On Monday, Six Flags (NYSE:SIX) announced plans to open theme parks in Saudi Arabia as part of the company's long-term strategy of expanding in international markets. Saudi Arabian leadership, eager to show that it is serious in its plans to reform the economy away from oil, expand the private sector, and open its borders to foreign investment, was receptive to the idea. The kingdom believes that new theme parks will drive tourism spending and create jobs. While international expansion is a step in the right direction for Six Flags, we think Saudi Arabia is a bad idea. Problems that have weighed on growth for decades are deeply ingrained in the culture and will continue to weigh on growth, while the idea of a theme park itself clashes with Saudi Arabia's ultra-conservative culture.
International expansion is a key aspect of the Six Flags' growth strategy. In 2014 the company announced plans to open six new parks in China, and pursue other opportunities in emerging markets with high growth potential. While some of the issues that plague Saudi Arabia are also present in China, they are much more pronounced and detrimental to growth in Saudi Arabia. The outsized public sector, corruption, lack of property rights, stifling regulations, and lack of openness that restrict economic growth all stem from religious roots that define the culture and business environment. With the necessary reforms resistant to change, we see limited growth potential. The IMF predicts average annualized GDP growth of less than 3% through 2020, substantially lower than other emerging market destinations that carry lesser risk.
Saudi Arabia's economy has grown roughly 5% on average over the past five years, but the recent oil price slump has depleted FX reserves and left the fiscal balance in tatters. Oil revenues account for 90% of export earnings and 80% of government revenues, according to heritage.org. The state employs the majority of the population, and has failed to cut spending on pensions and handouts in order to prevent political upheaval, racking up large debts in the process. The government collects less than 5% of GDP in taxes and spends more than 40% of output. With the trade and budget balances in disarray, the country has become more dependent than ever on foreign capital.
This is a problem because foreign investors aren't jumping at the opportunity to invest in Saudi Arabia. And you can't blame them. The lack of transparency and property rights, and stifling regulations discourage entrepreneurial activity. The country ranks 63 rd out of 113 in Transparency International's Corruption Perception. The court systems favors royal families and the businesses they control, and the rule of law is not always strictly enforced. On numerous occasions, courts have failed to punish intellectual property violations. Laws requiring businesses to employ a higher portion of Saudis at higher cost, and strict worker permit laws that raise barriers to entry into the workforce stymie foreign investment. Sexist segregation laws further undermine growth. Women are barred from many opportunities and are not allowed to drive. With females accounting for the majority of college graduates, this is a big problem. Finally, the country lags behind other emerging markets in terms of ease of openness, and foreign investment is still prohibited in many sectors.
The government has promised reforms in the past, without delivering much change. We are skeptical that the kingdom will implement the radical reforms necessary to unlock Saudi Arabia's growth potential. The problems that stifle growth and business formation are deeply ingrained in the religion, which defines the culture and policies that shape the business environment. Saudi Arabia will always depend on oil, but the commodity is unlikely to rebound anywhere close to the heights of recent years for a long time. We therefore think the outlook for income growth and consumer spending in Saudi Arabia is limited, and the Six Flags will regret its recent decision. There is also the fundamental issue of the theme park itself clashing with the ultra-conservative Arabic culture. According to Reuters, it is "unclear whether [SIX] will tailor its rides (which include water slides) to the social codes of a country where public spaces are gender segregated and patrolled by state-sponsored Islamic morality enforcers". A big appeal of theme parks is that they are a fun place to take dates and interact with the opposite sex. And being on constant watch by patrol guards detracts from the experience. The decision to invest in Saudi Arabia is a bad idea, and represents a failure to understand a radically different culture's belief system.
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