Market Diversification in Qatar and Saudi Arabia: Part 2
In the second instalment of ‘Market Diversification in Qatar and Saudi Arabia’, Hugh Dixson explores how diversification policies are being introduced into Saudi Arabia and what opportunities this brings for Australian exporters.
Saudi Arabia: market diversification for stability
Saudi Arabia is an important export partner for Australia and the second biggest market for Australian exports in the Middle East region. Like Qatar, Saudi Arabia is undergoing a process of transition from its reliance on its rentier economy to a more diversified and stable economy.
Speaking about market diversification in Saudi Arabia, Glen Lovell, Partner at Al-Tamimi & Company Lawyers in Riyadh stresses the importance of foreign investment to that process.
“Saudi Arabia is without doubt diversifying”, he says. “It cannot rely on oil and is looking at downstream oil products, and secondary products like plastic, the manufacture of which requires oil. The Saudis want to attract foreign investment and offer foreign companies opportunities to plug the gaps in their economy. They (the Saudi government) are very conscious of their dependency on oil and so are addressing secondary oil products as well as other natural resources.”
Saudi Arabia is currently the world’s biggest producer and exporter of oil, producing 11.6 million barrels per day of which it exports 8.9 million barrels per day. The government of Saudi Arabia has begun to look towards expanding other sectors in the economy to stabilise Saudi Arabia and insulate it from risk related to overexposure to the hydrocarbons market.
Dutch Disease has compounded the need for economic reform
The flourishing hydrocarbons sector keeps the Saudi Riyal perennially strong, making other exports very expensive, while imports remain relatively cheap. Consequently, Saudi Arabia’s non-hydrocarbons sectors are unable to compete internationally. The cannibalisation of other sectors by the hydrocarbons sector has also contributed to Saudi Arabia’s high unemployment rate (11.5% of Saudis and 5.5% including expatriate workers in the fourth quarter of 2013).
The weakness of Saudi’s non-hydrocarbons sectors including manufacturing and agricultural offers Australian exporters the opportunity to supply the demand for agricultural goods, cars and other manufactured goods to a wealthy market with a rapidly growing population. Saudi Arabia has enormous potential for Australian exporters because it is a large and wealthy market without much domestic capacity which remains relatively untapped by Australian companies.
Saudi Arabia’s weak agricultural sector – the result of a lack of water resources and arable land – make food security a present risk for Saudi Arabia. Agricultural goods continue to form a fundamental part of Australia’s exports to Saudi Arabia, particularly in the dairy, meat and grains sectors. Other traditional exports to Saudi Arabia – construction goods and services and manufactured goods – will also continue to underpin Australia’s exports to Saudi as the population grows, even as the Saudi government seeks to expand its domestic market.
New potential for Australian companies in a range of sectors
However, the growing potential for Australian companies lies in other sectors. Mining is a relatively new sector in Saudi Arabia and represents an area of immense potential for Australian companies. As Glenn Lovell explains, “Saudi Arabia is rich in minerals and there is a lot of exploration and some exploitation already going on”. Australian expertise in mining terrain similar to the deserts of Saudi Arabia makes Australian companies highly competitive in mining services particularly the provision of equipment, materials and engineering.
Furthermore, the expansion of the mining sector will generate a need for new rail lines and other mining-related infrastructure, a development which is likely to expand the existing demand for construction exports to Saudi Arabia. Australian companies have already entered the rail construction sector in Saudi Arabia, with construction company Laing O’Rourke building a railway in northern Saudi Arabia. Laing O’Rourke won the contract because of its experience in Australia’s similar desert terrain, a promising sign for Australian mining and other construction companies looking to export services to Saudi Arabia.
Saudi Arabia’s rapidly growing population is also creating a need for new schools, hospitals, housing and infrastructure. By 2016, the population is expected to reach 30 million, up 20% from 23 million in 2009. In response, the government is building six ‘mega-economic cities’ (Rabigh, Hail, Madinah, Jizan, Tabuk and Ras Azour) which will meet the residential, health and education needs of its booming population. Construction contracts associated with the new cities are estimated to be worth a total of $325.5 billion between 2009 and 2016.
The combination of a population boom and King Abdullah’s drive to educate the Kingdom’s citizens also means that education is a growing area for potential Australian export. Distance education by correspondence is well-received by Saudi students and vocational training for teachers and in medical fields such as nursing and medical technicians is increasingly popular. Given the planned expansion of Saudi cities and the construction of many schools, universities and hospitals, such demand is likely to increase. Most notably, English teaching and English language materials will be likely in great demand in Saudi Arabia, with significant growth in global demand for English coupled with the growth in the number of universities and schools in Saudi Arabia.
Rapid change creating enormous opportunity
Saudi Arabia and Qatar are both undergoing enormous change which is opening up substantial markets and opportunities for Australian companies. Both countries have wealthy, established economies with rapidly growing populations, making them lucrative and relatively safe markets for export.
Qatar has growing opportunities in education, agriculture, business and financial services, research and construction sectors, while Saudi Arabia has potential for Australian companies in construction, agriculture, education, business and financial services, and mining. Furthermore, as both Qatar and Saudi Arabia have similar requirements and are geographically proximate to each other, there is potential to export to both markets simultaneously. Essentially, Australian companies should look to Qatar and Saudi Arabia for export opportunities, as they are both wealthy countries with growing populations with limited domestic capabilities looking to undergo significant economic change, which presents great potential for Australian companies of all industries and sizes.
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Author: Hugh Dixson
Hugh is a student at the Australian National University majoring in International Relations and Arabic, specialising in international trade. He has a particular interest in Australia’s trade with the Middle East and Asia, focusing on trade and government relations in those regions. Hugh hopes to eventually work in international economic institutions, commodity and trade finance or international trade groups.