SIMES_INSIGHT_Dec_15_v2

SIMES Insight
A Publication by Research and Editorial Committee
Central and East Asia, and Russia │ Europe │ Southeast Asia and Australia │ The Americas
SIMES Insight | December 2015 Page 1 of 11
Contents
Saudi Arabia – Moving Beyond Oil......................................................................................................... 2
21st UN Climate Conference................................................................................................................... 6
Reserve Bank of India Keeps Interest Rates Unchanged....................................................................... 7
How the US Federal Reserve Rate Hike Could Affect Singapore........................................................... 8
The United States and Cuba .................................................................................................................. 9
REFERENCES......................................................................................................................................... 10
Disclaimer:
For internal circulation within SIMES only. No part of SIMES Insight may be reproduced in whole or in
part without written permission of SIMES Research and Editorial Executive Committee 2015/16. All
views and opinions reflected in this brief are of authors’ own. Neither SIMES nor SIM are to be held
accountable for the authors’ views.

SIMES Insight
Saudi Arabia – Moving Beyond Oil
Saudi Arabia is one of the largest yet least understood economy in the world. Its most popular fact is
perhaps being the world’s largest oil exporter. Over the decade of 2003 to 2013, her profits from oil
exporting almost doubled on the back of a protracted oil boom. At the same time, the country
underwent significant modernisation bringing about prosperity and change to the Saudi society. 4.4
million jobs were created. $450 billion was invested in health, education, and infrastructure. These
boosted living standards and quality of life of Saudi citizens.1
At a time of growing indebtedness across major developed and emerging economies since the 2008
financial crisis, Saudi Arabia has been a rare exception: the Kingdom eliminated national debt and
increased reserve assets to $732 billion, the equivalent of almost 100 percent of her GDP in 2014.1
Today's Challenges: A Changing Energy Market and Demographic Bulge
After those decades of prosperity and change, the Saudi economy faces two critical challenges that
will put the oil and financially rich country to a test.
The first is external and relates to oil, the lifeblood of the Kingdom’s economy. The oil market, having
experienced a boom for a decade, is volatile. Prices dropped about 50 percent during the second half
of 2014, and various forecasters including the International Energy Agency have outlined scenarios
for a more competitive global energy landscape in the near to medium term. Global investment in oil
is set to increase, and new sources of energy supply such as renewable energy and US shale oil,
together with disruptive technologies in the energy sector, mean greater competition for the
Kingdom’s key export and revenue source. These market shifts are already being felt. The Kingdom’s
budget swung from a surplus of 6.5 percent of her GDP in 2013 to a deficit of 2.3 percent in 2014 as
proceeds from oil exports dropped.2
The second challenge is internal and relates to the Kingdom’s demography and the projected
workforce of Saudi nationals. More than half of the Kingdom’s population is younger than 25 years
old, and by 2030 the number of Saudis aged 15 and over – that will make up the workforce – will likely
increase by about 6 million.*1
The number of Saudi women participating in the workforce has been rising, albeit from a very low
base. In 2014, the figure stands at 1.2 million, or 18 percent of the female population of working age.
Of this, 800,000 were employed. This figure doubles that in 2003. However, female unemployment
totals 33 percent, and the participation rate of women, youths (15 percent), and senior adults (35
percent) still lags well behind that of adult Saudi men (65 percent).3 Restrictions on mixed-gender
work environments and on female drivers create unique challenges and barriers to raising female
participation and employment.
*1 In its official statistics, Saudi Arabia’s Ministry of Economy and Planning defines the working-age population as
comprising people between the ages of 15 and 59.

SIMES Insight
Another unusual aspect of the Saudi labour force is that foreign workers (largely from India, Pakistan,
and Bangladesh) constitute more than half of the total workforce. They tend to be relatively unskilled
and are paid far less than Saudi nationals. Thus, Saudi Arabia has a track record for low labour
productivity.3
Based on historical trends in participation, McKinsey estimates that this impending demographic
bulge could bring at least 4.5 million new working-age Saudis into the labour market by 2030.3 This
would almost double its size to about 10 million—and more if accompanied by above-trend increases
in female labour force participation. To absorb this influx would require the creation of almost three
times as many jobs for Saudis as the Kingdom created during the 2003–2013 oil boom. There will also
be a growing number of older people to support, which will increase the demands on the country’s
health system and finances.
Transforming the Economy through Increasing Labour Productivity and a Stronger Business
Environment
Increasing Labour Participation and Productivity
Today, 54 percent of the total working-age population in Saudi Arabia is either employed or looking
for work. However, excluding foreign workers, the majority of whom are required to work to stay in
the country, the labour force participation rate for Saudi nationals is only 41 percent, of which 12
percent are unemployed. Only about one-third of the Saudi working age population actually works.*2
Increasing the number of Saudis (including women and youths) who choose to look for work will be
an essential factor in raising Saudi household incomes over the next 15 years.
Increasing Women’s Participation
Women face a number of regulatory barriers to their increased participation in the labour force. The
requirement for all organisations employing women to invest in separate facilities such as working
areas and eating areas, and the ambiguity around what the rules mean in practice and how actively
they are enforced, creates a disincentive to hire women. This is especially the case for smaller
companies, due to the additional cost required to retrofit facilities. In addition, women in Saudi Arabia
have historically been represented by male relatives in executing certain professional transactions,
such as setting up businesses and signing employment contracts. Although some of these policies
have begun to change in recent years, remaining legal obstacles and time lags in implementation of
new regulations continue to discourage participation.*3
*2 The World Bank categorizes countries into low-income, lower-middle-income, upper-middle-income and high-income
segments. Saudi Arabia falls into this latter category of countries with a per capita income above $12,736 annually.
Excluding oil from the economy, however, it would fall into the upper-middle-income category, which also includes such
leading G20 emerging economies as Malaysia, Mexico, South Africa, and Turkey.
*3 The Saudi press has reported on stores being closed for refusing to employ women, for example. Arab News, “90
bridal shops shut for not employing women,” June 8, 2015.

SIMES Insight
Other practical barriers to women’s participation are logistical in nature and include limited child care
and transportation options. Today, no formal, high-quality day care system exists in the Kingdom.
This is partly because of restrictive and unclear regulation of the sector, which is governed by multiple
ministries. In a recent survey of 3,000 Saudi men and women, 82 percent of respondents (and 86
percent of women) felt that increased availability of child care would improve women’s ability to
contribute to national development.4 The experience of other countries has borne this out; in one
study in the OECD, an increase in child care coverage was strongly associated with an increase in the
female employment rate.5
Transportation is another obstacle. In Saudi Arabia, women are not allowed to drive, and public
transportation options are limited, although the ongoing construction of new metro transit lines may
create more possibilities. For private transportation, either a driver employed by the household or
taxis, such expenses can consume a substantial share of a woman’s salary, providing a disincentive to
work. Many different government actions could address this challenge, ranging from providing more
public transportation options to loosening restrictions on women driving, to promoting telework.
Increasing Youth Participation
Engaging youths to work is a different challenge. While 62 percent of Saudi youths are in training or
education, only 20 percent are in the labour force, with a comparable number having dropped out of
the system entirely. These dropouts are often labelled as NEETs (not in employment, education, or
training).6 In Saudi Arabia, the current regulatory environment and job market do not create
incentives for young people to work and can actually make it hard for them to do so even if they want
to.
The Kingdom’s education system has a central role to play in upgrading the skills and productivity of
the Saudi workforce. There are three priorities: improving the basic level of education; ramping up
vocational education and training; and improving the flow of young people, including university
graduates, from education to employment. The government will have to provide for more resources
for the teachers (11 to 1 student), who make up 10 percent of overall Saudi workforce.7 The lack of
infrastructure in rural areas where 20 percent of Saudi’s pupils live is the challenge. Another is the
emphasis on academic education rather than a vocational education; a 2012 McKinsey survey showed
that 75 percent of Saudi Arabian youths thought that an academic path was more highly valued by
society than a vocational one. That was the highest proportion of the nine countries surveyed.8
Stronger Business Environment – Even without Oil
While the non-oil private sector is relatively small in Saudi Arabia, it has potential to drive growth.
Already during the 2003–13 period, the non-oil private sector outperformed the economy as a whole,
albeit starting from a low base. It grew at about 10 percent annually, much faster than the overall 6
percent GDP growth rate.3 Between now and 2030, there are opportunities throughout the economy
to supercharge this non-oil growth. The five sectors highlighted here are identified by analysts to have
some of the biggest potential, which could contribute more than 60 percent of the overall growth
needed to double GDP by 2030. The five industries are: mining and metals, manufacturing, and
tourism and hospitality.

SIMES Insight
Mining and Metals
They present an opportunity for the Kingdom to develop additional resource and manufacturing
sectors. While reserves are ample, the Mining and Metals sector are still largely underdeveloped.
McKinsey estimates this sector could triple in value addition and potentially create up to 500,000 new
jobs for Saudi nationals.3 To develop the industry, the Kingdom will need to invest more heavily in
exploration and create a competitive ecosystem that allows both public and private sector companies
to thrive.
Manufacturing
Saudi Arabia has a large market for a range of manufactured goods, including automobiles and
electrical and mechanical machinery. As with other countries in the region, its needs for now are
supplied from abroad. The Kingdom has an opportunity to meet a larger share of its domestic
demand, and potentially some regional demand, by leveraging the country’s natural endowments,
and relatively large market size. Already, some private companies are starting to produce locally,
including international firms such as Isuzu, which opened a truck assembly plant in the Kingdom in
2012. To ensure competitiveness in these segments would require a skilled and more productive
workforce, stronger legal and investment protection, and the removal of a range of obstacles that
hinder business, including high import duties, lengthy customs and visa procedures, and gaps in local
supply chains.3
Tourism and Hospitality
Saudi Arabia attracts 10 million to 13 million Muslim visitors to the holy sites of Mecca and Medina
every year, including more than two million during the annual Hajj pilgrimage period. However, the
tourist industry is in decline on the whole; the total number of visitors dropped by 31 percent
between 2004 and 2012 as Saudis preferred to vacation abroad.3 An onerous visa process may also
have discouraged some international visitors. There is potential to develop this industry by reversing
this trend and developing a thriving private-sector leisure tourism industry for Saudis and foreigners
alike that leverages the Kingdom’s long Red Sea coastline, a wealth of archaeological treasures, and
areas of natural beauty. Religious tourism could also be further developed which can cater to tens of
millions more pilgrims each year outside the peak Hajj season. Potentially, the sector could employ
as many as 1.3 million additional Saudi nationals and increase its value-add by more than fivefold.3
Conclusion
In summary, Saudi Arabia has to evaluate its potential segments to develop. The five industries listed
here were deemed the most valuable by analysts. Reader should note that only Economic factors are
evaluated here, implications of societal, political and cultural factors have not yet been accounted
for.
Written by: Helen Su Myat Moe
Edited by: Wang Ming Zhu

SIMES Insight
21st UN Climate Conference
COP 21, the 21st session of the Conference of the Parties took place in Paris from November 30, 2015
to December 11, 2015. It was a historical event that involved more than 190 nations gathered
together to discuss a potential new global agreement on climate change. Citizens all around the world
centred their eyes on this momentous conference. The aim of COP 21 was to reduce greenhouse gas
emissions and avoid the threat of global warming from human activities. In conclusion, a 14 page final
draft was reached - with areas of disagreements significantly reduced from 900 to 300.10 However,
the success of the conference can be debated as several key questions have yet to be answered.
Firstly, there were ambiguities regarding whether the warming should be limited to 1.5 or 2 degree
Celsius. 100 poorer countries and low-lying small island states had proposed tougher goals of limiting
the goal to 1.5 amid the largest limit proposed of 2.7 degree Celsius.11
This came about after PM Narendra Modi’s statement stating that developed countries must make
the deepest emissions cuts. Seconding him was President of China, Mr. Xi. Even though 60-65 percent
of the emission now comes from developing countries, the richer countries must still bare
responsibilities for their past emissions. However, arguments were also made that history cannot be
undone. 12
India is still a developing country with 300 million people without access to electricity. The country
will need to increase its coal usage to develop its economy and bring about basic utility. Also, the
undermining disagreement was that India accounts for 3 percent global greenhouse gases compared
to 27 percent for the US. Even after its extended coal usage, India’s emission per person in 2030 will
be 4-5 tonnes per capita, which is still lower than the global average of 6.6 tonnes and significantly
lower than 12 tonnes per capita in 2030 for U.S. and China. However, in accord to the solutions
proposed previously, all countries should contribute equivalently regardless of the country’s
capability to contribute to the global mitigation. PM Modi’s statement counter addressed this unfair
solution, as the burden was being shared disproportionally to reach the 2 degree Celsius target.13
Moreover, past promises have also yet to be fulfilled. In the 2009 UN climate conference in
Copenhagen, the rich economies pledged to provide $100 billion a year in financial support for poor
countries from 2020 to develop technologies and infrastructures to cut emissions. However, the
sourcing and distribution of the money are yet to be decided. Mr. Xi thus emphasized that the richer
countries should honour their commitments made.14
Though the summit had a positive omen, leaders have stressed for a stronger binding agreement.
With all its complexities, global warming can only be solved through global platforms and mitigations.
The success of COP21 will hence be determined with time.
Written by: Sonia Parwani
Edited by: Lim Wei Long

SIMES Insight
Reserve Bank of India Keeps Interest Rates Unchanged
On December 1, the Reserve Bank of India (RBI) released its fifth bi-monthly policy statement, in a
widely expected move the RBI kept its key benchmark interest rates unchanged. The policy repo rate
was held at 6.75 percent, Cash reserve ratio (CRR) was maintained at 4.00 percent and the reverse
repo rate was also kept unchanged at 5.75 percent. A customary press conference was held at the
RBI headquarters in Mumbai following the release of the monetary policy statement. Dr.Raghuram
Rajan spoke for less than 3 minutes before the question-and-answer session with the press. He
reiterated on the key considerations of this monetary policy decision which mainly focused on the
RBI’s vigilance on commodity prices, particularly food & energy. The RBI governor also mentioned the
effects of the 7th pay commission review on aggregate demand & fiscal spending, recommendations
from which will be implemented on January 1, 2016.
Inflation Expectations
Consumer price index (CPI) Inflation has been rising in line with the RBI’s expectation of 5.8 percent
by January 2016. Dr. Rajan has said that he expects that inflation will rise until December 2015 and
plateau thereafter reaching 5.00 percent by March 2017. Currently, October’s CPI inflation stands at
5.00 percent, a marked increase from August’s CPI inflation rate of 3.66 percent. Thus, it is evident
that despite its accommodative stance the RBI would be reluctant to award the market with more
rate cuts given its expectation of rising inflation and commodity prices. The RBI is also monitoring
geopolitical developments in oil-producing regions which may have adverse effects on the supply of
oil.
Transmission Issue
Since the RBI started cutting rates this year, the repo rate has gone down by a total of 125 basis
points. However, the median base lending rate of commercial banks has been reduced modestly by
60 basis points. Thus, the full benefits of the RBI’s monetary easing have not been transmitted to the
consumers. Currently, Indian commercial banks are engaged in a process of cleaning up their balance
sheet. Once this ritual is completed, banks will begin fresh lending, allowing greater transmission of
rates and further increasing money supply.
A major takeaway of the fifth bi-monthly monetary policy statement was that it has clearly shown
that there is still room for more monetary easing. This is evident from the bigger-than-expected rate
cut of 50 basis points from the previous monetary policy statement, which has remained largely
unchanged. This leaves the possibility of future rate cuts widely open, delighting those on Dalal Street
as the Sensex closed, to jubilant cheers, at 26,169.41 points above the trading day’s low of 26,121.52
points, reaching a high of 26,246.02 point on the same day.
Written by: Anish Mishra
Edited by: Alda Poon

SIMES Insight
How the US Federal Reserve Rate Hike Could Affect Singapore
On December 17, 2015 at 0300 SGT, the US central bank announced its decision to raise its benchmark
federal funds rate by 25 basis points to 0.25 to 0.50 percent. It was the first rate hike since June 2006
where the rate was increased from 5 to 5.25 percent.16 The rate hike has many significant implications
to Singapore and the rest of the world.
(10 year chart of the US Fed Funds Rate)
Source: http://www.tradingeconomics.com/united-states/interest-rate
The widely anticipated rate hike by the US Federal Reserve has generated a large capital outflow from
emerging markets. Investors have already withdrawn a net US$500 billion from emerging markets in
2015, the first annual outflow in decades.1 Investors are questioning the health of emerging markets
given the large capital outflows. Capital flows are important for investments, trade and business
production in the country.
It is widely expected that Real Estate Investment Trusts (REITS) will be negatively impacted once rates
rise, with some being more vulnerable than others. REITS are typically heavily geared and have very
high dividend payouts. Some REITS will face a contraction of -0.5 percent to -1.00 percent.
Distribution per Unit (DPU) while REITS that are more financially stable could only see a marginal
contraction of -0.2 percent DPU.17 Distribution per unit is the amount of dividends given for every
share of REIT.
Many analysts anticipate that the Singapore dollar will fall against the US dollar, making Singapore
exports cheaper and more attractive to international customers.18 However, a key factor that would
affect exports is the demand from China. China being one of Singapore’s main export partners, plays
a critical role in foreign trade.19
Written by: Mark Yaohua
Edited by: Wang Ming Zhu

SIMES Insight
The United States and Cuba
Source: Flickr/Day Donaldson
Background of the US-Cuba Relationship
U.S. and Cuba’s relationship had been severed during the Cold War. After Fidel Castro successfully
overthrew Fulgencio Batista, the elected President of Cuba and dictator in 1959, he improved trade
relations with the Soviet Union but nationalized the U.S.’ properties and imposed higher taxes on its
imports. As retaliation, Washington banned nearly all imports into Cuba and then President, John F.
Kennedy, further expanded this by a full economic embargo. By 1961, the US had severed diplomatic
ties with Cuba.20
Restoration of the US-Cuba Relationship
On December 17, 2014, the unexpected happened and took the world by surprise. President Barack
Obama and Raúl Castro, Cuba’s President, announced that both countries would restore diplomatic
relations.
A year on, the embargo against Cuba has still not been lifted. Americans are still unable to invest in
Cuba or visit the country as tourists. Companies caught having business dealings with Cuba are heavily
fined. There were only 100 imports into Cuba despite the order issued by the Obama administration
including exports of building materials, car parts and farm machinery into Cuba’s private sector.
Currently, many Cuban businessmen import goods into their home country illegally through their
travelling baggage. It seems like the embargo would not be lifted until the 2016 elections in the US.
Also, lobbying by corporations is required, together with changes in Cuba to encourage the lifting. 21
Written by: Chong Qian Ni
Edited by: Anuj Sehgal

SIMES Insight
REFERENCES
Saudi Arabia – Moving Beyond Oil
1. Primary Research: by McKinsey Global Institute Analysis
http://www.mckinsey.com/insights/growth/moving_saudi_arabias_economy_beyond_oil
2. World Economic Outlook, IMF, October 2015.
3. Central Department of Statistics and Information, Saudi Ministry of Economy and Planning.
4. Al Sayedah Khadijah Bint Khuwailid Center at the Jeddah Chamber of Commerce and Industry Poll
of 3,000 Saudi Females and Males, 2013.
5. Olivier Thévenon, Drivers of Female Labor Force Participation in the OECD, OECD Social,
Employment and Migration Working Paper No. 145, May 2013.
6. Women, Business and the Law 2016: Getting to Equal, World Bank September 2015.
7. Saudi Ministry of Education
http://www.saudinf.com/main/c6h.htm
8. Education to Employment: Designing a System That Works, McKinsey & Company, 2012.
9. G20 Employment Plan 2014—Saudi Arabia, G20 Leaders’ Summit, Brisbane, November 2014
21st UN Climate Conference
10. Everything You Need to Know About the Paris Climate Summit and UN Talks
http://www.theguardian.com/environment/2015/jun/02/everything-you-need-to-know-about-the-
paris-climate-summit-and-un-talks
11. What Is Climate Change?
http://www.bbc.com/news/science-environment-24021772
12. Why We Need the Next-To-Impossible 1.5°C Temperature Target
http://www.theguardian.com/environment/climate-consensus-97-per-cent/2015/dec/30/why-we-
need-the-next-to-impossible-15c-temperature-target
13. Why India Has a Point at the Paris Climate Talks
http://time.com/4138055/india-paris-talks-climate-change/
14. COP21: Fine Words but Divisions Run Deep
http://www.bbc.com/news/science-environment-34969276

SIMES Insight
Reserve Bank of India Keeps Interest Rates Unchanged
15. RBI Fifth bi-monthly monetary policy statement
https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=35595
How the US Federal Reserve Rate Hike Could Affect Singapore
16. The Fed's Historic Rate Hike: What You Need to Know in 6 Points
http://www.straitstimes.com/business/economy/the-feds-historic-rate-hike-what-you-need-to-
know
17. Here's How Rate Hikes Will Impact Singapore's Largest REITs
https://sg.finance.yahoo.com/news/rate-hikes-impact-singapore-largest-072000856.html
18. Can the Stronger Greenback Revive Singapore's Flailing Exports?
https://sg.finance.yahoo.com/news/stronger-greenback-revive-singapore-flailing-063400944.html
19. Singapore Exports
http://www.tradingeconomics.com/singapore/exports
The United States and Cuba
20. U.S.-Cuba Relations
http://www.cfr.org/cuba/us-cuba-relations/p11113
21. Lots of Diplomacy, Not Many Dollars
http://www.economist.com/news/americas/21679835-fruits-historic-year-united-states-and-cuba-
lots-diplomacy-not-many-dollars
Email: economic@mymail.sim.edu.sg
Facebook: https://www.facebook.com/simecons
Singapore Institute of Management
461 Clementi Road, Singapore 599491

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