In the Kingdom of Saudi Arabia (KSA) growing industrial activities are driven, as they should be, by low-cost feedstock emanating from economies of scale due to large-scale oil, gas and petrochemical industries providing comparative advantage for energy-dependent downstream industries. 

Added to the kingdom’s location advantage, midway between Western and Far-Eastern markets, there should and could be rapid industrial growth into the future.
However, it should be noted that the KSA economy has developed a strategic dependence on exports for reasons that will be discussed in greater detail later.  Thus, just as in oil and petrochemicals, growing industrial activities in the non-oil sector in the kingdom depends more on international than domestic growth. This is okay since there are more constrictions on domestic than international growth as will be outlined below.
World Economic Growth
Major consensus projections for world economic growth indicate that 2005 will provide continuing positive growth. However, there is some indication that the world economy will slow down from the very robust pace of 2004 by the last quarter of 2005, continuing quite well until then mainly due to the US and Asia, while Europe will struggle to post a positive GDP.  The same cannot be said for 2006 and 2007 due to re-balancing required between these major trading blocs because of vast differences in their saving and spending rates.
The current revaluation of the dollar is part of the global re-balancing process underway, and part of the answer to the increasing US trade deficit that is reaching the danger point.  A falling dollar will not be enough to cure problems, as it will also involve a rising savings rate from the US consumer that currently is near zero. What will bring that about? When a possible recession comes in 2006 or 2007, world stock markets will drop. Average drops during a recession are 43 per cent. The US baby boomer generation will realise that the stock market and current bubble in housing prices are not going to bail out their retirement hopes. They will stop spending and start saving with a vengeance. While the US’  problem is solved, it will create more problems internationally, as the world will not like it when the American consumer retrenches.
Why should Saudi Arabia and its industrial sector be concerned with this situation? Because it is the US economy’s large trade deficit with China that is causing the current imbalance that will create serious worldwide adjustments when re-balancing seriously occurs.  This will adversely affect basic commodities and exports that the kingdom increasingly depends upon.
On the positive side, there is now most likely a floor in the mid-30s on oil. Additionally, as Asian demand (especially China) increases, the pressure on oil gets on the upside.  Thus low-cost energy, a comparative advantage that the kingdom offers, provides much greater support to its industrial growth and exports than many other economies during the re-balancing process that is expected somewhere in the next few years.
KSA industry - Export driven

Saudi Arabia’s total foreign trade is approaching SR50 billion, constituting a significant 60 per cent of total GDP.  On the positive side, this is an indication of openness of the economy and the ability to withstand competition upon joining the World Trade Organisation (WTO), which is imminent.  Other than the US (19 per cent), which is the top country for KSA exports, the next six in the order of importance are Asian countries (combined 42 per cent).  These Asian countries’ largest export market is also the US.
Select KSA industrial sectors’ growth in exports is shown in Table 1, indicating the Manufacturing & Others sector slightly exceeds the Petrochemicals sector in the latest annual reporting for 2003, with projections based on the Base Period 2000-2003.
They indicate that Manufacturing & Others will exceed Petrochemicals by nearly 30 per cent by 2007.  When considering all four sectors listed however, the greater growth of 67 per cent is shown in the Base Period than in the Projection Period of 36 per cent, reflecting potential re-balancing in the world market as well as important structural imbalances within Saudi industry. 
Nevertheless, by 2007 the two largest sectors will comprise nearly 80 per cent of total exports.  This again is due to these two sectors being primarily export-oriented since downstream industrial growth is lagging.  Construction Materials and Agricultural & Food, although primarily oriented to the domestic market, are still showing significant growth in exports. Together these select sectors illustrate once again that the KSA industrial sector is highly export-oriented.
Sector Growth

When examining select sectors growth in total industrial activity as opposed to only exports as above, Table 2 again illustrates the heavy dependence on Crude Oil, Natural Gas, Mining, Quarrying & other activities making up the Industrial sector as classified in this table. 
In short, the Industrial sector is the only one indicating double-digit growth!  The remaining six sectors’ growth varies from 8.3 per cent by 2007 in the Manufacturing sector (<40 per cent of Industrial sector growth) to a minus (-1.9 per cent) growth in the Agricultural, Forestry & Fishery sector.
On the positive side, total industrial activity increases from only 4.14 per cent growth in the Base Period to 5.24 per cent in the Projection Period.  This indicates strengthening of total industrial activity in spite of world and domestic imbalances discussed above.
Foreign Direct Investment
Since international investment capital moves freely among countries seeking to maximise return while minimising risk, it becomes an excellent measure of industrial growth potential in the kingdom.  Table 3 indicates that Foreign Direct Investment (FDI) greatly favours the Industrial sector with >75 per cent investments therein versus  >23 per cent in Services and >1 per cent in Agricultural.  Furthermore however, it is interesting to note that FDI exceeds domestic investment by more than 2:1 in the two major sectors with only very small domestic investment indicated in the Agricultural sector.  This sends a clear message about investor confidence in these sectors, ie foreign investors recognise the imbalance in sector activity in Saudi Arabia and invest in far greater numbers in the Services sector, which is a necessary condition for increased industrial growth.  Only Saudi Arabia in the entire GCC region has a Services sector contributing less than or greater than 50 per cent to GDP, whereas the rest indicate >50 per cent share, which is  shown universally as a necessary condition for higher industrial growth. Again, this requires some explanation as to why domestic investors are reticent in investing in sectors necessary for faster growth.
Domestic Demand

So far discussion has centered on the Supply side, i.e. goods being produced for domestic utilisation and export.  In order to explain the imbalance among investments, sector activities and growth, it is important to examine the Demand side.  In this regard, Table 4 indicates anaemic Per Capita Income growth of only 1.8 per cent in the Base Period that is far less than the population growth rate, explaining why even this low rate is not maintained in the Projection Period that averages slightly lower at 1.7 per cent.  Further, the growth rate of Saudi Wages is negative throughout, although averaging a little better in the Projection than Base Period (-3.9 per cent vs -4.5 per cent).  Although as reported, but usually not believed by the average Saudi wage earner, decline in Consumer Prices throughout the Base Period averages 0.4 per cent, The Projected Period indicates a rise averaging 2.3 per cent. Utilising these three factors as a proxy variable for Net Growth Disposable Income as indicator for consumer demand, it is seen that weakness emanates from Demand, not the Supply side.  In fact, consumer demand is significantly weak as shown by -2.3 per cent in the Base Period, worsening to -4.5 per cent in the Projection Period on average.
Findings
By examining select economic indicators as shown in Table 5 it is further seen that:
• Growth in Population slows slightly (Base 9 per cent, Projected 8 per cent) as Per Capita Income declines and education levels rise
• Labour Force growth is constant (Base 3 per cent, Projected 3 per cent) as technical education lags behind sector needs
• Government Revenue continues to increase significantly (Base 14 per cent, Projected 24 per cent) benefiting from FDI investments in extractive and downstream sectors with government controls as well as FDI-driven services providing greater efficiencies
• Government Expenditure declines (Base 9 per cent, Projected 5 per cent) due to increased privatisation and government reforms
• Goods Exports increase most of all as expected from increased globalisation (Base 23 per cent, Projected 32 per cent)
• Goods Imports slightly decline due to limiting demand as discussed above (Base 22 per cent, Projected 20 per cent)
Change Required
From the above (limited by inadequate sector data) analysis it is evident that structural imbalances exist which are greater on the Demand side than Supply side, which should not be a surprise since the KSA economy is in rapid transition from an internal-development-oriented economy to an export-oriented economy based on its energy-related comparative advantages. 
The kingdom is now a mature economy requiring new industrial growth policies.
Domestic Investor View

Domestic investors operate in a protected environment in that foreign investors cannot invest in the Saudi stock market or real estate.  Due to benefits of the rapidly expanding export sector, increased earnings accruing solely to Saudi investors chase too few other industrial opportunities. It should be noted that the Saudi stock market is the largest in value with the fewest number of industrial listings in the region.  Surplus domestic capital drives Saudi stock prices and land values higher than their real values based on earning capacity.  Saudi investors, realising returns on a quarterly basis and often doubling their investment value from stock and real estate investments, shy away from long-term industrial investment alternatives that have internationally determined expected returns.  This greatly explains why FDI investments are currently exceeding domestic investment in Saudi Arabia’s industrial joint-development activities.  Additionally however, astute Saudi investors are aware of weak domestic demand for non-export-oriented industries in the kingdom.
On the other hand, domestic investors are reticent on funding studies and the up-front cost of determining whether a particular sector and/or industrial investment opportunity will be feasible.  This probably more than any other factor explains why foreign investors dominate in the larger industrial projects. 
Industrial Investment Opportunities

The following industrial investment opportunities should be pursued more aggressively by Saudi investors:
• Gas-related Industries since international demand for gas is growing much faster than oil due to environmental concerns worldwide. 
• So far Petrochemicals have led other sectors in private placement of capital.  Although private investment has previously been concentrated on downstream petrochemical projects, more capital placements are expected in the near future in basic petrochemicals as well due to allowed privatisation as opposed to government-owned domination of the past.
•  Independent Power & Water Projects (IPWP) provide the greatest opportunity for domestic dominated industrial investments.  The Power & Water Utility Company for Jubail & Yanbu (MARAFIQ) is a good example of this. 
• Downstream Supply Industries providing goods and services to the above energy-related industries will continue to provide greater breadth and depth for industrial development and private placement of capital than any other sector.
• Steel & Aluminum Related Industries growth, made possible by expanding production of steel and aluminum in the GCC, plus the requirement of the above-mentioned industries to supply their needs, provide a wide-ranging set of investment opportunities.
• Mining-Related Industries will be a wave of the future for industrial development opportunities. Astute investors should watch mining development closely as the timing of implementation is less certain than for most industries due to the required long lead-time in developing extractive mining activities.
• Within the Agricultural, Forestry & Fishery sector the greatest opportunity exists in dairy and poultry value-added activities by current operators, with expanion possibility in saltwater fish farming should recent domestic developments in this industry prove favourable.

* Dr Cox is also executive director, Al-Sudairy Foundation & co-owned Global Best Consult; executive director, International Development, ASHTF; executive director, Development Growth International, Phoenix; and CFO/treasurer, Developing Growth Ltd, Phoenix. 
With more than 25 years’ experience in the Middle East and having served on 15 international assignments for public and private entities as well as continuing project development activities, Dr Cox provides a unique perspective on international industrial development.  A selection of the most-viable industrial and market opportunities within the MENA region, ready for investment, is available upon request by contacting Dr Cox.