Doing Business in Saudi Arabia - International Franchise Association
Doing Business in Saudi Arabia - International Franchise Association Doing Business in Saudi Arabia - International Franchise Association
are no private sector or government efforts to restrict foreign participation in industry standardssetting consortia or organizations. Efficient Capital Markets and Portfolio Investment Return to top Saudi Arabia has generally free and open financial markets, although non-GCC foreign investors may only invest in the stock market through mutual funds and “swap agreements.” These limits are gradually relaxing. Financial policies generally facilitate the free flow of private capital and currency can be transferred in and out of Saudi Arabia without restriction (with the exception of previously mentioned limits on bulk cash movements). In 2003, SAMA, the Central Bank, enhanced and updated its 1995 Circular on Guidelines for the Prevention of Money Laundering and Terrorist Financing. The enhanced guidelines are more compliant with the Banking Control Law, the Financial Action Task Force (FATF) 40 Recommendations, the 9 Special Recommendations on Terrorist Financing, and relevant UN Security Council Resolutions. Historically, credit has been widely available to both Saudi and foreign entities from the commercial banks, and has been allocated on market terms. The global financial crisis of 2008, followed by the default on $20 billion in debt by two Saudi business concerns and the debt restructuring in Dubai, has substantially reduced this availability to all parties, resulting in the delay or cancellation of some projects. Credit is also available from several government credit institutions, such as the SIDF, which allocate credit based on government-set criteria rather than market conditions. Companies must have a legal presence in Saudi Arabia in order to qualify for credit. The private sector has access to term loans, but there is no true corporate bond market. Most IPOs have been put on hold as the Saudi stock market’s volatility has spiked in response to the global financial crisis. The IPO market will likely take some time to recover as skittish investors are not likely to return to the market in the near future. As part of the economic reforms initiated for accession to the WTO, Saudi Arabia liberalized licensing requirements for foreign investment in the financial services. In addition, the government increased foreign equity limits in financial institutions from 40% to 60% to entice further foreign investment. In the last few years, the Saudi government has taken steps to increase foreign participation in its banking sector by granting operating licenses to foreign banks. SAMA granted ten foreign bank licenses to operate in the Kingdom in December 2005, including to BNP Paribas, Deutsche Bank, J.P. Morgan, National Bank of Kuwait, National Bank of Bahrain, Emirates Bank, Gulf International Bank, State Bank of India, and National Bank of Pakistan. The legal, regulatory, and accounting systems practiced in the banking sector are generally transparent and consistent with international norms. SAMA, which oversees and regulates the banking system, generally gets high marks for its prudent oversight of commercial banks in Saudi Arabia. SAMA is the only central bank in the Middle East other than Israel’s that is a member and shareholder of the Bank for International Settlements in Basel, Switzerland. The new Capital Markets Law, passed in 2003, allows for brokerages, asset managers, and other non-bank financial intermediaries to operate in the Kingdom. The law created a market oversight body, the Capital Market Authority, which was established in 2004, and opened the stock exchange to public investment. New financial firms established under the new law will drive an increase in corporate and consumer finance activity. By late 2008 more than 100 companies had received licenses to provide investment banking and brokerage services. As of August 2008, foreigners can now invest in the stock market through “swap agreements” with
local investment houses. These allow foreign investors to hold Saudi securities for a period ranging from three months to four years, but without any voting rights. There is an effective regulatory system governing portfolio investment in Saudi Arabia. Competition from State-Owned Enterprises Return to top There are a number of state-owned enterprises that operate in the Saudi market, but whether they compete with any private entity is questionable, since, with the notable exception of SABIC, they are all involved with the provision of public utilities and pensions. The major state-owned companies in Saudi Arabia are: • Saudi Basic Industries Corp. (SABIC) — one of the world’s leading manufacturers of chemicals, fertilizers, plastics, and metals, • Saudi Electric Company (SEC), • Saudi Telecommunications Co. (STC), • Saline Water Conversion Corporation (SWCC), • Reyadah Investment Company (investment arm of the Public Pension Agency) • Al-Hasana Investment Company (investment arm of the General Organization for Social Insurance). Corporate Social Responsibility Return to top Corporate Social Responsibility is still in its infancy in Saudi Arabia, with only some very large banks and state-owned corporations, like Saudi Aramco and Saudi Basic Industries Corporation (SABIC) having signed on to the principle. Political Violence Return to top In the most recent Travel Warning for Saudi Arabia, the Department of State urges U.S. citizens to consider carefully the risks of traveling to Saudi Arabia. The last major terrorist attack directed against the civilian population was an attack against French nationals in 2007. Significant enhancements in the capacity and capability of Saudi security and intelligence forces have greatly improved the security environment. Although much improved, the changes remain fragile and reversible. Corruption Return to top Overview Corruption, including bribery, raises the costs and risks of doing business. Corruption has a corrosive impact on both market opportunities overseas for U.S. companies and the broader business climate. It also deters international investment, stifles economic growth and development, distorts prices, and undermines the rule of law. It is important for U.S. companies, irrespective of their size, to assess the business climate in the relevant market in which they will be operating or investing, and to have an effective compliance program or measures to prevent and detect corruption, including foreign bribery. U.S. individuals and firms operating or investing in foreign markets should take the time to become familiar with the relevant anticorruption laws of both the
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local <strong>in</strong>vestment houses. These allow foreign <strong>in</strong>vestors to hold <strong>Saudi</strong> securities for a period<br />
rang<strong>in</strong>g from three months to four years, but without any vot<strong>in</strong>g rights. There is an effective<br />
regulatory system govern<strong>in</strong>g portfolio <strong>in</strong>vestment <strong>in</strong> <strong>Saudi</strong> <strong>Arabia</strong>.<br />
Competition from State-Owned Enterprises Return to top<br />
There are a number of state-owned enterprises that operate <strong>in</strong> the <strong>Saudi</strong> market, but whether<br />
they compete with any private entity is questionable, s<strong>in</strong>ce, with the notable exception of SABIC,<br />
they are all <strong>in</strong>volved with the provision of public utilities and pensions. The major state-owned<br />
companies <strong>in</strong> <strong>Saudi</strong> <strong>Arabia</strong> are:<br />
• <strong>Saudi</strong> Basic Industries Corp. (SABIC) — one of the world’s lead<strong>in</strong>g manufacturers of<br />
chemicals, fertilizers, plastics, and metals,<br />
• <strong>Saudi</strong> Electric Company (SEC),<br />
• <strong>Saudi</strong> Telecommunications Co. (STC),<br />
• Sal<strong>in</strong>e Water Conversion Corporation (SWCC),<br />
• Reyadah Investment Company (<strong>in</strong>vestment arm of the Public Pension Agency)<br />
• Al-Hasana Investment Company (<strong>in</strong>vestment arm of the General Organization for Social<br />
Insurance).<br />
Corporate Social Responsibility Return to top<br />
Corporate Social Responsibility is still <strong>in</strong> its <strong>in</strong>fancy <strong>in</strong> <strong>Saudi</strong> <strong>Arabia</strong>, with only some very large<br />
banks and state-owned corporations, like <strong>Saudi</strong> Aramco and <strong>Saudi</strong> Basic Industries Corporation<br />
(SABIC) hav<strong>in</strong>g signed on to the pr<strong>in</strong>ciple.<br />
Political Violence Return to top<br />
In the most recent Travel Warn<strong>in</strong>g for <strong>Saudi</strong> <strong>Arabia</strong>, the Department of State urges U.S. citizens<br />
to consider carefully the risks of travel<strong>in</strong>g to <strong>Saudi</strong> <strong>Arabia</strong>. The last major terrorist attack<br />
directed aga<strong>in</strong>st the civilian population was an attack aga<strong>in</strong>st French nationals <strong>in</strong> 2007.<br />
Significant enhancements <strong>in</strong> the capacity and capability of <strong>Saudi</strong> security and <strong>in</strong>telligence forces<br />
have greatly improved the security environment. Although much improved, the changes rema<strong>in</strong><br />
fragile and reversible.<br />
Corruption Return to top<br />
Overview<br />
Corruption, <strong>in</strong>clud<strong>in</strong>g bribery, raises the costs and risks of do<strong>in</strong>g bus<strong>in</strong>ess. Corruption<br />
has a corrosive impact on both market opportunities overseas for U.S. companies and<br />
the broader bus<strong>in</strong>ess climate. It also deters <strong>in</strong>ternational <strong>in</strong>vestment, stifles economic<br />
growth and development, distorts prices, and underm<strong>in</strong>es the rule of law.<br />
It is important for U.S. companies, irrespective of their size, to assess the bus<strong>in</strong>ess<br />
climate <strong>in</strong> the relevant market <strong>in</strong> which they will be operat<strong>in</strong>g or <strong>in</strong>vest<strong>in</strong>g, and to have an<br />
effective compliance program or measures to prevent and detect corruption, <strong>in</strong>clud<strong>in</strong>g<br />
foreign bribery. U.S. <strong>in</strong>dividuals and firms operat<strong>in</strong>g or <strong>in</strong>vest<strong>in</strong>g <strong>in</strong> foreign markets<br />
should take the time to become familiar with the relevant anticorruption laws of both the
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