such as the battles of Bader and Uhud. The Prophet Mohammed considered Madinah’s ‘Masjid Al Nabawi’ as one of three mosques for pilgrims to visit, stating "do not undertake a religious journey except to three mosques: this mosque of mine in Madinah, the sacred mosque in Makkah, and the farthest mosque in Jerusalem”.
To date, Makkah and Madinah receive approximately 2 Million foreign visitors for Hajj every year. This number is expected to grow further at a rate of 6.2% per year until 2030, reaching 5.4 Million visitors per year. Historically, Makkah and Madinah have received approximately 6 Million inbound visitors to Umrah per year, which is expected to grow at a rate of 7.6% until 2030, reaching a remarkable 50 Million inbound and domestic visitors. As Hajj and Umrah pilgrims increase in number to reach unprecedented levels, KSA will implement the changes and improvements necessary to meet the demands of its expanding sector.
Commitment to develop and unlock the sector
KSA is committed to developing and unlocking the Hajj and Umrah sector through its Vision Realization Program (VRP) and by fulfilling its Vision 2030 objectives. Several infrastructure projects have already been launched to further develop the overall experience for pilgrims and to significantly increase capacity from 20 Million to 50 Million visitors per year by 2030. The VRP set a target to provide the largest possible number of Muslims easier access to Hajj and Umrah and to enrich their spiritual and cultural experience by developing the two Holy Mosques. Program objectives also include the development of additional touristic and cultural destinations as well as further enhancing services provided to visitors before, during, and after their visits to Makkah, Madinah and the holy sites. KSA intends to reaffirm its role as a religious and cultured nation and to provide an exceptional service to all visiting pilgrims. The VRP will also support a strengthening relationship with the private sector and will play an active role in developing the economics of the sector.
To achieve its Vision 2030 targets, the KSA government has committed to invest approximately 110 Billion SAR towards this sector over the next 10 years. This will include a three-phase project to expand the capacity of King Abdulaziz airport to accommodate 80 Million travelers per year by 2035. Furthermore, the Haramain High Speed Rail Project will link Jeddah, Makkah, Madinah and King Abdullah Economic City (KAEC) over a 450km distance with a capacity to serve 60 Million passengers per year. New metro services are also set to be introduced, with the Makkah Metro project being launched in phases and the first section running over an 11km distance and operating between 7 stations. This project forms part of the 62 Billion SAR Makkah Public Transport Program (MPTP), which will include integrated bus services. The Grand Mosque expansion is currently in its third phase of expansion and will soon be able to simultaneously accommodate more than 2 Million worshippers. Further infrastructure improvements are set to enhance the management of electricity and water as well as expand key roads that link to the Grand Mosque.
New era for private sector
Historically, the KSA government was solely responsible for developing the Hajj and Umrah sector through public sector initiatives and government owned companies. Today, the government has changed its approach by fully opening up the sector to private businesses and enterprises. Furthermore, the government is reviewing and refining the rules and regulations regarding Hajj and Umrah in an ambitious attempt to unlock the sector. Public private partnerships (PPP) are being encouraged in order to enhance services throughout the Hajj and Umrah visitor journey. Attractive investment opportunities await businesses in the areas of transportation, pre-visit planning, accommodation, catering, retail, tour-operating, entertainment and other tourism related activities.
The Government has launched several projects in Makkah and Madinah to partner with the private sector and improve visitor experience.
The Rou’a Al-Haram project in Makkah covers an area of 854km2 and is set to receive 30 Million visitors by 2030. The project will create around 160,000 jobs opportunities by 2030, with an estimated annual GDP contribution of 8 Billion SAR. The project is to benefit from a vastly improved infrastructure upgrade that will include 70,000 hotel rooms for 310,000 guests, 9,000 residential units and 400,000 prayer areas for worshipers.
The Dar Al-Hijrah project in Madinah has been allocated a 55 Billion SAR budget to service a 1.6 Million m2 project area containing 100 towers: 20 administrative towers and 80 residential towers, as well as 76 four-star hotels and 6 five-star hotels, which will offer 40,000 rooms to pilgrims – all of which will lead to the creation of approximately 31,000 new job opportunities.
Rou’a Almadinah project in Madinah is forecasted to attract 23 Million visitors annually by 2030 and will benefit from the creation of 80,000 hotel rooms and 500 residential units to accommodate 240,000 visitors. The project will cover an area of 1.3 Million m2. It is estimated that the project will attract 7 Billion SAR annually towards GDP and create around 200,000 job opportunities. The government is seeking to partner with private sector investors for the purpose of completing these projects and enhancing the KSA tourism sector to reach globally recognized standards.
Saudi Arabia considers education to be its engine of development. As such, KSA is implementing groundbreaking measures that will adorn its youth with the most equipped and sophisticated classrooms available.
Great strides await the largest education system in the GCC as it paves the way for the construction of 2621 new schools to serve over a million new students by 2020. With the private sector on board and the relaxing of restrictive regulations, the education sector is set to more than double in size by 2023. The Saudi government is fully committed to supporting the growing local education market and has allocated the second biggest portion of its fiscal budget towards education, placing it 8th in the world in terms of education expenditure. As the digital age enters maturity, Saudi schools and universities are to benefit from cutting-edge facilities that transform classrooms into technologically interactive learning centers.
Largest market in the GCC
The education sector in Saudi Arabia is the largest among the GCC nations for both the K-12 and tertiary education segments. Its infrastructure includes more than 30,000 public schools, 25 public Universities, 27 private universities and a large number of colleges.
KSA accounts for approximately 75% of the total gross enrolment in the K-12 segment, with approximately 300,000 students in kindergartens and 5.6 million students enrolled at the primary and secondary levels. Beyond K-12, Saudi Arabia has the highest gross enrolment ratio in tertiary education compared to others in the GCC (61%). The tertiary education market in KSA consists of approximately 128,000 students in Technical and Vocational Education and Training (TVET) and 1.4 million students in higher education institutes. The size of the education market is expected to significantly increase due to rising participation and the growing student population. Consequently, demand for public/private Kindergartens, schools and universities is set to increase considerably. By 2020, 80,000 additional seats will be needed at the Kindergarten level, 300,000 are needed at the primary level (Grade 1-6), 300,000 at the intermediate level (Grades 7-9), 400,000 at the secondary level (Grades 10-12) and 125,000 at the higher education level.
Large untapped potential in KSA private education market
Over recent years, the KSA education market has seen a shift towards the private sector. Private schools have seen a 4% compound annual growth rate (CAGR) whilst higher education institutes have seen a 15% CAGR. Several trends are driving this shift towards private education; including government incentives for the private sector to play a key role in education reforms, the expanding expat population (5% CAGR over the past 10 years compared to 1% CAGR in Saudi National population) and increasing interest among Saudis seeking better outcomes by enrolling their children in international private schools.
At the current growth rate, it is expected that 70,000 additional private school seats will be needed at the primary level (Grade 1-6), 20,000 will be needed at the intermediate level (Grades 7-9) and 60,000 will be needed at the secondary level (Grades 10-12).
The Saudi Government has set ambitious targets to grow the share of private school students from 12% today to 25% in 2020. Through Vision 2030, KSA is committed to increasing private sector participation in the education sector. Several initiatives to unlock the sector for private investment are underway, with some having already been implemented. These include the acceptance of 100% foreign owned educational institutions and the use of public education buildings for private schools, hence removing the challenge of accessing capital, land and obtaining permits to establish infrastructure - easing the complex regulatory environment surrounding education. As a result, the Saudi private education market is therefore expected to increase from SAR 18.75 billion (USD $ 5 billion) in 2016 to SAR 45 billion (USD $ 12 billion) by 2023.
Government commitment to support the growing local education market
In accordance with Vision 2030, education forms a central part in the government’s long-term development plan. The government has prioritized expenditure on domestic education for several years now, enabling it to dramatically increase by 82% over the last decade.
Education spending currently occupies the 2nd largest portion in the annual national budget. In 2018, the government has allocated SAR 192 billion (USD $ 51 billion) for education. This represents 21% of fiscal spending or 7% of GDP on education, placing Saudi Arabia as 8th in the world in terms of education expenditure. This additional funding will enable the introduction of a number of new projects and allow for the expansion and continuation of existing programs. This includes the building of 2621 new schools by 2020 and the renovation of girls’ colleges at various universities.
A new era for digital education in Saudi Arabia
The Ministry of Education (MoE) has made it a primary objective to support both teachers and students by shifting to digital education. SR 1.6bn (USD $ 426.6 million) has been allocated towards this transformation, which has already started to take effect through paperless education, the introduction of ICT devices in classrooms and the application of e-learning.
Paperless education in the form of ‘phase 1’ began during the 2017/2018 academic year, which has seen 150 schools replace all printed books with digital versions. 1500 more schools will be brought into the program during phase 2 and the goal of phase 3 is to shift all 30,000 schools away from printed books by 2020.
The introduction of ICT to classrooms is set to transform the way students learn through an interactive model that enables students to interact with each other and with their teacher. To apply this model, Saudi Arabia has started capacity building by sending 1,000 teachers to top education institutions abroad for the purpose of learning best practices that can be taught and replicated. Saudi Arabia aims to boost internet user penetration from 2016 levels of 63.7% to 85% by 2020, along with 80% broadband coverage in densely populated urban areas and 55% in other urban areas.
The E-learning program has been started by a Royal Decree in 2011, which mandated the establishment of the Saudi Electronic University (SEU), a specialized distance learning university (e-university) that offers graduate, undergraduate and life-long learning programs to its students.
Growing and attractive housing market for residential developers
- Over the next couple of years, KSA is expected to witness a sharp increase in the demand for new housing units (1.5 million cumulative housing units needed by 2030) driven by
- Rapid growth of a large and young national population
- Presence of middle-income class of nationals able to afford housing units
New era in housing construction
- The housing construction industry in KSA is moving from traditional to technology based delivery methods (e.g., 2D, 2.5D and 3D building systems)
- The shift towards new construction techniques is driven by the government’s appetite to address current gaps including:
- Decreasing the cost of constructing a single housing unit to ensure affordability
- Decreasing the construction time of residential units to ramp-up housing production
- Increasing the quality of residential housing structure and finishing
- Increasing the construction industry’s contribution to value added employment of Saudi nationals
- Utilizing KSA local content to ensure scale and catalyze housing production
Government commitment to develop the industry
- The KSA government commitment is expressed through incentives to developers, enablers to beneficiaries and a well-developed ecosystem in place
- For developers, incentives are provided for construction on ministry and private lands including:
- Financial support is provided in different forms: interest-free loans, infrastructure financing support, conditional purchase back guarantees, VAT coverage and higher floor to area ratios
- Non-financial support is provided in different forms: set-up facilitations (e.g., fast track licensing), operational support (e.g., marketing and sales) and business development / expansion support (e.g., linking technology providers to demand / developers)
- For beneficiaries, the Real Estate Development Fund (REDF) and the Saudi Real Estate Refinance Company (SRC) were created to develop the nascent mortgage market in KSA with the aim of increasing home ownership to 60% by 2020 and 70% by 2030
- REDF covers defaulting borrowers, covers defaulting developers and pays portion of down payment in the aim of incentivizing borrowers to accept more mortgages and developers to lend more
- SRC provides solutions to originators, ensures a balanced and sustainable market thrive and channels liquidity in the market
- KSA established a clear governance for the housing sector by allocating clear entities across the housing value chain: sector owner / promoter, developers, funders and license issuers
The Saudi economy is growing rapidly and so are opportunities in the Saudi insurance market, which is already the second largest in the Middle East. With a population of 33m and the highest GDP in the region, as well as being the only Arab country in the G20, Saudi Arabia presents enormous potential for growth. The time is right for expansion – doors are open for branch set ups, with the demand for M&A activity, entry of brokers, specialty lines providers and reinsurers, expert service providers currently unprecedented. Saudi Arabia is firmly on its way to becoming an attractive option for insurers looking to expand into this emerging market.
Key areas of growth
With only one reinsurer on the ground, cedants are naturally in need of more support. Saudi Arabian Monetary Authority (SAMA) regulations require insurers to cede a minimum of 30% to locally incorporated reinsurers and current statistics from SAMA and Tadawul indicate that the sole reinsurer accounts for only 2% of the Saudi insurance market and 14.5% of premiums ceded to local or international reinsurers, reflecting large potential for any reinsurer entering the market today.
Demand for specialty lines and innovative solutions
Credit, cyber and financial lines are just a few examples of market opportunities for insurance players with bespoke solutions, unique expertise and cutting-edge technology and processes ready to disrupt the market.
Insurance and reinsurance brokers
The market is dominated by a limited number of brokers and opportunity is open to new entrants offering expertise, advice and services.
Health insurance market
With limited number of players able to compete in the health insurance market, risk carriers and service providers in the medical field have significant potential for penetration and differentiation.
Demand for service providers is high, particular for experts in loss adjusting, consultancy and advisory, risk management services, actuarial studies, third-party administrators and insurance agencies.
The culture and infrastructure of Saudi Arabia has seen significant changes that have welcomed foreign investors in numbers never seen before! Regulators are encouraging mergers and acquisitions and the market is open for business.
The Saudi financial services sector is preparing itself for unprecedented growth, reform and privatization. Despite already being a major player in global markets, strong government commitment is to see this sector strengthen even further. Funds are being allocated to stimulate businesses, red tape is being cut to encourage international investment and capital is being raised by some of KSA’s flagship corporations through privatization. As Vision 2030 begins to take shape, global investors should feel very excited about the opportunities that are coming their way.
Leading economy that is expected to grow further
Saudi Arabia is by far the largest economy among all Arab league countries and is the only Arab country among the G20. Nominal GDP stands at SAR 2.422 trillion (USD $ 646 billion) and is expected to grow significantly by 2030 to reach SAR 6.375 trillion (USD $ 1.7 trillion).
The population of the Kingdom ranks second among all Arab countries at 32.5 million and is expected to grow at an annual rate of 2.5%. Remarkably young demographics and the application of Vision 2030 directives present the Kingdom with unequivocal prospects for GDP growth.
One of the world's leading financial sectors globally
KSA has one of the most robust banking sectors globally in terms of resilience and capital adequacy. Its Capital-to-Assets ratio stands at 15%, ranking above many other G20 countries including the US and Germany. KSA’s net stable funding ratio is a comfortable 126%, signifying a reliable expectation of capital to meet the Kingdom’s liabilities. The financial sector’s total assets to GDP sit at 192%, putting KSA amongst the highest of any nation.
Saudi Arabia also has the largest capital market in MENAT, with deep and liquid domestic debt and equity segments. With 179 listed companies, a stock market capitalization of SAR 1.69 trillion (USD $ 450 billion) and SAR 836 billion (USD $ 223 billion) worth of shares traded on the Tadawul Saudi stock exchange (2017), Saudi Arabia easily presents as one of the world’s leading financial sectors.
Strong government commitment to further strengthen the sector
Vision 2030 sets out a core goal for the strengthening of KSA’s financial sector, allocating reserves that provide small and medium sized businesses (SMEs) with access to SAR 3.75 billion (US $1 billion) capital through venture capital and private equity funds. Huge opportunities await foreign fund managers who invest in Saudi assets as the government steps up its privatization efforts. Saudi Aramco's IPO is expected to raise SAR 375 billion (US $100 billion) worth of capital alone, providing investors with sizeable access to one of the biggest companies in the world. Furthermore, the relaxation of regulations and bureaucratic processes has led to the opening of previously closed financial opportunities. The Ministry of Finance is now solely responsible for providing licenses to foreign banks that wish to operate in the Kingdom, a role previously reserved for the Council of Ministers. The Capital Market Authority recently amended the Qualified Foreign Investor (QFI) framework by easing qualification requirements and opening up the secondary market (NOMU).
Efforts have been made to align the Saudi Stock Market with leading global settlement practices by shifting the Tadawul Exchange to a two business day settlement cycle. This will increase the level of asset safety for investors and develop an environment that promotes institutional-level investments that meet the necessary requirements for coping with future changes. International Financial Reporting Standards have also been introduced for all listed companies, banks, and insurance companies, which will further align KSA’s financial sector with recognized global practices.
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Investment Highlights - Winter 2020
In this fourth edition of “Investment Highlights” brought to you by Invest
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