SAUDI ARABIA

Topic:- Economic Overview Of Saudi Arabia Sector:- HOTEL Group Members:Utpal Shah Balaji Nagargoje Hemin Shah Dilip Prajapati Chandu Mevada

SAUDI ARABIA
ECONOMIC OVERVIEW OF SAUDI ARABIA
Economy - overview: The Saudi Arabian economy is fuelled almost entirely by the production and distribution of petroleum and its derivative products. Over the past decade oil sales have generated, on average, 90 percent of the country's yearly export earnings, 35 percent of annual gross domestic product (GDP), and 75 percent of all budget revenues. High oil prices in the 1970s led to rapid economic expansion, with GDP growing over the course of the decade by 10 percent per year. As oil prices dropped in the 1980s, GDP growth slowed, averaging just 1.3 percent per year between 1980 and 1998. Rising oil prices beginning in 1999 again boded well for the economy. Oil was discovered in Saudi Arabia by American geologists in the 1930s, but high level production did not begin until after World War II (1939-45). In the 1960s, the Saudi oil industry began to mature, resulting in a massive accumulation of wealth, fast paced economic growth, and rapid urban development. However, it was not until the 1970s that Saudi Arabia emerged as one of the Middle East's preeminent political and economic powers. Two events in the 1970s were crucial to Saudi Arabia's economic development. One was the Arab oil embargo of 1973, during which time Arab countries withheld oil from the world market, raising world oil prices dramatically. The other was the 1979 Iranian Revolution, when Shiites overthrew the western-backed monarchy in Iran and assumed control of the country. Both events disrupted oil supplies, causing the commodity's cost to rise. Throughout the 1970s, Saudi Arabia was able to export oil at substantially elevated prices, leading it to become one of the fastest growing economies in the world. The massive inflow of revenue allowed the kingdom to increase import levels and still maintain a favourable balance of trade. Spending on defence and infrastructure rose, and Saudi Arabia became a benefactor nation to the rest of the Arab world, supplying large amounts of financial aid. (Aid has averaged 4 percent of GDP per year over the past 25 years, making Saudi Arabia's average aidto-GDP ratio the highest in the world.) In a matter of decades, Saudi Arabia

transformed itself from a desert kingdom populated by nomadic tribes to a modern economic entity which controls over a quarter of the world's oil. While petroleum exports are indeed lucrative, Saudi Arabia's dependence on oil as its primary source of revenue is potentially problematic. In the near term, the Saudi economy is left vulnerable to shifts in the price of oil, lowered demand, or disrupted production due to any number of factors, including regional conflicts and the Organization of Petroleum Exporting Countries (OPEC) shifting oil production quotas. In the long term there is the problem of dwindling supplies. While the Saudis maintain over a quarter of the world's known oil reserves (about 263 billion barrels at the end of 1999), these reserves, at the current rate of production, will last only 87.5 years. If, in that time, Saudi Arabia fails to sufficiently diversify its economy or discover new sources of oil, the country will be faced with a serious shortfall in revenues. And even if the kingdom does discover new reserves (as will likely be the casesome estimates put undiscovered reserves in Saudi Arabia at nearly a trillion barrels) the price of oil will probably steadily drop in the coming years as supplies and production efficiency increase. The need to begin generating alternative sources of income was recognized as early as 1970, when the government issued the first in an on-going series of 5 year plans aimed at expanding the non-oil sectors of the economy. While infrastructure expansion and urban developmentboth natural outgrowths of the oil industry have proceeded at an impressive pace, attempts to diversify the economy have produced limited results. Similarly, efforts to decentralize the state run economy through broad privatization schemes have been largely unsuccessful.

Saudi Arabia has an oil-based economy with strong government controls over major economic activities. It possesses about 20% of the world's proven petroleum reserves, ranks as the largest exporter of petroleum, and plays a leading role in OPEC. The petroleum sector accounts for roughly 80% of budget revenues, 45% of GDP, and 90% of export earnings. Saudi Arabia is encouraging the growth of the private sector in order to diversify its economy and to employ more Saudi nationals. Diversification efforts are focusing on power generation, telecommunications, natural gas exploration, and petrochemical sectors. Almost 6 million foreign workers play an

important role in the Saudi economy, particularly in the oil and service sectors, while Riyadh is struggling to reduce unemployment among its own nationals. Saudi officials are particularly focused on employing its large youth population, which generally lacks the education and technical skills the private sector needs. Riyadh has substantially boosted spending on job training and education, most recently with the opening of the King Abdullah University of Science and Technology - Saudi Arabia's first co-educational university. As part of its effort to attract foreign investment, Saudi Arabia acceded to the WTO in December 2005 after many years of negotiations. The government has begun establishing six "economic cities" in different regions of the country to promote foreign investment and plans to spend $373 billion between 2010 and 2014 on social development and infrastructure projects to advance Saudi Arabia's economic development.

Reaction to Arab Spring Saudi Arabias reaction to the Arab Spring has been exactly opposite to the United States. The Saudi regime has a vested interest in the regions stability and the various other Middle Eastern monarchies staying in power. They have acted on this interest by assisting Bahrain quiet the protests that have troubled the Saudi neighbour for the past couple of months. Saudi Arabia has also been trying to strengthen its ties with other monarchies in the region, and has been pushing the Gulf Cooperation Councils (GCC) expansion with the inclusion of Morocco and Jordan. While Saudi Arabia is not immune from the effects of the Arab Spring popular uprisings, the ruling family has the power and money to ride out the storm better than other nations in the region. Any protests so far have been very small and mainly inconsequential, and the Saudi government recently announced a new $136 billion social welfare spending package with the hope that it would counter act the calls for political reform.

Relationship with the U.S. The United States recent trend of siding with pro-democracy reformers at the expense of former political allies (see Hosni Mubarak in Egypt and Zin El Abidine Ben Ali in Tunisia) gives Saudi Arabia legitimate reason to be concerned. At the moment however, Saudi and American interests overlap in enough areas that the two countries expect to continue a mutually beneficial relationship for many years to come. Both nations need the region to remain stable, both politically and economically; both want Yemen to continue to undergo a smooth transition; and both are nervous about the continued ambitions of Iran. But most importantly, both countries need the oil to keep flowing. This set of objectives will keep U.S.-Saudi relations close for the foreseeable future. Economic Indicators: The GDP of Saudi Arabia is $622 billion, making it one of the 25 largest economies in the world. Saudi Arabia has one of the highest per capita incomes in the region, standing at roughly $24,200. Saudi Arabias GDP grew by an estimated 3.6% in 2010. Unemployment last year was high at approximately 10.8%, however underemployment is an even more serious concern.

Economic Structure: Saudi Arabias economy relies primarily on its oil and natural gas reserves, which accounts for 80% of the Saudi governments budget revenue, 45% of the GDP and 90% of export revenues. GDP by sector: o agriculture: 2.7% o industry: 61.9% o services: 35.4% Although Saudi Arabias economy is somewhat vulnerable due to its high level of dependence on a single industry (oil and natural gas production), its proven

reserve of 263 billion barrels should ensure its continued output of oil for a substantial number of years. Moreover, Saudi Arabia has used its oil and natural gas resources to diversify its economy and promote foreign investment into a number of other industries, including petrochemicals, telecommunications, and energy production. Negotiations to secure Saudi Arabias acceptance into the WTO in 2005 brought about a new guarantee of openness to foreign investment.

Political Considerations: Saudi Arabia is ruled as a kingdom by a traditional hereditary monarchy. The current head of state and Prime Minister is King Abdullah bin Abd al-Aziz Al Saud. Under Saudi Basic Law, the King is chosen from among the sons and grandsons of former King Abdul Aziz Al Saud. Most cabinet, ministry, and other positions in the government are appointed by the King and occupied by members of the extensive royal family. Saudi Arabia is governed under strict Sharis, or Islamic law, with the King serving as the main administrator of the law.

Attractions: Natural Resources Oil and Natural Gas: Saudi Arabia has the largest oil reserves in the world (over 25% of the worlds known reserves), and is the number one oil producer and exporter. Foreign Direct Investment A Positive Climate: After 12 years of negotiations, Saudi Arabia finally joined the WTO in 2005. Part of the requirements for Saudi Arabias acceptance into the organization was a promise to open the nation to more foreign investment. Saudi Arabia has embraced this new openness, and designated six economic cities as the primary sites of foreign investment and economic growth.

Troubled Spots: Dependence on Oil: As oil accounts for 80% of the Saudi budget revenue, 45% of the GDP and 90% of export revenues, it is naturally and unavoidably vulnerable to shocks revolving around this resource. Although its leadership in OPEC helps it to maintain some control over this vulnerability, the bottom line is that oil prices, predictions that reserve levels are dropping and peak oil is approaching, and the growth of alternative renewable energy technology leave the economy in danger of disaster. Attempts to diversify the economy have started, with growth into the petrochemical, power generation, and financial services industries. Underemployment and Reliance on Foreign Workers: Saudi Arabia has a huge population of foreign nationals who make up a significant portion of the labour force. Some estimates suggest that as much as 80% of workforce is non-national. Many of these foreign workers are from other Muslim countries in North Africa, the Middle East, and Southeast Asia and work in construction, oil production, or provide basic services. Saudi Arabias young and quickly growing population tends to be under- or unemployed, making job creation for Saudi citizens a national priority. Government and Civil Rights: Saudi Arabia is frequently criticized for its human and civil rights record. Among the trouble spots is the lack of

freedoms of speech, press, political power, and religion, as well as a denial of womens rights. Western nations have cautiously pushed for, and won, some minor reforms, but Saudi Arabia remains too important of an economic and military ally to risk upsetting with a major push for reform.

HOTEL SECTOR OF SAUDI ARABIA

In recent years, the Hotel Industry of Saudi Arabia has evolved to become one of the backbones of the local economy. The diverse product availability and the extraordinarily seasonal markets of Makkah and Madinah, and in recent years Jeddah and Riyadh, have allowed the Hotel Industry to develop in a very rapid, yet efficient manner. With sufficient room capacity finally in place, the Kingdoms hotel industry is now geared to meet all the demand of both domestic and international tourism. Lately, there has been a sizable increase in four and five star hotels due to the high demand of the services and facilities they offer which include first class international restaurants and spa amenities. The other main reason for this dramatic increase is the shortage of luxurious high end international hotels in the Kingdom.

In 1999, there were a total of 425 hotels in Saudi Arabia with a total capacity of 41,028 rooms. As of Q4 2007, the number of hotels stood at 1,209 Kingdom wide providing an estimated 185,000 rooms - Graph 1/Table 1. Based on 100 percent occupancy, the existing hotel room capacity in the kingdom is adequate for more than 67.5 million visitors' nights. Further-more by assuming that each room could accommodate at least two persons, the aggregate capacity of hotel rooms in the Kingdom would be adequate for 135 million visitors' nights, which will easily cater for the Saudi Arabian population many times over.

As a part of the economic reform and diversification program, the Saudi government has established the General Commission for Tourism and Antiquities by the Council of Ministers in 2008 an entity responsible for overseeing a three phased project starting with the development and implementation of a tourism strategy to guide the Kingdom in the next 20 years. As a first cautious step, the focus on the development of domestic tourism was taken with the dual purpose of protecting the conservative nature of the Kingdom and capturing some of what is believed to be billions of dollars of tourism related spending that normally exits the country every year. The government has been actively considering a package of new rules aimed to attract international tourists to a few of the Kingdoms twelve thousand natural resources, cultural and historic sites, like the Madain Saleh, the second city of the Nabateen Empire. In mid-2008, a package of new relaxed visa rules were released allowing many groups from Europe to visit Jeddah with a group tourist visa, which years before was unheard of.

The Ministry of Finance and National Economy has been largely responsible for the proliferation of the accommodations infrastructure, providing loans of up to 50 percent, or SR50 million, of the total construction cost of a hotel project. The Ministry of Commerce, in turn, licenses and inspects these facilities to ensure the maintenance of quality services is at reasonable levels. Because of the relatively saturated situation of the accommodations market in the Kingdom, subsidized hotel Loans have slowed down tremendously, and investment in luxury hotels is currently the main focus due to the lack of adequate supply around the Kingdom. The Ministry of Commerce now issues fresh hotel licenses only to projects in those areas not adequately served, or typically demonstrate a need for more hotel accommodation.

Market Characteristics and capacity

As a result of previous government incentives, a large number of hotels were constructed in the Kingdom, expanding from 249 hotels with combined capacity of 22,616 rooms in 1988 to 425 hotels and 41,028 rooms in 1999 and to 1,209 hotels and approximately 185,000 rooms in Q4 2007. Based on the licensed room capacity, the deluxe hotels comprised 5.7% of the market total, first-class hotels 22.2%, second-class hotels 40.9%, third-class 29.7%, and rest-houses 1.4%.

Although a large number of major hotel chains are represented in the country, the extent of their direct investment is considered to be limited but growing, as most of the deluxe hotels are owned and financed by Saudi companies and individuals. But under management contracts they are operated by international chains. The other form of organized accommodation is licensed furnished apartments. This market has been steadily expanding over the years to cater for domestic tourists, as they prefer furnished apartments over hotels. By Q4 2007, this market stood at 2,784 licensed housing units with an estimated capacity of 68,000 units. Jeddah

accounted for the largest percentage standing at 22.4%, followed by the eastern region 14.4%, Riyadh 14.3%, Abha 9.7%, Makkah 8% and the rest of the Kingdom 31.2%.

Besides the organized accommodation market, there exists a large informal market that offers accommodation facilities during the pilgrimage season in Makkah and Madinah. How-ever, the exact size of the informal market is not determined, but it has been progressively decreasing due to the competitive prices hotels and furnished apartments are offering with their respective amenities, facilities and services.

Distribution of hotel capacity by region

In terms of room capacity, (The Tourism Information and Re-search Centre of the Saudi Commission for Tourism and Antiquities (SCTA) indicated in its annual accommodation statistical report) that Makkah was first with about 15.6 million visitor nights, Madinah came second with 3.7 million visitor nights, Riyadh third with 1.6 million visitor nights and the Eastern province fourth with 1.2 million visitor nights. While Makkah and Madinah remain extraordinarily seasonal destinations, with approximately 80% of annual demand converging into three months of the year, more than half of the total capacity is located in these regions, where future growth in the pilgrimage attendees will require expanded hostelry facilities. It is estimated that foreign Hajj and Umrah pilgrims will surpass the 4 million mark by 2015, from the 2.5

million of 2000 and 3 mil-lion in 2008. This will create a tall order for the hotel industry, including the informal market operators in Makkah and Madinah regions. The growth of visitors will further strengthen with the governments decision of granting 230 licenses to local pilgrim service companies to provide ground-handling services between the two holy cities.

Hotel capacity outlook: 2011

While the information on different segments of the accommodation market is scanty, additional room capacity is assessed for deluxe hotels only. In 2000 and 2001, six new deluxe hotels started operation with a combined capacity of around 1,800 rooms, thus increasing the total number of five-star hotels to 40 with a capacity of 11,476 rooms. Those that commenced operation in Jeddah include Westin (195 room), Hilton (350 rooms), and Le Meridian (355 rooms). Additional supply from Riyadh includes 400 rooms at Rosewood and Olaya Holiday Inn and 250 rooms at Four Seasons. By Q4 2007, the total number of deluxe hotels reached 69 hotels providing 22,500 rooms, kingdom wide. By year end; Jeddah will have in operation the Kemipinski hotel (250 rooms), Marriot Court Yard (300 rooms) along with 4 others offering an additional 541 rooms - Table 2. Riyadh however, by end of 2011 will add 10 new hotels offering over 2500 rooms including Sofitel (300 rooms), Hilton Garden inn (200 rooms) and Marriot Court-yard (250 rooms). As for the Makkah region, the Sofitel, Sheraton Hotel and Intercontinental Dar El Tawhid, which are being managed by Bass Hotels and Resorts, have been completed and in business.

Deluxe hotels in Jeddah: Performance 2000-2010

Hotel industry sources report that the performance of deluxe hotels in Jeddah has improved dramatically by 2008 compared to 2001, largely on the back of a successful summer festival program and notable improvement in macroeconomic conditions. Corporate business demand escalated slightly and the business was spread evenly among major deluxe hotels in the city. With the current room capacity, the average occupancy rate (AOR) during the high season was between 67% and 78%, with the average room rate (ARR) ranging from US$146-US$173. As for the low season AOR was between 50% and 63% with ARR ranging from US$122US$145. A news report, from the Saudi Gazette; researched by The Saudi Gazette staff, stated that the revenue per available room in February 2010 was $127 with an occupancy rate of 72% for all hotels. This is an increase from January were the values stood at $119 and 70%, respectively. With the expansion of additional five star accommodations in Makkah, the role of Jeddah as a provider of high-class accommodation to Makkah bound pilgrims will likely be under-mined, although this might be balanced out by a growth of pilgrimages prompted by the relaxation of Umrah visa regulations. The occupancy rate in Jeddah is expected to decrease slightly over the next few years, due to the sheer number of new hotels opening in the city and all the new hotels expected to open in King Abdullah's Economics City, which is located in Tuwal, 88 km away from Jeddahs City Centre. In the wake of increased supply environment, the hospitality services providers in Jeddah should concentrate on quality services rather than the current marketing campaign of reducing average room rates, as this strategy would undermine profitability and should prove to be unsustainable in the long run.

Deluxe hotels in Riyadh: Performance 2000-2010

The market for deluxe hotels in Riyadh is the fourth largest in the country, but generally is a corporate destination as the city has undergone a steady growth over the last two decades be-cause of the Mega government and private projects being planned and executed. This notable improvement in the performance of deluxe hotels is mainly due to the growing business demand and wide range of conferences

being offered in the capital city. In terms of room capacity, Riyadh with 7,784 rooms is in fourth place as of Q4 2008. It accounts for nearly 6% of the total number of hotels in the country, but with more than 20% of the nations high end hotels. The combined aver-age occupancy rate for the five star hotels in the same year was recorded to range between 72% and 79%. However, the average room rate (ARR) was recorded at approximately US$242 in 2008 compared to US$220 in 2007, an increase of 10%. The same Saudi Gazette news report stated that occupancy in Riyadh went down from 75% in May 2010 to only 66% in June, while the rate per available room went down from $215 in May to $181 in June. Meanwhile, the new addition of ten more deluxe hotels in Riyadh is expected to increase competition and reduce average room rate.

Deluxe hotels in Makkah and Madinah: Performance 2000-2010

The accommodation market in the Holy Cities of Makkah and Madinah is highly seasonal, however, recent relaxation of visa regulations combined with incentives offered by the deluxe hotels in these cities has allowed more visitors to come during the low season to perform Umrah. As of Q4 2008, the number of hotels in Makkah reached an estimated 60 offering a total of 14,500 rooms. In Madinah, the estimated number of hotels for the same period was 53 offering over 10,000 rooms, 3,400 rooms being in deluxe hotels. Hotel supply in Makkah is showing a clear inclination to the high-class market segment with a number of new and planned five star hotels already in the pipeline and are in the close vicinity of the Holy Mosque. At the same time, the Holy City is going through some radical infrastructure changes to cater for the expected pilgrims over the next 20 years. In Madinah, on the other hand, the last few years have been highly successful on the back of the recent measures, which include relaxed visa regulations during the low season periods. The combined occupancy rate in Makkah and Madinah at five star hotels is estimated to have risen from 47.6% in 2000 to 55% in Q4 2008. As for the

occupancy rate across the whole industry; in the Holy Cities grew from the average 36.4% in the year of 2001 to 44.8% by Q4 2008, while the average room rate (ARR)

in Makkah more than doubled to a range of $320-$400 by Q4 2008 from $159.9 in Q1 2001. Revenue per available room for the holy city of Makkah increased by 32.7 % in the first quarter of 2010, which is a remarkable rise in a short period.

GOVERNMENT HELP TO DEVELOP HOTEL SECTOR IN SAUDI ARABIA:

The Saudi authorities have said they want to diversify away from their dependence on oil, and the tourism industry has been a focal point. Government expenditure has focused on developing the religious tourism and business travel sectors in particular, and for this reason we forecast an increase in collective government expenditure and individual government expenditure over the forecast period.

The government is also keen to develop its domestic tourism market in an effort to capture some of the capital spent by the millions of Saudi citizens that travel abroad each year. Saudi tourists mainly travel to other countries in the Middle East. Despite efforts to encourage more Saudis to holiday at home, It forecast the number of citizens travelling abroad increasing from an estimated 8.72mn in 2010 to 12.42mn by 2015. International tourism expenditure is also forecast to increase, reaching nearly US$10bn by the end of the forecast period.

Saudi Arabia has been boosting its international presence and tourism marketing. In January 2011, the Saudi Commission for tourism and antiquities published special pages on tourism in the kingdom on a number of interactive social networking sites.

Since non-hajj tourism has never been a significant industry in Saudi Arabia, many tourist-friendly operations that other countries take for granted are not in place. To begin rectifying this situation, the Supreme Commission for Tourism has proposed instituting a hotel rating system, developing roadside rest areas, funding hotels in rural regions, encouraging archaeological and museum visitors, and licensing tourist companies. The commission has also developed plans for expanding education opportunities for those interested in the hospitality and hotel industries.

Upcoming Hotels in the kingdom of Saudi Arabia:

Property Hilton Hotel & Residences Riyadh Swissotel Makkah Movenpick Hotels & Resorts Al Diyafa Radisson Blu Hotel, Makkah Hilton Riyadh King Saud University Royal Tulip Makkah Double Tree By Hilton Al Khobar Park Inn Riyadh Crown Plaza Al Khobbar Crown Plaza Medina Kempinski Jeddah Movenpick Riyadh Radisson Blu Makkah Swiss Belhotel Sharma Resort & Spa No of Rooms 830 1500 445 334 390 820 304 259 249 502 280 445 334 150 Opening 2013 2012 2012 2012 2012 2012 2012 2012 2012 2012 2012 2012 2012 2012

FUTURE PLANNING TO DEVELOP THE HOTEL SECTOR

Zuhair Almarhoumy, Member of the Board of the Chamber of Commerce in Jeddah said, The tourism sector is witnessing across the world, and in the Kingdom of Saudi Arabia in particular, great prosperity especially in light of legislation and laws that let private companies into the sector to increasing competition in the types of services provided to tourists and travelers. He noted that Saudi Arabia, as part of its efforts to strengthen the presence of Saudi cadres in this sector, succeeded in raising the rate of its national cadre by forming professional standards for tourism and travel, in cooperation with many relevant authorities. Essam Naas, Member of the Board of the Jeddah Chamber of Commerce added, The future of investment in the tourism sector in the Kingdom is cause for optimism, in light of the attention this vital sector is receiving from the Custodian of the Two Holy Mosques, King Abdullah Bin Abdelaziz Al Saud, may Allah Protect him. In light of the efforts of His Royal Highness, Prince Sultan Bin Salman Bin Abdelaziz,

President of the Tourism and Antiquities General Authority, tourism became the most important sector to support the national economy and is expected to become one of the most important economic resources, to exceed 70 billion Riyals. Saudi tourism is characterized by rapid growth, providing nearly half a million job opportunities, of which Saudis occupy over 130 thousand. It is expected that the sector will provide over 90 thousand additional jobs by the year 2014. Ahmad Almarbaey, Member of the Board of the Jeddah Chamber of Commerce, indicated that competition in the field of tourism is an important factor supporting the tourism movement, and that the current direction of privatization provides a better opportunity for investment and expansion in this promising industry. A trained labour force is one of the most prominent features of the tourism industry. Almarbaey explained that tourism provided 7.5% of the Countrys gross domestic product, excluding petroleum, in 2010 and will be a major factor in the Countrys plans to reduce dependence on petroleum and afford job opportunities for Saudis as the sector continues to grow.

CONCLUSION
The performance of the Saudi domestic economy and its ripple effects on the private sector are directly dominated by oil price fluctuations, which necessitated the need for diversification, but the cultural traditions have historically demonstrated a hidden deterrent to the development of international tourism. There is, however, a great deal of enthusiasm in the hospitality sector for the work of the General Commission for Tourism and Antiquities, and the sustainable strategic growth of tourism that is likely to follow. Initial steps taken by the Commission toward the development of religious tourism are quite encouraging, as there is a great demand potential, which so far has only been partially explored. And with the current inadequate supply, the Hotel

Industry has much room for improvement and growth within the Kingdom.