The GCC’s long-term economic interests should encourage resolution of political crisis

Intraregional competition among GCC countries is normal and it has benefited foreign companies due to its encouragement of infrastructure upgrades in finance, ports, and tourism. However, the decision by Bahrain, Saudi Arabia, and the UAE to withdraw ambassadors from Qatar is an unprecedented move and it is a big deal. The political divide is over regional security, particularly Qatar’s ongoing support for Egypt’s Muslim Brotherhood and accusations of meddling in “internal affairs directly or indirectly” of other GCC states.

An extended diplomatic row between Qatar and other GCC states would have significant ramifications on the business climate, because of trade ties and the drive towards further economic interdependence within the region. For example, Asia is the top destination for Qatari exports, but Saudi Arabia and the UAE are two of the country’s top three sources of imports.

Still, the region’s long-term economic interests should help to resolve this political crisis. There is a massive amount of coordination required among GCC countries for the World Expo 2020 in the UAE and World Cup 2022 in Qatar. Without close cooperation, the region’s most ambitious projects will be difficult to achieve. More importantly, trade potential among GCC states lies within the non-oil sector. This means that maintaining good relations will be critical as each state seeks to diversify away from dependence on natural resources exports. Moving towards a sustainable economic path, in order to create jobs and raise the standard of living, is the key to long-term security in the region. The failure to cooperate would represent a far greater threat to the region’s future than the current political crisis.

Companies should take a wait-and-see approach rather than making any immediate changes to their regional investment plans for 2014 and beyond. If the political crisis is protracted, executives should assess whether there is an impact on getting goods to their markets, operating costs, and partner relationships.

Five Political Events that will Impact your MENA Business in 2014

My last post focused on an overlooked topic in the MENA region: business opportunity. This post covers a more popular regional theme: political risk. MNCs must prepare for how the following political events could impact their MENA business performance in order to be successful in 2014:

1.   The next round of Iran nuclear talks beginning on February 18

  • Why it matters: A deal would lead to the opening of MENA’s largest untapped market, while failed talks would shake business and consumer confidence throughout the region.
  • Political context: It is unclear whether a final deal involving Iran’s nuclear program can be reached this year. Decades of an uncoordinated international sanctions policy would be difficult to roll back even with a final agreement, particularly if the process is made into a campaign issue ahead of US congressional elections later this year. 
  • Business impact: Companies without a local presence should manage expectations regarding the pace of market entry if a final nuclear deal is reached; the sanction rollback process could take quite a long time and economic recovery will take longer. Established companies would have a head start against rapidly rising competition, but do not expect an immediate easing of restrictions on critical business activities like repatriating funds.

2.   Algeria’s presidential election, which is scheduled for April 17  

  • Why it matters: Algeria could become a major FDI destination if critical economic reforms are implemented after the election.
  • Political context: Companies should monitor whether President Abdelaziz Bouteflika announces that he will run for a fourth term. While the ruling National Liberation Front (FLN) could field another candidate who would win, Bouteflika’s absence from the election would be seen as a shakeup in the political order, leading to political uncertainty.
  • Business impact: If President Bouteflika decides to run for a fourth term, it could signify his desire to usher in a new economic era that would enshrine his legacy. Economic reforms are badly needed, particularly to ease the process for foreign investment and market entry. Some economic reforms could be aimed at encouraging local production in important sectors such as pharmaceuticals, as the government seeks to reduce its import bill and reorient spending toward local investment.

 3.   The Iraqi parliamentary election, which is scheduled for April 30

  • Why it matters: An election accompanied by significant violence would lead to another year of high business costs and frequent transportation disruptions. However, a modestly successful election could encourage stability and boost substantial business potential.
  • Political context: Politically disaffected Sunnis (and some Shiites) are not motivated to seek change through the ballot box, because they feel excluded from the political process. Low voter turnout and significant violence would further undermine political cohesion and fuel ongoing instability. On the other hand, if the federal government and Sunni tribal leaders cooperate to combat militants in the Anbar province, this could act as a building block to ease tensions ahead of the election.
  • Business impact: An election that is widely seen as a failure will lead to more violence and necessitate companies to ensure contingency plans protect staff and local partners. On the other hand, if the election is seen as a modest success, it could slow down the momentum of ongoing violence. Companies would be in a better position to establish a foothold to build market share and to expand geographically with a sustained improvement to political stability.

 4.   The expiration of the 6-year term of Lebanese President Michel Suleiman in May

  • Why it matters: A new government must be agreed upon before President Suleiman’s departure from office or a worsening security situation would hurt business locally and across the Middle East.
  • Political context: To limit instability, it is critical that a new government is formed before the expiration of President Michel Suleiman’s six-year term in May. Without a functioning government, it has been difficult for Lebanon to contain rising instability since mid-2013. Last Saturday’s car bombing in Hermel, which killed four and injured 30, is the latest example of spill over from the Syrian civil war. The deteriorating security situation cannot be improved without a new government.
  • Business impact: Companies should brace for escalating violence, especially if there is no move towards political consensus. The volatile environment will continue to undermine consumer confidence, depress foreign investment, and raise the cost of doing business. Regionally, ongoing instability contributes to rising competition in the stable GCC region. In addition, if Lebanon becomes more enveloped in the Syria conflict, it threatens to disrupt transportation across the Middle East given the integral role played by the Port of Beirut for accessing nearby markets.

 5.   The announcement of any new Saudi labor regulations during 2014

  • Why it matters: Senior executives rely heavily on the Saudi market for overall MENA growth. Tighter labor regulations could slow down business enough to threaten MENA performance targets in 2014.
  • Political context: The government could tighten labor regulations without more private sector hiring of Saudi nationals, which increased only 4.6% between 2010 and 2012. The labor market must absorb 100,000 Saudi graduates per year and the government is willing to accept short-term economic pain in exchange for a long-term rebalancing of the job market.  Official figures indicate that Saudi Arabia has deported up to 1.25 million of 9 million foreign workers since 2013.
  • Business impact: As a result of the imbalance created by the mass deportations of foreign workers, some construction firms are struggling with higher costs and worker shortages. As a result, banks must deal with an increase in late payments and non-performing loans. More stringent labor regulations would exacerbate this situation and lead to tighter credit conditions, undermining consumer spending and business activity in 2014.

Uncovering Opportunities in the Middle East and North Africa

Despite news headlines highlighting political instability in the Middle East and North Africa (MENA) region, business continues as usual. FSG estimates that only 14% of the region’s GDP, which is expected to surpass US$ 4 trillion by 2017, comes from unstable markets. With private consumption forecast to grow more than 7% in MENA and spending power nearly 50% higher in GCC markets than in Central and Eastern Europe, there are plenty of investment opportunities for foreign multinational companies.

Three market developments to watch in 2014

  1. Iraq: This is your last chance to stay ahead of competition in Iraq. Devastating violence deservedly draws media attention, but it does not preclude the emergence of significant business opportunities. Iraq has the fifth-largest oil reserves in the world and funds are already being spent on infrastructure upgrades in education, healthcare, housing, IT, and retail. Iraq is expected to have MENA’s second-largest youth population within a decade, providing future customers to consumer-oriented companies. Many companies are working with local partners to capture these opportunities, while minimizing security and operational risks. First-movers are positioned to build customer loyalty, establish relationships with key government officials, and gain market share. FSG clients should read Frontier Market Access: Iraq to learn about strategies for entering the market, finding local partners, and navigating the difficult regulatory environment.
  2. Iran: Oil analysts estimate that global crude prices could drop by up to 15% following an international agreement involving Iran’s nuclear development program. Companies should expect lower oil prices to provide some relief to oil-importing countries in North Africa and the Levant, plagued by dwindling currency reserves, and as a result, currency volatility since 2011. Sanction rollbacks will also lead to more companies assessing Iran as a frontier market. Still, senior executives should manage expectations for Iran. Even if a deal is reached, it will be complicated to undue decades of an uncoordinated sanctions policy.
  3. Saudi Arabia: The recent crackdown on illegal labor is designed to provide long-term economic benefits. And while Saudi Arabia remains the top MENA market for many companies, senior executives should plan for higher inflation, which could impact consumers and small businesses, and project delays at least through the beginning of 2014. Close to one million migrant workers left Saudi Arabia this year. Some small businesses, such as bakeries and grocery stores, were forced to close after losing workers. Costs are up for electricians, mechanics, and plumbers. Foreign companies should allocate additional resources for recruiting and developing Saudi nationals due to mounting pressure from the government. FSG clients should read the Saudi Quarterly Market Review Q3 2013 report for strategies to overcome labor challenges.

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Syria Intervention Impacts Your MENA Business

Syria USThere are growing indications that the US is readying for a military intervention in Syria after last week’s suspected chemical weapons attack, which killed up to 1,000 people in a rebel-held Damascus suburb. This post highlights three business challenges likely to arise from an intervention and three suggested actions for multinational companies operating in the MENA region.

Business impact:

  1. Higher Energy Prices: Anticipate a spike in oil prices that could last for days or weeks. Oil analysts are estimating that Brent Crude could exceed US$120 per barrel as a result of a military strike. In extreme circumstances, Société Générale envisions prices climbing up to US$150 per barrel in the short term. A sustained spike in energy prices could lead to increased cost of production and less discretionary income available for households.
  2. FX volatility: Higher energy prices could place significant pressure on currencies in import-dependent countries. Several countries are near 10-year lows in currency reserves (Tunisia, Morocco, Jordan, and Lebanon) and they could have trouble covering the cost of imports during a sustained conflict. Currency depreciation is possible as reserves run low, putting further pressure on imports.
  3. Supply-chain disruptions: It is unlikely that military intervention will impact supply chain through key ports in the GCC or cargo traffic through the Suez Canal. However, even the threat of disruptions to shipping routes through Lebanon’s Port of Beirut could increase insurance rates and lengthen travel times for goods destined for other parts of the Levant, Eastern Mediterranean, Iraq, and Europe.

Suggested actions:

  1. Lend dollars to top customers and partners: In MENA countries that are impacted by Syrian spillover, provide liquidity to partners and customers to help them maintain local operations in case of a liquidity crisis. Lending can be used to build loyalty and extract concessions.
  2. Educate your team on the impact of FX volatility: Factor currency depreciation into next year’s strategic plans for import-dependent countries that are vulnerable to commodity price shocks. Use our quarterly report on FX volatility to align your team and adjust your strategy.
  3. Anticipate higher transportation costs:  Hold inventories in several locations to ensure goods can reach customers. Protect your staff and products by identifying secure facilities away from areas that could be targeted in the event of spillover from the Syrian conflict.

Royal Succession Planning at Saudi, Inc.

Qatar’s royal succession puts Saudi Arabia’s unresolved leadership question back into the spotlight. While it is unlikely the next king will alter Saudi Arabia’s path, it is important for companies to be prepared given the prominence of the market in their portfolio.

A survey conducted last year revealed that FSG clients count on Saudi Arabia to deliver sales growth rates than are more than double the overall average in the Middle East and Africa region. In addition, Saudi Arabia is forecast to receive 60% of FDI directed to the GCC by 2014, indicating a heavy reliance on the Saudi market among foreign investors.

Saudi Arabia v MEA and GCC

While a smooth transition is more likely than a botched one, the lack of political certainty will keep senior executives up at night. To understand why a smooth transition is important to business, consider how the king’s role has evolved during the past several decades. King Abdullah is essentially the CEO of one of the largest corporations in the world.

Four ways the king manages Saudi Arabia, Inc.

  1. Messaging to the board: The Saudi state’s legitimacy is built on support from religious conservatives, and the king must ensure they are satisfied with the direction of the country
  2. Keeping employees motivated: The king manages royal family rivalries by appointing new princes to positions of importance. Princes are motivated to remain loyal based on the prospect of increasing power that is laid out by this policy. The king also allocates generous allowances to more than 25,000 royal family members in exchange for support
  3. Setting the corporate vision / strategy: King Abdullah’s cautious reform agenda is slowly improving the investment climate and aims to promote sustainable growth. While the king cannot control all of the implementation, his vision plays a key role in the shaping the direction of the kingdom
  4. Portfolio Management: As part of the king’s power to set a strategic agenda, he sets the tone for which sectors and sub-regions benefit the most from public spending

Just as corporate entities are vulnerable to a lack of clear succession planning, so is Saudi Arabia Inc. King Abdullah has done much to alleviate these concern in recent years, positioning young princes in key ministerial and gubernatorial posts, and ensuring the princes that are next in the line roughly share his vision for the country. Still, doubts will likely persist until Saudi Arabia is able to successfully move to the next generation of leaders.

In preparation for changes in Saudi Arabia, companies can take actions now to protect their business:

  1. Establish and maintain government contacts on multiple levels: ministerial, regional, and municipal. This will promote cohesive relationships during a leadership transition
  2. Extend receivables for key customers and buy long-dated oil futures if you are concerned about a sustained disruption to the business landscape
  3. Do not alter or reduce investment plans in Saudi Arabia, particularly in social sectors like education and healthcare
  4. Communicate to corporate that you have a plan in the event of a royal succession

Syrian Civil War: Wait-and-See Approach Will Hurt MNCs in the Middle East

Syria

(This post is adapted from FSG’s report on how the Syrian Civil War impacts the MENA business climate. The report is part of FSG’s monthly series on managing volatility in the MENA region and is available for FSG clients here.)

Seasoned Middle East executives are confident in steady sales growth rates regardless of sensational news headlines from the region. Companies that overreact to the region’s latest developments risk falling behind aggressive competition, especially from the Gulf and Turkey. However, Western multinational companies should avoid following the lead of their governments that are taking a wait-and-see approach on Syria.

Companies must adjust business plans for the Levant region and surrounding markets as the Syrian Civil War will not end anytime soon. Fighting has already led to more than 70,000 deaths, one million refugees, and two million internally displaced in Syria. The conflict will increasingly spill over Syria’s borders and hurt economic and political stability in Iraq, Jordan, Lebanon, Israel, and Turkey.

Planning ahead allows companies to weather short-term instability, while still positioning for long-term growth in the Middle East. FSG suggests that businesses consider taking actions across core functions:

  • Human Resources: Mitigate risk for staff and local partners located in areas that are most vulnerable to spillover from Syrian fighting: Anbar province, Iraq; Jordanian-Syrian border areas; Tripoli, Lebanon; Bekaa Valley, Lebanon; southern Lebanon; northern Israel; and southeastern Turkey. Designate alternative locations for offices, outline emergency plans regarding whether employees should come to the office, and set up IT capabilities to allow people to work remotely.
  • Logistics: Reorient shipping routes through Lebanon’s Port of Beirut and Jordan’s Port of Aqaba until at least 2015. Syrian ports are not viable supply chain options for transiting goods to other parts of the Levant, Eastern Mediterranean, Iraq, and Europe. Regionally, prepare for increased insurance rates and longer transportation times for the duration of the Syrian Civil War, which could last years without any major change in the environment, such as an international intervention.
  • Sales: Reassess sales targets for your businesses in Iraq, Jordan, and Lebanon. The Syrian Civil War represents an immediate threat to economic stability in Jordan and Lebanon and political stability in Iraq. Emphasize a market share-driven strategy to position for long-term growth after political turbulence associated with the Syrian Civil War subsides. Your business can focus on a profitability-driven strategy in relatively stable and economically vibrant markets in the Gulf Cooperation Council like Saudi Arabia, Qatar, and the UAE.
  • Marketing: Utilize social media tools to establish customer loyalty, recruit local talent, and reach new customer segments in the region. Even if the corporate office wants expansion plans to be put on hold, this is an effective way to maintain and create new relationships without the cost of a strong physical presence on the ground.
  • Partners: Establish relationships with Syrian-run businesses that moved operations to nearby countries. These businesses will be positioned to reenter the market after the cessation of fighting. Egypt is an attractive destination for Syrian businesses looking to take advantage of low labor costs, reasonable cost of living, and the local textile industry infrastructure. Jordan is a natural destination for Syrian-run tourism companies that focus on the broader MENA region. Lebanon’s multi-communal society is attractive to Christian businessmen who fled Syrian cities like Aleppo, Damascus, and Homs.

 

Preparing Your Business for Subsidy Rollbacks in Morocco

More than two years of economic and political turmoil in North Africa has reoriented foreign investors toward the most stable market in the sub-region: Morocco. The country’s relative stability is mostly driven by two factors: steep increases in food and fuel subsidy spending and modest political reforms following street protests in February 2011. These two factors have allowed Morocco to avoid the same fate as its North African neighbors and emerge as a top investment destination.

Running out of money

Government spending on subsidies has promoted stability, but it has also contributed to Morocco’s precarious fiscal position. FX reserves are barely enough to cover four months of imports, which is a 10-year low, and the budget and current account deficits are straining the economy. This is forcing the government to consider cutting the same food and fuel subsidies that promoted stability. Such a move could come this year and impact all industries operating in the country, raising input and supply chain costs and reducing customer purchasing power. The government estimates that reducing or eliminating subsidies would lead to annual inflation rates jumping to 7% from 2% during the next few years.

 

Planning for subsidy rollbacks this year

Companies should prepare a flexible response to Moroccan subsidy rollbacks to mitigate risk and identify opportunities. The impact of subsidy rollbacks will depend on which areas of the economy are targeted and speed of implementation. Below are three subsidy rollback scenarios and recommended actions for foreign companies:

1. Full subsidy rollback (high impact/ least likely)

This scenario includes rolling back fuel subsidies, which comprise more than half of total subsidy spending. A change to heavily subsidized fuel would reverberate across Morocco’s economy and lead to a higher cost of distribution and inputs. Companies should plan to adjust tactics for core functions like finance, marketing, and sales in the context of a period of significant belt-tightening in 2013. All industries should look into forward contracts for local inputs given the likelihood of a spike in inflation. Technology companies should position their products as cost-saving solutions and emphasize their after-sales services.

2. Partial subsidy rollback (medium impact/ most likely)

This scenario includes electricity and sugar with an initial reduction of up to one-third of total subsidy spending. The plan would undermine private consumption, especially for the middle class which is not eligible for cash payments that could go to as many as 2 million poor Moroccan families.  Companies should consider supporting top partners and offering special prices to important customers, because higher electricity costs would hurt local businesses. Consumer goods companies should switch to smaller packaging and emphasize value items in their product portfolio.

3. Limited subsidy rollback (low impact / somewhat likely)

This scenario primarily focuses on sugar, which is an obvious target for the government. Artificially low prices created by subsidies led Moroccans to become among the highest per capita sugar consumers in the world. Not all companies will need to respond to limited subsidy rollbacks. FMCG and other consumer goods companies should consider offering short-term financing to top partners and engaging the overnment as a preemptive step to turn the potential crisis into an opportunity.

Do not run, Do not hide

Instead of investing time and energy in lobbying the government to spare your industry, leading companies should consider preempting the reform initiative. Assess the feasibility of waving your eligibility for subsidies, agree to replace government payments for top suppliers for a two- or three-year period, or adjust pricing downward as part of a corporate social responsibility effort. This effort could be a high-profile move and highlighted as an effort to support the Moroccan people during tough economic times.

Maintaining a foothold in Morocco is critical for foreign companies operating in North Africa, which has the greatest long-term investment potential in MENA. The region is not for the faint of heart, but companies are often rewarded for sticking out short-term instability for long-term opportunity. Other companies may leave in response to protests or uncertainty, opening up opportunities for gaining market share.

Surprise Israeli election results: It’s the economy, stupid

Israel

Israel’s surprising 2013 general election results weaken Prime Minister Benjamin Netanyahu’s political power, which has wider ramifications on the economic and political landscapes in Israel, the region, and beyond. The election results reduce the likelihood of an Israeli strike on Iranian nuclear facilities, assuming the governing coalition moves toward the center. This could lead to lower global oil prices, because it would help reduce a key risk to MENA regional stability in the short term.

A pre-election poll by Ha’aretz Daily explains some of the underlying factors that influenced the surprise gains for leftist and centrist parties. Only 10% of Israeli voters ranked Iran’s nuclear program as the most important issue that they were considering, while nearly 50% cited socioeconomic issues as their top concern. Security issues remain important, but companies should expect the next government to prioritize addressing economic issues like high cost of living, income inequality, the budget deficit, and social benefits for ultra-religious groups.

Netanyahu and the Knesset will be under pressure to rebalance the Israeli economy, while following through on campaign promises to not raise taxes. One consequence could be tax hikes on large companies rather than Israeli citizens to raise government revenue. To address a widening budget deficit, Israel’s central bank is calling for tax hikes and significant cuts to the state budget for education, healthcare, infrastructure, and defense. The central bank governor also warned that failing to raise taxes and cut the budget will result in significantly higher budget deficits for several years.

 

Saudi Arabia: 7 Major developments for businesses to monitor in 2013

Saudi Arabia will be the critical growth driver for foreign companies operating in the Middle East and North Africa (MENA) in 2013. However, economic and political uncertainty in the region has led many companies to form an overreliance on the Saudi market. As a result, senior executives must ensure they are prepared to tackle major developments that could alter Saudi Arabia’s investment climate next year. FSG has identified 7 major developments across the political, economic, and business landscapes that could impact the investment climate significantly.

1) Regional stability
Saudi Arabia could become increasingly involved in neighboring conflicts in Bahrain and Yemen to prevent spill over. In addition, a longstanding rivalry with Iran could escalate in Iraq, Lebanon, and Syria. While it is unclear whether or not Iran perpetrated this year’s cyber-attack that rendered useless 30,000 computers for Saudi oil giant ARAMCO, the Shamoon virus illustrated a potent, 21st century weapon that can be used against the sensitive oil infrastructure in the kingdom.

2) Domestic stability
Underreported unrest in Saudi Arabia’s oil-rich Eastern Province could escalate as a result of increasingly harsh crackdowns in 2013. Prince Mohammad, who is credited with pushing al Qaeda out of the country during the past 10 years, has been promoted to Interior Minister in part to maintain stability in the Eastern Province. Saudi Arabia has dedicated a chunk of its social sector spending program on the underserved province, which means plenty of investment opportunities in 2013 and beyond. However, more than a dozen Saudis were killed in Eastern Province protests in 2012. High unemployment and heavy-handed responses by the police remain catalysts for unrest.

3) Leadership succession
It is unlikely that the next leader of Saudi Arabia will change King Abdullah’s path drastically. Saudi Arabia needs to maintain close trade ties with Europe, Asia, and the US, given the country’s dependence on oil resources for export revenue and longstanding foreign investment plans to diversify the economy. If Crown Prince Salman were to become the next ruler of Saudi Arabia, it would represent continuity from King Abdullah’s reign.

The major concerns lie in the process of succession, particularly due to the opaque and untested Allegiance Council that is charged with selecting new leadership. King Abdullah has already set the precedent of bypassing the Council by twice selecting a new Crown Prince without utilizing the official mechanism. Assuming the Allegiance Council is activated, the process could still accentuate rifts between rival factions within the royal family. Behind-the-scenes infighting could spill out into the public eye, which would be a destabilizing factor in the kingdom. If the leadership role is passed to the third generation, it may ruffle the feathers of remaining princes in the second generation. Yet a dearth of qualified second generation princes means this generational leap is imminent.

4) Global economic volatility
Saudi Arabia is uniquely positioned to withstand global economic instability in the medium term due to currency reserves that surpass US$600 billion. Higher-than-expected oil prices this year will lead to a budget surplus for another year in a row. As a result, government spending priorities are unlikely to be altered by economic stagnation in Asia, Europe, and the US. Those spending priorities include: education, healthcare, housing, and transportation infrastructure.

On the other hand, a weaker global environment would dampen FDI flows into Saudi Arabia, particularly if the eurozone and US economies contribute to a slowdown in Asia. Economies in Asia are also important customers for Saudi exports such as oil, petrochemicals, and plastics. If global economic stagnation undermines oil prices, companies should expect more pressure on contractors to keep costs down to maintain their own profitability and keep government clients happy.

5) Consumer prices
Many Saudi consumers are insulated from the most severe swings in global commodity prices due to generous government subsidies. While Saudi Arabia was able to insulate its citizens from price spikes following international droughts in 2012, climate change will likely make food shortages a more common occurrence globally. Regional instability has the potential to disrupt transportation of goods across borders, which places upward pressure on food prices as well. Food costs account for 25% of Saudi household expenses so it will be difficult for the country to remain insulated to sustained global price swings.

It is unclear when Saudi Arabia will start to implement its new mortgage law, which should lead to an explosion in housing demand across the country. The current housing shortage places upward pressure on housing costs, but a significant increase in housing demand will be another factor to push up prices in the short term.

6) Labor regulations
Private sector firms are being fined if the majority of their workforce is non-Saudi with a penalty of US$640 for each excess foreign worker. While this is a negligible cost for foreign companies without a significant presence in the country, the fine could hit harder for local Saudi companies, many of which are foreign company partners and customers. The construction industry’s reliance on foreign labor, which comprises up to 95% of the workforce, could lead to project delays. All companies should diversify their workforce to include more GCC nationals, who are not counted as foreigners under the new labor regulations.

Saudi Arabia is committed to rebalancing the local labor market due to demographic trends that cannot be ignored. More than 60% of Saudi Arabia’s population is under the age of 24, and youth unemployment rates are up to 25% or higher. The economy must create an estimated 400,000 new jobs every year to bring down the unemployment rate. Currently, 90% of the private sector’s workforce is comprised of expatriates. This must change for the long-term viability of Saudi Arabia’s economy.

7) Rising competition
Volatility in the rest of MENA is leading to rising competition in Saudi Arabia where companies are focusing on market opportunities. Next year’s FDI inflows are expected to reach US$20 billion in Saudi Arabia, which significantly outpaces other regional investment destinations. Even among relatively stable and well-capitalized Gulf Cooperation Council countries, Saudi Arabia is rapidly growing its share of foreign investment from 54% in 2011 to a forecast of 60% by 2014.

Competition from GCC neighbors, especially Qatar, will push Saudi Arabia to increase its attractiveness for foreign businesses. For example, Saudi Arabia plans to invest more than US$200 billion in port infrastructure amid upgrades in Qatar as it prepares for the 2022 FIFA World Cup and in the UAE, which is upgrading Jebel Ali in Dubai and continuing to build out Khalifa Port in Abu Dhabi.

Assessing distribution partners in the Middle East and North Africa

Despite economic and political instability, the Middle East and North Africa (MENA)’s economies will continue to expand, offering both opportunities and risks. In the current business landscape, effective distributor management is a critical element to capitalizing on opportunities and mitigating risks in MENA.

Local partners can provide a buffer to operational risks in order to assuage the corporate center, which might be concerned about some of the more volatile markets. Local partners can also provide critical capabilities like market insight and value-added services, which help companies to capture growth opportunities that might otherwise be out of reach.

More than two-thirds of FSG clients that were polled said they rely on distributors to reach their customers in MENA. In addition, nearly 70% plan to expand their local presence during the next three years and distributors will play a critical role in this process.

Companies that are assessing new partners should vet the prospective distributors based on considerations that are unique to the MENA region:

MENA Distribution