(MENAFN- Khaleej Times) The Saudi economy's diversification will promote UAE's position as a regional trading hub, said Jules Kappeler, chief executive officer GCC, Euler Hermes.
"The diversification of KSA's economy will promote UAE's position as a regional trading hub, with more products and services being exported and re-exported through the UAE. As of 2015, investments by Saudi companies in the UAE, were valued at Dh35 billion. As the market opens up, more international companies will want to come in, and could possibly use the UAE as a base to set up their regional office, thus giving a boost to the economy," said Kappeler. "As of 2015, investments by Saudi companies in the UAE, were valued at Dh35 billion. As the market opens up, more international companies will want to come in, and could possibly use the UAE as a base to set up their regional office, thus giving a boost to the economy. On the other hand, it will give businesses from the UAE an opportunity to explore investment and trade opportunities in Saudi Arabia - which is a huge market." Despite being the closest of neighbours, trade between the UAE and Saudi Arabia is relatively low. Of total UAE imports only 2.2 per cent represents goods from Saudi Arabia and just over four per cent of UAE re-export trade is destined for Saudi markets. To an extent, the low level of trade reflects the countries' similar natural resource base (largely oil and gas) and therefore trade patterns. However, this move towards diversification by Saudi will open new areas for mutual cooperation, states Euler Hermes. A very high proportion of the two-way trade consists of primary goods - approximately one-third of UAE's re-exports to Saudi Arabia is classified as sugars. Manufactured goods or even semi-manufactures are conspicuous by their low levels of trade. According to the UAE Ministry of Economy, the country's main export to Saudi Arabia is gold and the main re-export products are jewellery and gold. Relations with the UAE, already close, will deepen. To an extent, the Saudi reforms aim to turn its economy into a mirror image of that of the UAE (Dubai is now a diversified economy that used to be as dependent as Saudi Arabia on hydrocarbons) and the latter will act as something of a role model, with the UAE's experiences (negative as well as positive) useful guides for the Saudi authorities. Based on various reports, the move to diversify the economy may see investment flow increase into a number sectors, such as healthcare and real estate, and we might also see a spillover effect into other countries, such as the UAE, which is already very advanced in these sectors. Trade between the two countries is limited because of similarities in their respective existing export bases (chiefly oil) but will increase directly because of Vision 2030, partly because Dubai acts as a regional entrepot center and partly because expansion of tourism and manufacturing sectors in Saudi Arabia will improve commercial inter-connectedness in the Gulf. The Kingdom of Saudi Arabia recently announced an economic reforms package. There is no denying that there has been need for reform including diversification for a long time; hydrocarbons account for over 50 per cent of GDP and for over 80 per cent of export revenues. In the past, acknowledgement of this need was accompanied by general pledges to implement reforms, but these lacked commitment. This time it is different, partly reflecting the realization that oil prices will not return to around USD100/barrel in the next few years and partly because of the dynamism of a more youthful leadership. In the short term, large fiscal and current account deficits will be recorded (perhaps -15 per cent and -8.5 per cent of GDP in 2016, respectively) and GDP growth is likely to be halved to around +1.5per cent in 2016. Large financial assets provide a window of opportunity for reforms to be implemented and to take effect. Saudi authorities are being pro-active in the reform process and that is very important. However, Vision 2030 is unlikely to have a swift impact on the economy. Reforms take time. In terms of employment and job creation, it is difficult to see that the reforms will provide a significant boost, particularly as the aim is to reduce the public sector head count and the private sector (outside the services sector) is less labor intensive. The "green card" reform is positive for the labor market, although not for Saudi citizens seeking work openings. Increasing activity in the mining, defense and tourism sectors will be long-term goals but creation of the large Sovereign Wealth Fund will enable quick benefits from revenue growth from investments. Long road ahead It is important to note that Vision 2030 is a long term plan and only time will tell how it will impact the country and its neighbors. Saudi Arabia wants to encourage non-oil sectors, including manufacturing and defense-related goods. These will take time to establish, so significant trade gains purely from this development should not be expected in the very near term. Forecasting such gains over the period to 2030 is not possible, being dependent on how deep the Saudi reforms become in practice, on future exchange rates and, of course, uncertain oil prices. We would always suggest diversification is the way forward. Two important points to consider in relation to Vision 2030: (i) as the name indicates this is a long-term strategy - little substantive economic impact should be expected in the short term and managing expectations will be challenging. However, some short-term benefits (confidence and boost from the pro-active stance) will be felt through adoption of reform measures and (ii) specific targets within Vision 2030 e.g. increasing private sector activity to 65per cent of GDP by 2030 (from 40per cent) or reducing unemployment to 7per cent from 11.6per cent should not be seen as make or break targets for the whole concept/vision. The most important thing is that progress is made in relation to the underlying concepts. A more-detailed road map for implementing Vision 2030 is scheduled to be released in June. Further changes to the regulatory environment will also be required; a new company's law is now in operation and a new insolvency law is reportedly close to finalisation. - Sandhya D'Mello Journalist. Period. My interests are Economics, Finance and Information Technology. Prior to joining Khaleej Times, I have worked with some leading publications in India, including the Economic Times.