#1GLOBAL COMPETITIVENESS FORUM منتدى التنافس الدولي Capital Markets & Private Sector Development in Saudi Arabia: Focus on Debt Capital Markets GCF2015 Competitive Governments Dr. Yahya Alyahya, CEO Gulf International Bank, B.S.C. Session: The Role of Banking & Innovative Financing in Competitive Economies Global Competitiveness Forum 2015 Riyadh January 26-27, 2015#2AGENDA Development of the Saudi Private Sector MENA Private Sector Funding Challenges Sizing GCC Long-Term Investment Demand (2014 - 2035) Enhancing the Role of the Private Sector Private Sector Development Opportunities: Saudi Arabia The Role of Financial Development: Focus on Debt Capital Markets Development Challenges Facing the GCC Debt Capital Markets Saudi Arabia's Long-Term Funding Challenge Unlocking New Sources of Long-Term Finance: The Way Forward Slide No. 1 2 2 3 4 5 6 7 8 6 10 The Role of Small & Medium-Sized Enterprises in Private Sector Development#380% 70% 60% 50% 40% 30% 20% 10% 0% 1970 1972 1974 1976 - 1978 - Development of the Saudi Private Sector Composition of GDP (1970-2013) Private Sector Contribution to GDP and Budget Expenditures (1970 - 2013) 100% 1,200,000 Periods of substantial increases in non-oil private GDP growth 90% 1980 1982- 1984 - - 986T 1988 - 1990 1992- 1994- -966T 1998- Oil Sector GDP Non Oil Government Sector GDP Non oil Private Sector GDP 2000 - 2002- 2004 - 2006 2008 Development of the private sector has exhibited an erratic trend. GCF2015 Competitive Governments 2010- 2012- SR Mn 1,000,000 800,000 600,000 400,000 200,000 0 1970 1972 1974 1976 1978 1980 1982 - 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006. 2008_ Non oil Private Sector GDP Budget Expenditures The private sector is dependent on government spending. Slide No. 1 2010 2012#4MENA Private Sector Funding Challenges Global Funding Patterns (2013) Bank Assets ■Bonds Stock Market Capitalisation WORLD AVERAGE Middle East Latin America Emerging Asia North America European Union World 0% 20% 40% 60% 80% 100% Banks constitute the main source of funding for economic development and growth in the MENA region. GCF2015 Competitive Governments OECD Countries GCC AVERAGE Bahrain UAE Kuwait Oman Saudi Arabia Qatar Private Sector Credit to GDP (2013) 0 40 80 120 160 Private sector credit to GDP in Saudi Arabia is the lowest among the GCC countries and less than half of the world average. Slide No. 2#5Sizing GCC Long-Term Investment Demand (2014 - 2035) Investment Demand by Sector (US$ Billion) $175.2 $95.9 $434.1 $1,021.3 $1,435.6 Infrastructure Breakdown (by sector) $3,162.1 Roads 16% Seaports 2% Airports 7% Industry Petrochemicals Oil & Gas Infrastructure Real Estate TOTAL GCF2015 Competitive Governments Power 44% The role of the private sector needs to be enhanced to help meet the massive investment needs. Saudi Arabia accounts for nearly 40% of the total investment demand of the region. Rail 18% Telecom 2% Water 11% Slide No. 3#6Enhancing the Role of the Private Sector Why is it Important? Private sector is a key driver for: Balanced development Economic diversification Improving productivity Boosting the gross domestic product Enhancing the competitiveness of the domestic economy Creating employment What are the Enablers? Reforms to improve the business and investment climate: Policy environment and institutions Regulation & Laws Infrastructure Business facilitation & economic diversification Macroeconomic environment Financial market development GCF2015 Competitive Governments Slide No. 4#7Private Sector Development Opportunities: Saudi Arabia Strong sovereign, economic, and social support Consistent growth at macro-level and ongoing policy of diversification BROAD ECONOMIC DEVELOPMENT AGENDA Regional socio- political developments and increased social pressure High population growth Need for increased job opportunities. Rising demand for utilities (i.e. power, water). Growing demand for housing. Rising demand for education and health services. Vast infrastructure spending needs across a multitude of sectors. Further development of economic sectors. New emphasis on labor intensive manufacturing sectors. Increased emphasis on economic diversification and privatization. Expand economic role of private sector. Enhance foreign direct investment inflows. NEED FOR EXPANDING FINANCING SOURCES AND PROVIDE INNOVATIVE FINANCING SOLUTIONS TO FACILITATE PRIVATE SECTOR INVOLVEMENT SUCH AS DEEPENING DEBT CAPITAL MARKETS GCF2015 Competitive Governments Slide No. 5#8The Role of Financial Development: Focus on Debt Capital Markets Developing local debt capital markets must become a priority for the Saudi government, given the strategic role of the public sector in deepening financial markets. ADVANTAGES: • • • Developing local debt capital markets is an important component of providing innovative financial solutions for an economy towards enhancing the private sector. Deep, efficient local markets are the foundation for a thriving private sector, the key driver of jobs and growth. Debt capital markets create access to long-term, local currency finance. Debt capital markets can mobilize private sector funds to finance infrastructure, housing and other priority sectors, thereby reducing dependence on government financing. Countries with strong local equity and debt markets are more resilient to economic uses. Efficient local capital markets protect economies from capital flow shocks and reduce dependency on foreign debt. GCF2015 Slide No. 6 Competitive Governments#9Development Challenges Facing the GCC Debt Capital Markets . Change market mindset from a bank market to an investor market: bank loans are cheaper and less complex. Critical need to shift to more capital market financing of GCC project finance transactions. GCC debt capital markets remain shallow and face numerous challenges. ○ O Governments have reduced outstanding debt in recent years. Need for increased issuances of government paper across a range of tenors to build domestic yield curve. Absence of institutional investors and secondary markets. GCF2015 Competitive Governments O Need for regulatory overhaul to boost local debt capital market development. ○ Scarce investor confidence and challenging global economic and finance conditions. o Challenging socio-political regional environment. Absence of supporting infrastructure i.e. domestic rating agencies, qualified brokerages etc. Slide No. 7#10Saudi Arabia's Long-Term Funding Challenge Dominant Current → Desired Risk transfer & private sector efficiency benefits Infrastructure (Long-term Funding) Partial Partial Infrastructure (Long-term Funding) Public Sector Financing Private Sector Financing Public Sector Financing Sources of Funds Government Revenues Development Institutions GRE Sovereign Bank Finance Conventional Bonds Islamic Finance (Sukuks) Export Credit Agencies Sources of Funds Equity GRE Corporate Public Private Partnerships (PPPs) Sources of Funds Sovereign Wealth Funds (SWFs) Development Institutions Export Credit Agencies GCF2015 Competitive Governments Dominant Private Sector Financing Sources of Funds PPPs Asset Finance Islamic Finance (Sukuks) Conventional Bonds GRE Corporate Equity Bank Finance Export Credit Agencies Slide No. 8#11PREREQUISITES Unlocking New Sources of Long-Term Finance: The Way Forward How can Saudi Arabia bridge the gap between the 'Current" and the 'Desired' financing structure? Policy Factors Enhance transparency & corporate governance standards. Deepen financial markets. Deepen Sharia-compliant system. Support Factors • Make regulatory framework robust & effective. Change the mindset to accept the private sector as a capable provider of public services. Engage support of Multilateral institutions. Provide government guarantees & explicit support initially. Increase supply of bankable projects evaluated on financial terms. Systems Factors • Establish credit rating system for infrastructure projects. • Establish an integrated process with major clearing systems. GCF2015 Competitive Governments 'DESIRED' FINANCING STRUCTURE Slide No. 9#12The Role of Small & Medium-Sized Enterprises (SMEs) in Private Sector Development Innovative financing sources will also encourage the development of SMEs. Why is it Important? A well developed SME sector is a key driver for: Diversification into non-oil businesses and ancillary sectors. Growth in productivity Boost the export base Creating employment opportunities Enhancing living standards Improving wealth distribution Diversifying lending avenues Encourage financial market development Enhance economic efficiency and institutional structure GCF2015 Competitive Governments What are the Enablers? Coordination between relevant authorities and stakeholders to develop supportive regulatory and legal framework. Need for government financial support structure (i.e. in the form of partial guarantees) to provide initial impetus for the development of the SME sector. Establish specialized institutions and teams within the banking sector with a SME focus to: Provide guidance and support on attractive business areas Provide support on business and financial management Coordinate with regulators to address bottlenecks Slide No. 10#13Disclaimer This report and its contents are prepared for information purposes only. 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