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The Burgeoning Entertainment Industry in Saudi Arabia

Date : 19/06/2018
Author:  Marmore MENA Intelligence

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As a part of its broader economic diversification plans, Saudi Arabia took an unprecedented policy move by framing a new entertainment policy. In line with the Kingdom’s Vision of 2030 of creating a vibrant society, General Entertainment Authority (GEA) has been established and an investment of US$ 64 Bn has been planned (BBC News 2018). GEA is part of the subprogram, Quality of Life under the Vision 2030 which aims for improving lifestyle by increasing entertainment and cultural avenues.
Entertainment policy area witnessed sudden jerk in recent times in Saudi Arabia, because a formal institution (GEA) overlooking entertainment industry with broad and clear objectives took shape. It signifies role of entrainment and culture in economic diversification and how it can impact auxiliary sectors such as tourism, construction, entertainment, parks and establishments in the economy.
 

Entertainment Policy Key Pillars


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Source: Gulf State Analysis, 2018

 
Saudi Arabia Entertainment Industry Fast Facts
  • Approximately 50% of the population is under age of 30
  • Annually US$ 26 Bn spent aboard for entertainment
  • Licensed Cinemas: 1
  • US$ 2 Bn is expected to invest in developing entertainment projects
Source: Invest Saudi Website
 
Quality of Life Program
It’s a gigantic plan targeted towards revolutionizing the entire lifestyle equation in the country, which anchors both private and public investments. It operates on 2 basic indices, Liveability and Lifestyle.

Funding By Source for Quality of Life Program in SAR Bn
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Source: Quality of Life Document, 2018
 
Factors backing for Formalization of Policy

Firstly role of private sector in Saudi Arabian entertainment industry is small (mostly non-existent) thus huge initial public investment worth US$ 64 bn is being offered by the Government for development of entertainment sector. Secondly, nationals currently spend billions of dollars annually for entertainment purposes in neighbouring countries which causes massive outflows of money from the country (New York Times, 2018), authorities think can be prevented. Finally, Vision 2030 aspires to grow household spending on entertainment from current 2.9% to 6% which is expected to develop a SAR 30 Bn market (Ibid). (US$ 8 Bn) Vision 2030 has three thematic flavours, a vibrant society, a thriving economy, and an ambitious nation where policymakers (for Vibrant Society theme) are focused for the promotion of physical, psychological social well-being of every citizen (General Entertainment Authority Website).

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Myriad economic and social issues are associated with Vision 2030 and its sub-programs like Quality of Life. These programs are initially driven by huge public investment (essentially construction led) and aspires to attract private capital in the later stage, (as sector develops) but policy as a whole misses certain critical issues (which might act as an impediment) such as availability of adequate labour, technical expertise, ability of domestic private sector to take off as expected under the plan and what would be the socio-cultural response to such herculean modernization programs.
 
Potential Socio-Economic Impact


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Source: Marmore
 
The Policy aims to perfectly address the problems that were associated with cultural and social life in Saudi Arabia; which naturally stretches beyond economic diversification and employment creation. Earlier there was an apparent lack of a platform for cinema and theatre for utilizing talent, an absence of avenues for cultural, entertainment and leisure activities. Moreover, there was an absence of institutions and bodies promoting arts, cultural and sporting activities.

Cinemas, theatre and arts are social and economic necessities; primarily because of their consumption value and additionally because employment it creates, the technology it utilizes and thereby accelerator effect that it sets in.

On this account, the GEA is entrusted with host duties for expansion of the entertainment sector. GEA acts as the licencing authority and designated authority for setting standards and implementing plans. This helps in augmenting investments and talent in desired channels for the development of the sector. Additionally, GEA is mandated to encourage investments and promote collaboration and deliberations between different government and private agencies (General Entertainment Authority Website, 2018). These two are the critical functions of the agency, because it provides the unified and independent platform for cooperation across organizations and firms.

Big Push to Private Sector
The crux of this mega policy is the intertwined benefits of promoting entertainment, sports, leisure, health sectors and strengthening the private sector thus create more sustainable job opportunities. In the current backdrop of crawling private sector; as business conditions improved at the slowest pace for nearly last nine years as Saudi Arabia Purchasing Managers Index (PMI) rounded off to weakest quarter recorded since March 2009 (Arabian Business News Website 2018), entertainment policy acts as a big boon in a sense that it attracts huge private investment.
 
Growth Rate of Private Non-Oil GDP, Saudi Arabia 2014-2017
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Source: Jadwa Investment 2017
 
Public Investment Fund (PIF) is actively involved in the Qiddiya project with a commitment of SA 10 Bn (Quality of Life Document) and at the broader level the fund is at the forefront of diversification plans in line with Vision 2035. The Private sector is expecting a strong return on investments based on business-friendly environment and strong social demand (for entertainment) in the country. Liberal stand by the government on private (domestic and international) investments in the sector is creating a host of lucrative avenues.

Private investments are set to thrive and policy aims seem fairly achievable given that fact that delivery mechanism (for the policy) tends to be more private oriented. On the other hand, entertainment had been a long societal preference given the fact that Saudi nationals used to enthusiastically travel to neighbouring countries for the purpose of entertainment and leisure activities.

Potential Investment Opportunities
Construction has already began for the new Entertainment City near capital Riyadh (Qiddiya Project-an entertainment, sports and cultural destination). GEA expects that during the next two years, Quality of Life generates 300,000 jobs and most of in the private sector. (First Abu Dhabi Bank Markets Insights 2018)

Saudi Arabian Public Investment Fund and Six Flags (US based entertainment corporation) agreed to build a new city focusing on theme parks, wheels and wings, scenic and animal encounters, water and snow sports, education, culture and host of other events (Gulf State Analytics website 2018). With respect to the development of Cinemas in the country, the construction industry is expected to see a robust growth in the years ahead because the Saudi Government plans to build approximately 2,000 cinemas in 13 regions of Saudi Arabia.

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Furthermore, according to latest statistics around 500 entertainment companies established during 2017 created as much as 22,000 job opportunities (Invest Saudi 2018). Moreover, the retail sector (especially malls) are likely to be buoyed by the new entertainment policy, as more and more cinemas will most probably be constructed in large malls. For example, Saudi Arabia’s biggest mall operator, Arabian Centre, has allocated space for cinemas in 10 of its upcoming malls (Arabian Business 2018). Development of theme parks, opera houses, concert places, resorts, museums, art galleries, and theatres could be a catapult for the economy leading to growth in sectors such as tourism, hospitality, associated public transportation, etc.

Finally, the biggest impact is expected to be in the technology sector. For example, Artificial Intelligence (AI) is helping in writing scripts with complete stage instructions for a science fiction movie. Moreover, Immersive technologies (virtual reality, augmented reality) are becoming cheaper and it could herald a new era into content (World Economic Forum Creative Disruption 2018), media, film industry, entertainment, amusement parks in Saudi Arabia with its wide applications. These hold promise of allowing a creative industries ecosystem to develop and thrive in the Kingdom as a long-term consequence of the current policy posture.

Development of proposed parks and entertainment zones will be able to utilize current and upcoming technological developments and can deliver more robust growth. In summary, it can be said that entertainment policy and its objectives of creating a vibrant society in Saudi Arabia, is a step that will push entertainment, technological sector, cultural tourism and other sectors to greater levels of advancement in the years ahead.

 

Tags:  Arabia, Entertainment, Investment, Saudi

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How Inflationary is VAT in the GCC?

Date : 25/03/2018
Author:  Marmore MENA Intelligence




The residents of Saudi Arabia and the UAE, who had long enjoyed a tax-free existence, were finally subject to a Value Added Tax of 5% on goods and services, from Jan 1st 2018. The introduction of VAT, which is seen as one of the biggest policy shifts in recent times across the region, is expected to bring in additional revenue to the respective governments. VAT being a consumption based tax, will have implications on customer spending as well as inflation. As of 2018, Saudi Arabia and UAE are the only GCC countries to implement VAT, with the others aiming to follow suit in 2019.
 
Considering that interest rates and economic growth have a bigger influence on inflation, there is little doubt that the short-term effects of VAT on prices, will pose challenges to both consumers and businesses. The additional expenses incurred due to the addition of VAT are likely to have a bigger impact on high value purchases than day-to-day expenditures.

After the inception of VAT, both Saudi Arabia and the UAE witnessed a sharp rise in inflation for the month of January 2018. Annual inflation for January 2018 spiked to 3.0% and 4.7% for Saudi Arabia and the UAE respectively. Compared to the prices of December 2017 significant changes were seen in prices of Clothing & Footwear, Restaurants & Hotels, Transport and Tobacco. Notably, the annual inflation on tobacco products was more than 50%. However, this was due to the implementation of a 100% sin tax in both countries for tobacco products. Inflation on transport was also higher owing to the subsidy cuts in fuel.

Taking the case of UAE, the effect on inflation in January 2018 could’ve been worse if not for the weak real estate market which resulted in a decline of residential rents. Lower rents therefore helped offset some of the inflation effect as housing and utilities form a significant chunk of the price basket. For Saudi Arabia, the change in base year for consumer price calculation from 2008 to 2013, helped bring down its inflation figures.

Change in Consumer Price Index – Jan 2018




Source: SAMA Monthly Statistics, Federal Competitiveness and Statistics authority, Marmore Research

In the UAE, housing, healthcare and education costs did not see a major change as they were exempted from VAT. Despite public transport and air travel not falling under the purview of VAT, transport costs rose by 4% in Jan 2018 compared to the previous month due to the taxation on fuel. The case was similar in Saudi Arabia where housing and education were not affected. Cost of apparels including clothing and footwear fell by 2.3% between Dec ’17 and Jan ’18 despite being taxed, as they were being heavily discounted due to the slump in sales.

While the introduction of VAT has effected a push up in inflation for January, its impact is expected to fade over time. Japan, which increased its VAT from 5% to 8% during April 2014, witnessed an immediate impact on its inflation rates which surged to 3.7% in May 2014. However, the rates eased off to 0.5% after 12 months. Evidences from other global cases also suggest likewise.

Although 5% VAT is lower compared to several other countries worldwide, it sets a precedent that governments in the GCC are willing to adopt subsidy cuts and levy taxes in order to strengthen their finances. The introduction of VAT would nudge consumers to spend more responsibly and change their spending patterns. Prices of products would also come down in order to match the demand eventually leading to a decrease in inflation.
 
This article is published in "Marmore Blog"

Tags:  Arabia, Estate, Real, Saudi, UAE, VAT

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World's Cheapest Power Project: A milestone shift to solar electricity generation?

Date : 28/12/2017
Author:  Marmore MENA Intelligence





Saudi Arabia recently registered the cheapest price bid to supply solar electricity ever recorded. Abu Dhabi’s Masdar and Electricite de France SA bid to supply power from a 300-megawatt photovoltaic (PV) plant for as cheap as 1.79 cents a kilowatt hour. If the project is successfully awarded by the Ministry of Renewable Energy Project Development, it would top the leader board beating the previous record for a solar project in Abu Dhabi for 2.42 cents a kilowatt-hour. It is a milestone in Saudi Arabia’s nascent solar program and a landmark start of a USD 50 billion program to diversify domestic energy supplies away from fossil fuels.
 
Bids for Saudi Arabia’s Sakaka Solar plant


Source: TheNational


Saudi Arabia is among the leading Middle Eastern oil producers looking to renewables to feed growing domestic consumption that’s soaking up crude which it could profitably export to generate higher revenues. The plant in Sakaka will be the first project awarded under the renewables program, which targets 9,500 megawatts of electricity generation capacity using solar and wind by 2030( Bloomberg). The project is set to start producing power by June 2019.  

Record lowest solar power pricing (US cents/kWh)


Source: Electrek

Prices for new solar power projects have fallen so rapidly that the cheapest price of previous year has become the ceiling price for the current year. The prices have reduced by as much as 78% since 2013. A combination of improving and less costly technology, free land earmarked for the plants, connections to the national power grid and favourable financing have helped to significantly reduce the costs. Developers are also expected to benefit from the economies of scale due to the large sized projects. The already-plummeting costs of installing solar power could fall by further 60 percent over the next decade(IRENA).
 
Current power generation scenario
 Saudi Arabia generated 330.5 billion kilowatt-hours (kWh) of electricity from installed capacity of 66 GW in 2016(EIA). It faces a sharply rising demand driven by population growth, a rapidly expanding industrial sector led by the development of petrochemical cities and high demand for air conditioning during the summer months. Total generating capacity is expected to be over 120 GW by 2032.
 
Saudi Arabia’ installed electric power capacity by fuel as of Jan 2017

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Source: EIA
 
Saudi Arabia that gets less than 1 percent of its power from renewables currently, is targeting 60 projects in renewable energy program with investments estimated between USD 30 billion and USD 50 billion by 2030(Reuters). The expansion into renewables will substitute the usage of 18 million barrels of oil equivalent for electricity generation by 2020.
 
Outlook for solar energy in Saudi Arabia
 
Saudi Arabia’s renewable energy program is part of a broader project to wean the economy from its reliance on oil exports. The kingdom is restructuring its energy sector as part of Vision 2030 and a focus on renewable projects is a pillar of this transformation. Saudi Arabia is an ideal location for both Concentrated Solar Power (CSP) and PV power generation as it has remarkably high solar radiation of around 2,550 kWh/m2 per year, which is almost double the average radiation in European countries. There is also the availability of vast areas of empty desert that can host solar installations. Additionally, Saudi Arabia has huge deposits of the type of clear sand that can potentially be used in the manufacture of silicon PV cells.
 
However, some barriers may exist such as large reserves of oil with relatively low cost compared to solar energy. Saudi Arabia also currently lack any demand-side policies to stimulate the private sector. These include tax benefits or feed-in tariffs for renewable electricity generation. In addition, the dust effect, which can reduce solar energy by up to 10–20 % can be a major hindrance and will require solar energy technology to be adapted for desert conditions to enable more efficient harnessing of the energy.
 
Still, the percentage of renewable energy is estimated to reach 10 percent of total installed capacity in Saudi Arabia by 2023. Further, The King Abdullah City for Atomic and Renewable Energy (KACARE) is targeting for 41 GW of solar power, 17.6 GW of nuclear power, and 9 GW of wind power by 2032(KACARE). The fact that Saudi Arabia, an ardent booster of fossil fuels, has found compelling economic reasons to bet on solar is one of the clearest signs yet that solar has become a cost-effective source of power.
 
This article is published in "Marmore Blog"

 

Tags:  Arabia, Electricity, Energy, Power, Saudi, Solar

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How much more can KSA cut production

Date : 16/11/2017
Author:  Marmore MENA Intelligence




Saudi Arabia relies heavily on the oil revenue to support is fiscal expenditure and also support its ambitious economic growth plans. Due to this prominence, when the oil prices declined in 2014, Saudi Arabia’s initial stand was to increase market share by increasing the production thereby driving higher-cost US shale drillers out of the oil game.  However, this strategy did not pay off and two years later, the OPEC members including Saudi Arabia have agreed to reverse their stance and instead cut production.

Saudi Arabia plans to pump about 9.77mbpd in November, which would be its lowest output since January 2015. According to the Saudi energy ministry, the decrease in allocations for November includes a full 290,000-bpd reduction over and above the 486,000 bpd that Saudi Arabia pledged to cut as part of its commitment.

Table: Saudi Arabia Oil Supply (Jan-2015 to Sep-2017)



Source: Reuters, Marmore Research

Considering Saudi Arabia’s commitment to do whatever it takes to end the oil glut, it is pertinent to understand how far Saudi Arabia can actually go to cut its output. Some of the prominent factors that would influence Saudi Arabia’s production cuts are its market share, global demand for oil and most importantly Aramco’s valuation.

Market Share
One bright spot for Saudi Arabia as an outcome of its initial decision of not cutting the production, is that it gained market share by 1% over the last two years. However, with the OPEC proposal to freeze or cut production, the gain receded to some extent. Saudi Arabia’s exports declined from 7.4 mbpd during October-2016 to 6.7 mbpd during September-2017.

Considering that Saudi Arabia’s supply is still in excess compared to that at the end of 2014, it appears there is still some room to cut output albeit at the cost of losing market share by a few more basis points.

Table: Saudi Arabia Oil Supply



Source: Reuters, Marmore Research

Table: Saudi Arabia Production Cut Target and Compliance



Source: Reuters, Marmore Research

Global Demand
The oil price woe started with the shrinking gap between demand and supply and eventually leading to the current scenario of excess supply. Consumption was affected due to slowdown in the phase of growth in demand for oil globally and in particular China- the second largest oil buyer. This led to increased gap between supply and demand. The demand of crude is beyond the vicinity of control for the crude suppliers and hence they can only rely on the supply to influence the price. Excess supply at a lower price is not likely to result in increased consumption, though the oil importers might use this opportunity to stockpile crude. However, considering the long-term storage costs, the increase in the level of consumption is going to be limited unless real demand kicks in.

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Source: Reuters, Marmore Research
 
Saudi which relies heavily on the oil revenue, is better off with higher oil price. Despite increased production levels, Saudi will not be able to push the required additional barrels of oil to compensate for the loss of revenue due to the lower oil price. For instance, Saudi would have to increase the exports volume by 1.5X @ USD 65 per barrel and 2X @ USD 50 per barrel to match export revenue of oil price @ USD 100 per barrel. Now that the gap between supply and demand appears to be diminishing, Saudi would it’s supply cut to further reduce this gap. However, Saudi will also ensure through its dominance in OPEC that all the members to contribute to plug this gap.
 
Aramco Valuation
 The significance of oil prices on the Aramco IPO cannot be emphasized enough. Higher price of oil would help the Aramco report stronger realized sales in the financial performance details that it must release ahead of the IPO. According to Sanford C. Bernstein estimates, Aramco would make a net profit of USD 13.3 a barrel on its upstream production with oil @ USD 50, on the contrary its profit would increase to USD 16.90 with oil @ USD 60. This suggested that a USD 10 swing in the oil price could effectively translate into hundreds of millions of dollars to Aramco’s IPO valuation. Considering the coveted USD 2 trillion valuation of Aramco that the Saudi Government is aiming towards, marginal receding of market share is relatively a smaller sacrifice.
  
 Conclusion
 The Saudi Arabia-led OPEC initiative to control the oil prices have started to yield result with the global oil market improving and stabilizing. The oil price has recovered considerably and global oversupply has nearly halved since the beginning of the year. Saudi Arabia would aim to keep the oil prices around USD 60 per barrel by cutting production, for now as this would help Saudi Arabia maneuver its economy comfortably and at the same time not offer much incentive to US shale producers to increase output drastically.
 For Saudi Arabia it may appear that oil price recovery has come at a cost of giving up market share. However, it has two very strong reasons – reducing budget deficit and highest possible valuation for the Aramco, to stick to the cuts. Considering these priorities, historic production and market share levels of Saudi Arabia and global oil demand in the near future, it can be argued that Saudi Arabia production levels haven’t reach the maximum floor levels. We believe that Saudi Arabia wouldn’t hesitate to cut its production by another half a million barrels to achieve its target price.
 
This article is published in "Marmore Blog"
 
 
 
 
 
 
 

Tags:  Arabia, Economy, Oil, Saudi

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