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With the more developed GCC (Gulf Co-operation Council) economies still reeling from the credit crunch punch, Saudi Arabia's relative conservatism is now being seen as a boon. "We feel very fortunate to be in Saudi Arabia because this is the only place left standing," says one partner at an international firm....

With the more developed GCC (Gulf Co-operation Council) economies still reeling from the credit crunch punch, Saudi Arabia's relative conservatism is now being seen as a boon. "We feel very fortunate to be in Saudi Arabia because this is the only place left standing," says one partner at an international firm.

The kingdom is still viewed as something of a sleeping giant economically. Investors are hungry for the country's vast natural resources and the potential of its youthful population, and there are signs that the government is loosening its strict economic controls. Investors in turn are becoming more targeted in their interests. "Companies coming into Saudi Arabia are coming into specific sectors now, rather than 'entering the Saudi market'," says one partner, "People are becoming more focused on their aims."

The legal market itself remains fairly fluid. International firms are still required to seek a link-up with a local firm; however, as with any relationship, finding a suitable partner can be a challenge, and shifting allegiances are not uncommon. As one international lawyer says: "It's almost musical chairs in terms of associations."

Increasing market sophistication also leads clients to demand local contacts. "Saudi Arabia was a jurisdiction where lawyers on the ground were doing simple work, but the transactions are now happening on the ground," explains one partner. Yet getting staff in is easier said than done, due to the culture shock that confronts western lawyers. "Some law firms are recognising that it's a lot easier to get talent to move to Dubai than Saudi," explains a partner.

In the banking sector a reduction in new lending has coincided with a shift towards Islamic finance. "It is not a good time because the banks are becoming very difficult," says a lawyer. The rise in Islamic finance is due largely to greater liquidity, and as a result many partners see the increase as a phase, not a long-term shift. As one banking practitioner says: "In the short to medium-term Islamic finance has its attractions, but when liquidity comes back people won't be too fussed whether it is Islamic or something else."

Capital markets work has been slow to say the least. "The Saudi stock market has had quite a beating," says a partner: "There are a number of transactions that are pending but the transactions are not feasible any more." In the equity market the only work that is being done is in private placements while, on the debt side, sukuk (Islamic bond) deals have been slow due to the financial crisis and a decree by the AAOIFI (Accounting and Auditing Organisation for Islamic Finance Institutions) in February 2008 that changed the terms of classification. "It was declared that a lot of the sukuks were not shariah-compliant," says one Islamic finance partner: "That was a big blow to the sukuk market in general."

M&A activity in the kingdom is still not as prevalent as in other Gulf states. "Saudi companies like to establish their own subsidiaries rather than taking over companies in the country," explains a practitioner, while another adds: "It's a feature of the market that a buyer and a seller say, 'we trust each other, come in as a shareholder'".

In the private-equity area however this may be changing. "I know that private-equity houses are looking at opportunities," says a partner: "One of the biggest private-equity houses in the region moved to Saudi, which shows some potential."

Firms are also predicting a rise in work from privatisations as the government opens up the market.

The biggest development in project finance has been the government's decision to put some projects back on the balance sheet. "We have seen a number of projects where the market expects to see project financing being taken back by the government," reports one partner. However this measure seems to be more out of necessity than choice, and private investors are still being encouraged to enter the market. "A lot of infrastructure is going to be secured through the government, but what Saudi Arabia is doing is [making] the jurisdiction more attractive for foreign investors," says a partner.