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1. Country ReportSaudi ArabiaOctober 2010Economist Intelligence Unit26 Red Lion SquareLondon WC1R 4HQUnited Kingdom
Economist Intelligence UnitThe Economist Intelligence Unit is a specialist publisher serving companies establishing and managingoperations across national borders. For 60 years it has been a source of information on business developments,economic and political trends, government regulations and corporate practice worldwide.The Economist Intelligence Unit delivers its information in four ways: through its digital portfolio, where thelatest analysis is updated daily; through printed subscription products ranging from newsletters to annualreference works; through research reports; and by organising seminars and presentations. The firm is amember of The Economist Group.London New YorkEconomist Intelligence Unit Economist Intelligence Unit26 Red Lion Square The Economist GroupLondon 750 Third AvenueWC1R 4HQ 5th FloorUnited Kingdom New York, NY 10017, USTel: (44.20) 7576 8000 Tel: (1.212) 554 0600Fax: (44.20) 7576 8500 Fax: (1.212) 586 0248E-mail: email@example.com E-mail: firstname.lastname@example.orgHong Kong GenevaEconomist Intelligence Unit Economist Intelligence Unit60/F, Central Plaza Boulevard des Tranchées 1618 Harbour Road 1206 GenevaWanchai SwitzerlandHong KongTel: (852) 2585 3888 Tel: (41) 22 566 2470Fax: (852) 2802 7638 Fax: (41) 22 346 93 47E-mail: email@example.com E-mail: firstname.lastname@example.orgThis report can be accessed electronically as soon as it is published by visiting store.eiu.com or by contacting alocal sales representative.The whole report may be viewed in PDF format, or can be navigated section-by-section by using the HTML links.In addition, the full archive of previous reports can be accessed in HTML or PDF format, and our search enginecan be used to find content of interest quickly. Our automatic alerting service will send a notification via e-mail when new reports become available.Copyright© 2010 The Economist Intelligence Unit Limited. All rights reserved. Neither this publication norany part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means,electronic, mechanical, by photocopy, recording or otherwise, without the prior permissionof The Economist Intelligence Unit Limited.All information in this report is verified to the best of the authors and the publishers ability. However, theEconomist Intelligence Unit does not accept responsibility for any loss arising from reliance on it.ISSN 0269-6215Symbols for tables“0 or 0.0” means nil or negligible; “n/a” means not available; “–” means not applicablePrinted and distributed by IntypeLibra, Units 3/4, Elm Grove Industrial Estate, Wimbledon, SW19 4HE
Saudi Arabia 1 Saudi Arabia Executive summary 3 Highlights Outlook for 2010-14 4 Political outlook 6 Economic policy outlook 9 Economic forecast Monthly review: October 2010 13 The political scene 15 Economic policy 16 Economic performance Data and charts 18 Annual data and forecast 19 Quarterly data 20 Monthly data 21 Annual trends charts 22 Monthly trends charts 23 Comparative economic indicators Country snapshot 24 Basic data 25 Political structure Editors: Rory Fyfe (editor); Justin Alexander (consulting editor) Editorial closing date: September 29th 2010 All queries: Tel: (44.20) 7576 8000 E-mail: email@example.com Next report: To request the latest schedule, e-mail firstname.lastname@example.orgCountry Report October 2010 www.eiu.com © The Economist Intelligence Unit Limited 2010
2 Main railway Turayf Main road Al Qurayyat IRAQ International boundary Arar Arar Province boundary JORDAN IRAN AL JAWF Main airport Sakakah Rafha Capital KUWAITCountry Report October 2010 Al Jawf HUDUD AL QURAYYAT AL SHAMALIYAH Major town (Northern Borders) Hafar al-Batin Other town Tabuk THE GULF HAIL TABUK Tayma Hail Jubail Duba Dammam Al Khobar Dhahran BAHRAIN Al Ula Buraydah N Unayzah Abqaiq Al Wajh Al Mubarraz QATAR AL QASSIM Al Hufuf E MEDINA RIYADH Al Kharj Harad Al Dawadimi Medina J Al Hariq Al Hilah UAE Yanbu EGYPT D AL SHARQIYAH RED SEA (Eastern Province)www.eiu.com Rabigh Zalim AL RIYADH Layla OMAN MECCA SAUDI ARABIA Jeddah Mecca Taif Al Sulayyil AL BAHAH Al Bahah ASIR SUDAN Khamis Mushayt NAJRAN Abha Najran JIZAN 0 km 100 200 300 400 Jizan YEMEN Farasan 0 miles 100 200 © The Economist Intelligence Unit Limited 2010© The Economist Intelligence Unit Limited 2010 Saudi Arabia
Saudi Arabia 3 Executive summary Highlights October 2010 Outlook for 2010-14 • The rule of the Al Saud family will remain secure in 2010-14, although the complex issue of succession will become increasingly prominent. • Some resentment of Al Saud rule will continue, but this is unlikely to translate into organised movements. There is some risk of a conservative backlash against socially liberalising reforms, particularly regarding the role of women. • The governments political effectiveness will be constrained by the need to build consensus among elites and by the vast and inefficient bureaucracy. • Saudi Arabia will seek to contain Iranian influence. However, although it will compete with Iran for influence in Iraq, Lebanon and Yemen, the kingdom will be careful not to get too embroiled in proxy conflicts. • The government plans US$373bn of investment in 2010-14, which will help to support real GDP growth of 3.7% a year on average over the five-year period. • The central government budget surplus will track trends in international oil prices and is forecast to average 2.2% of GDP in 2010-14. • The riyal is forecast to remain pegged to the US dollar in 2010-14 at its current level. A single Gulf currency is in preparation, but is unlikely before 2014. • We forecast that the current-account surplus will narrow from 11.4% of GDP in 2010 to 4% of GDP in 2014, in line with oil price trends and assuming slow growth in world oil demand. Monthly review • The US president has asked the US Congress to approve the sale of US$60bn of military equipment to Saudi Arabia. The motivation may be to ensure security in the Gulf after the planned US withdrawal from Iraq by end-2011. • The Gulf Co-operation Council has postponed the full implementation of a customs union until 2012 or 2013. • The director of a TV station has offered his resignation (although it was not accepted) after the broadcasting of a controversial programme that drew links between terrorism and Western perceptions of religion in Saudi Arabia. • Two major contracts have been awarded for a power and water desalination complex at Ras al-Zour, on Saudi Arabias western coast. • The development of an industrial zone at Taif, in the province of Mecca, has been announced. • The Saudi Arabian Monetary Agency (SAMA, the central bank) has issued its 46th annual report, although most of the principal statistics had already been released.Country Report October 2010 www.eiu.com © The Economist Intelligence Unit Limited 2010
4 Saudi Arabia Outlook for 2010-14 Political outlook Political stability The rule of the Al Saud family is expected to remain secure in 2010-14, with opposition movements fragmented and suppressed. The power of the king, Abdullah bin Abdel-Aziz al-Saud, will be checked by the need to maintain consensus among senior princes with strong power bases of their own, and to accommodate the conservative clerical establishment. Limited institutional capacity and a large and inefficient bureaucracy will also constrain policymaking and implementation. The kings personal standing is bolstered by his reputation for piety, but there is believed to be significant resentment of Al Saud rule, owing to perceptions of corruption, vast inequalities in the distribution of wealth, high youth unemployment, the often arbitrary application of the law and the governments strong ties with the US. To counter this, the government will claim legitimacy through its religious credentials— domestically the king uses the title of Custodian of the Two Holy Mosques— and through extensive public spending. Wider public opinion will be difficult to gauge, given tight restrictions on civil society and freedom of speech as well as a ban on political parties. Uncertainty persists about the political succession, which will be an increasingly pressing issue over the forecast period since both the king and the crown prince, Sultan bin Abdel-Aziz al-Saud, are in their late 80s. Having returned to Saudi Arabia last December after several months of medical treatment abroad, Prince Sultan made an unscheduled trip to Morocco in August, prompting further speculation about his health, and he is unlikely to survive King Abdullah. By law, the heir to the throne must be a male descendant of the countrys founder, Abdel-Aziz al-Saud. Traditionally, the crown prince is appointed by the king, but King Abdullah has established a formal council of the direct descendants of Abdel-Aziz to help to determine the succession. This is intended to ensure that future kings have broad legitimacy within the family, but its mandate does not begin until after King Abdullahs reign. The interior minister, Prince Nayef bin Abdel-Aziz al-Saud, is widely seen as the most likely successor since the king appointed him as second deputy prime minister in 2009. He has a strong internal power base and is regarded as a conservative; principally concerned with stability, he is unlikely to promote reform. He has won some support in the West by tackling domestic militant Islamist violence. Prince Salman bin Abdel-Aziz al-Saud, the governor of Riyadh, the capital, is another contender, and a less well-known prince could emerge as a consensus candidate. Given the advanced age of Abdel-Azizs sons, there will be increasing focus on the eventual transfer of power to the next generation, with the sons of Prince Sultan, Prince Nayef and Prince Salman being among the possible contenders, benefiting from the strong power bases of their fathers. An ongoing threat of attacks by Saudi militant groups loosely aligned with al-Qaida remains. Attacks on government and Western targets will beCountry Report October 2010 www.eiu.com © The Economist Intelligence Unit Limited 2010
Saudi Arabia 5 attempted, possibly from Yemen, although Saudi Arabias border defences and military capability will be strengthened by arms purchases. The government will continue to address the issue by arresting suspected militants and sometimes by attempting to co-opt them by putting them through rehabilitation programmes. The king has taken steps towards implementing some socially liberalising reforms and this will continue to risk provoking a backlash from within the clerical establishment and from conservatives. Job shortages and rising unemployment could also lead to discontent among Saudi nationals, which may create unrest in the medium term. There is also a risk that the marginalised Shia minority, concentrated in oil-rich Eastern Province, will become increasingly restive as a result of tight restrictions on religious practices and economic discrimination. Election watch There is unlikely to be any democratic reform or move to an elected parliament before 2014, and political parties are expected to remain illegal. The king appoints the Council of Ministers and the Consultative Council, which has advisory powers. There are no parliamentary elections. The authorities have put on hold plans to introduce more elected representatives following the partial municipal elections in 2005, and have even postponed the next set of municipal elections from 2009 until at least 2011 to carry out further "studies". Women cannot vote, but this may change ahead of the municipal elections in 2011, if these actually take place. The recent election of female members of parliament in neighbouring Kuwait and Bahrain is likely to strengthen demands from the growing numbers of educated women that they be enfranchised. International relations Internationally, Saudi Arabia will use membership of the G20 group of leading economies to highlight its concerns and the interests of oil exporters. Saudi Arabia will pursue an active foreign policy in the face of many difficulties in the region. Containing Iran will be the main priority, and the two countries will compete for influence, particularly in Iraq (where Saudi authorities have taken a growing interest in the post-election horse-trading) but also in Lebanon and Syria. However, mindful of its own Shia minority and the likely destabilising impact of a US or Israeli strike against Iran, Saudi Arabia is unlikely overtly to support any military action. There is a risk that a severe deterioration in Iraqi security as the US withdraws could lead Saudi Arabia to back Sunni Arab armed interests there. In Yemen, where an offshoot of al-Qaida has gained a foothold and Iran is accused of backing a Shia insurgency near the Saudi border, Saudi Arabia will lead efforts to bolster stability and secure its borders. In Afghanistan, Saudi Arabia will assist international efforts by taking on a role as a mediator with the Taliban. King Abdullah will continue to emphasise the Arab League plan for an Arab- Israeli peace agreement. But, having been disappointed by the international and the Palestinian response to the intra-Palestinian "Mecca Accord" it brokered in 2007, Saudi Arabia is unlikely to try to broker such an agreement again without US and EU diplomatic backing. The US will remain Saudi Arabias most important strategic partner and the two countries interests will remain broadly aligned in terms of containing Iran and advancing the Arab-Israeli peaceCountry Report October 2010 www.eiu.com © The Economist Intelligence Unit Limited 2010
6 Saudi Arabia process, although Saudi Arabia may try to distance itself from any process it deems unlikely to succeed, such as the current one. Relations with fellow Gulf Co-operation Council (GCC) members will be bolstered by economic co-operation. However, relations with the UAE are likely to remain frosty because of an ongoing border dispute and the damage caused by the UAEs withdrawal from the planned GCC single currency. The kingdom will continue to try to maintain cohesion among the Arab states and to present a united Arab front in the face of security risks. Economic policy outlook Policy trends The government will remain a major force in the economy, although there is a long-term effort to encourage a greater role for the private sector. The state will continue to monopolise crude oil production, although private firms will have some involvement in gas exploration and joint-venture refineries. Oil export revenue will continue to provide the bulk of government income, and fiscal policy will thus be constrained by oil market developments. Nonetheless, substantial savings built up in recent years will enable the government to play a significant role in financing new industrial and infrastructure projects, with a long-term strategy of reducing the countrys dependence on crude oil exports, using more of its energy resources as feedstock for value-added, energy- intensive industries and creating jobs in manufacturing, tourism and other services. The private sector will continue to benefit from soft loans from five public-sector credit institutions. Public investment worth US$373bn is planned in 2010-14. Having completed a large-scale expansion of crude oil production capacity to 12m barrels/day, Saudi Aramco, the state oil company, will focus on ramping up output of gas, refined products and petrochemicals. The government is also increasing spending on health and education, backing major new rail and infrastructure projects, and plans to invest in food production abroad. The Saudi Arabian General Investment Authority (SAGIA) will seek to make the business environment more conducive to foreign investment, but a number of deterrents will persist, including heavy bureaucracy and an unpredictable and restrictive visa policy. Investment opportunities will result from gradual liberalisation in several sectors, including power generation, ports and transport. SAGIA is also seeking to attract investment into four new "economic cities", although the plans may take some time to implement, especially given the subdued outlook for the global economy in the early part of the forecast period, or may not fully materialise at all. Some of the state-owned enterprises will be part-privatised, but the restructuring of large companies, such as Saudi Arabian Airlines and the loss- making Saudi Electricity Company, will take time. Privatisation will often be carried out through initial public offerings on the local stock exchange, which are open only to Saudi citizens, in order to redistribute wealth while allowing the state to remain the largest shareholder. Government institutions will retain shares in some of the banks, given concerns about the health of the globalCountry Report October 2010 www.eiu.com © The Economist Intelligence Unit Limited 2010
Saudi Arabia 7 financial sector. The state will continue to guarantee bank deposits and (implicitly) borrowing by parastatals. Overall, policy implementation will be mixed, given the lack of co-ordination between ministries and the inefficiency of the overstaffed bureaucracy. "Saudiisation" quotas on the proportion of expatriates firms can hire will remain a drawback for businesses. In focus Future hydrocarbons strategy focuses on gas and refining Over the short term the focus of Saudi Aramco, the national oil company, in the hydrocarbons sector will be on natural gas production and refining (rather than crude oil), with large investments in both subsectors. There are a number of development projects, with total investment in the region of US$37bn, at various stages of implementation. By 2012 these projects aim to have boosted the natural gas production capacity by 6.8bn cu ft/day, and by 2015 production of refined products will have increased by 1m barrels/day (b/d). Owing to shortages of natural gas, the Saudi Electricity Company and operators of independent water and power plants (IWPPs) have been running their utility plants on heavy fuel oil. Aramcos strategy has therefore focused on developing additional gas production to feed power plants and free up more oil for export. There is some evidence that this strategy has been successful. In July Aramco agreed to allocate 300m cu ft/d of gas to the proposed Qurayyah power station. The plant will have a capacity of 1,800 mw and was originally planned to run on heavy oil. It was originally expected to be brought on stream in two phases, in 2014 and 2015, although now that it is going to run on natural gas instead, the whole plant is scheduled to start up in 2014. Upcoming tenders in the gas sector include that for the 1bn-cu ft/d Khursaniyah associated gas processing plant, which is expected to be commissioned imminently. The engineering, procurement and construction (EPC) contract for the US$6bn Wasit gas mega-complex is expected in late October. With a nameplate capacity of 2.5bn cu ft/d, the Wasit project is the largest gas development in the kingdom since the master gas system (MGS), which was built in the 1970s and early 1980s and was originally designed to handle 3.5bn cu ft/d of natural gas. Wasit has been rolled out to support Aramcos corporate strategy to use gas as much as possible to meet rising domestic energy demand over the short term. It is estimated that without the Wasit development, the MGS will have a shortfall of sales gas for end users of about 740m cu ft/d from 2014, according to Aramco. The development will entail the construction of a processing complex about 10 km south-east of Khursaniyah. This will process non-associated sour gas from the offshore Arabiyah and Hasbah fields to produce 1.75 bn cu ft/d of sales gas and 4,200 tonnes/day of sulphur. In late December EPC bids are also due to be submitted by an array of US, European and Asian contractors for the 1.5bn-cu ft/d Shaybah natural gas liquids (NGL) extraction and processing project in Rub al-Khali (the Empty Quarter). The US$4.5bn project involves the fabrication and installation of facilities to recover NGL and the relieving of bottlenecks at the existing gas oil separation plant (GOSP). Aramco is aiming to award the contract by mid-2011, with commissioning scheduled for autumn 2014.Country Report October 2010 www.eiu.com © The Economist Intelligence Unit Limited 2010
8 Saudi Arabia Onsite construction work on the offshore Karan gasfield project has also advanced, with plant commissioning due to start in 2012. The 1.8bn-cu ft/d project is Aramcos first venture to commercially develop non-associated gas. The new natural gas capacity will primarily be used by Aramco to provide ethane feedstock for the petro- chemicals industry in Eastern province, with the propane and methane being used for power generation and reinjection into oilfields to maintain reservoir pressure. Along with building new grassroots gas projects, Aramco has also stepped up exploration and production (E&P) activity in the past few years. Some progress has already been made, with Aramco having adding 31trn cu ft of gas to its existing reserves base between 2005 and 2009, taking total reserves to 275trn cu ft. Looking ahead, the state oil company is targeting probable reserves in deep offshore areas and the unconventional sectors of sour gas, shale and tight gas. Aramco has also added to crude oil reserves in recent years and aims to boost proven resources of 265bn barrels by 40%, or 106bn barrels, in the coming years. The company has also targeted recovery rates from major fields of 70%, which is twice the global average. However, with a spare capacity of around 4m b/d, the spotlight is not on crude oil but on refining, where work is already under way to build two 400,000-b/d export refineries. The more advanced refinery is the facility at Jubail, with the Saudi Aramco Total Refining and Petrochemical Company (Satorp), a joint venture between Aramco and Total (France), already having awarded the major EPC contracts. The refinery is expected to cost around US$9.6bn and will use Arabian Heavy crude as feedstock. Following the exit of ConocoPhillips (US) from the proposed Yanbu refinery, Aramco is forging ahead with the project alone. In August it announced the establishment of the Red Sea Refining Company to build and operate the refinery and also awarded contracts covering the main process elements. Preliminary work is also due to start on the 250,000-400,000-b/d Jizan refinery in the south-east of the kingdom, near the border with Yemen, with companies being invited to submit bids by the end of the year for a contract to carry out the front-end engineering and design package. Construction work for the project is scheduled to begin in late 2011, with start-up expected in late 2015. Jizan was initially intended to be the first private refinery in the kingdom. However, owing to a lack of interest from international oil companies, in February Aramco took over management of the development. Fiscal policy Fiscal performance will remain closely tied to the fortunes of the oil sector, and no serious efforts to increase the tax base are expected. A generally pro-cyclical approach to fiscal policy will exacerbate the impact of the volatility of international oil prices. The government is planning to continue its fiscal expansion, including a marked increase in capital spending. Several factors will make it difficult to cut expenditure in 2010-14, including rapid population growth, a growing wage bill as the bulk of new labour market entrants continue to be absorbed into the public sector, rising pension and other welfare costs, and commitments to education and healthcare. Although government budgets are dependent on oil revenue, and therefore remain exposed to a collapse in international oil prices, the government will not struggle to increase expenditure; oil revenue is expected to be high by historical standards and the government has amassed substantial savings during the recent boom. Nonetheless, the pace of spending growth is likely to be slower than it was during the 2003-08 oil boom. Based on the Economist Intelligence Units oilCountry Report October 2010 www.eiu.com © The Economist Intelligence Unit Limited 2010
Saudi Arabia 9 price and export volume assumptions, the budget is forecast to record a surplus of 2.5% of GDP in 2010 and 1.2% of GDP in 2011 (when oil prices are expected to dip slightly). A recovery in oil demand in 2012 will lead to higher international oil prices, although excess supply capacity is likely to produce a fall in prices thereafter. Consequently, the budget surplus is forecast to rise to 3.2% of GDP in 2012, before falling to 1.2% of GDP in 2014. Monetary policy The currencys peg to the US dollar, which is likely to be maintained throughout the forecast period, means that the main policy rate of the Saudi Arabian Monetary Agency (SAMA, the central bank) must roughly track movements in US interest rates, although this can sometimes lead to economic distortions when the two countries growth paths are misaligned. The reverse repo (repurchase), or deposit, rate was cut to 0.25% in June 2009, following another cut by 25 basis points in April. The Federal Reserve (the US central bank) is expected to maintain rates at a low level throughout 2010 and is likely to begin monetary tightening in 2012 with US dollar three-month commercial paper reaching 4.1% by 2014. SAMA will follow these broad trends but may begin to tighten monetary policy ahead of the US owing to concerns about rising inflation and money supply growth. A small premium is likely to be maintained given Saudi concerns about inflation. Credit to the private sector stagnated for much of 2009 owing to banks concerns about corporate risk and as companies adjusted to new lending requirements. However, it picked up in early 2010 and is likely to continue expanding. The bulk of current lending may be going to larger companies, and the government may privately lean on banks to increase their lending to smaller businesses in the domestic private sector. Economic forecast International assumptions 2009 2010 2011 2012 2013 2014 Economic growth (%) US GDP -2.6 2.3 1.5 1.9 2.3 2.4 OECD GDP -3.4 2.4 1.6 1.9 2.1 2.3 World GDP -0.7 4.4 3.6 4.0 4.1 4.2 World trade -11.1 10.7 5.5 6.2 6.4 6.6 Inflation indicators (% unless otherwise indicated) US CPI -0.3 1.3 1.0 1.9 2.5 2.8 OECD CPI 0.0 1.2 1.1 1.6 2.0 2.2 Manufactures (measured in US$) -3.3 0.3 -1.5 1.5 2.4 2.9 Oil (Brent; US$/b) 61.9 77.5 76.4 81.3 78.3 75.5 Non-oil commodities (measured in US$) -22.5 16.6 5.1 -0.3 -0.3 2.6 Financial variables US$ 3-month commercial paper rate (av; %) 0.3 0.2 0.3 0.7 2.2 4.1 SR:US$ (av) 3.8 3.8 3.8 3.8 3.8 3.8Country Report October 2010 www.eiu.com © The Economist Intelligence Unit Limited 2010
10 Saudi Arabia Economic growth Saudi Arabias economy is forecast to grow by an average of 3.7% a year in 2010-14, a slowdown from the annual average of 4.9% during the 2003-08 oil boom, but a recovery from 0.6% in 2009, when growth was dragged down by oil production cuts. Oil output policy will remain a key determinant of overall economic growth and a source of uncertainty, given the potential for volatility in international oil markets. The government has some ability to offset this risk by pursuing a counter-cyclical fiscal policy using the savings it has built up in recent years. However, it has tended to exacerbate business-cycle volatility by ramping up spending dramatically in years of strong oil prices. Growth in the non-oil private sector is projected to pick up over the forecast period, averaging 3.9%, as it recovers from a tightening of bank lending (following the default of two major Saudi conglomerates) and as foreign direct investment (FDI) rises. Government spending, subsidised credit and public-sector contracts will support growth in this sector. In terms of demand components, private consumption is forecast to expand, underpinned by strong population growth and by expansionary fiscal and monetary policies. However, it will be lower than the historical period owing to credit being harder to obtain, lower levels of foreign investment and persistent high unemployment. The economy will be heavily supported by extensive government spending and by a public sector that continues to absorb a large proportion of job market entrants. Therefore, government consumption will rise in 2010-11 before falling slightly in the remainder of the forecast period as private-sector growth accelerates. The government will also drive strong increases in investment, which is likely to grow faster than any other expenditure component over the forecast period. Private investment growth will be stimulated by a number of projects already planned or under way. Some US$373bn of public investment is planned in 2010-14. Foreigners will be an important source of investment, and inward FDI has remained relatively strong despite the weak global climate. Export volumes largely depend on oil production policy and are expected to grow steadily over the forecast period. Import volume growth will be stimulated by demand from ongoing construction projects and a reliance on imports to meet many consumer needs. As ever, oil price movements pose significant risks, as does the spectre of more corporate defaults. Economic growth % 2009 2010 2011 2012 2013 2014 GDP 0.6 3.4 3.7 3.8 3.7 3.7 Private consumption 4.1 4.0 4.2 4.3 4.3 4.4 Government consumption 5.5 5.8 4.5 4.3 4.1 3.9 Gross fixed investment 6.0 5.9 5.8 5.6 5.2 4.8 Exports of goods & services -10.0 1.7 2.8 2.7 2.5 2.2 Imports of goods & services 1.8 5.5 5.5 5.4 5.1 4.8 Domestic demand 4.8 5.0 4.9 4.9 4.8 4.6 Agriculture 0.6 0.6 0.0 0.1 0.2 0.2 Industry -2.8 3.1 3.6 3.7 3.3 3.1 Services 4.0 4.0 4.1 4.2 4.3 4.3Country Report October 2010 www.eiu.com © The Economist Intelligence Unit Limited 2010
Saudi Arabia 11 Inflation We expect inflation to average 5.7% in 2010, up from 5.1% in 2009 but broadly in line with the 6.1% year-on-year figure recorded in August. Inflation slowed following the 2009 global and local economic slowdown but is now likely to increase steadily, mainly driven by rises in food, rental and electricity prices. Housing shortages are expected to stem the slowdown in rental price rises and higher international food prices are likely to drive inflation in 2010-11. The link between interest rates and inflation is weak (as consumer debt levels are relatively low and are capped by the government), and inflation is contained largely through subsidies. There is a risk of a renewed inflationary spike, as in 2008, given the weakness of the policy tools available to contain inflationary pressure. A weakening dollar, and thus Saudi riyal, will add to the risk of imported inflation during the forecast period. These factors suggest that inflation will be higher in 2010-14 (when we expect it to average 5.6%) than in 2005-09 (when it averaged 4.4%). Exchange rates Saudi Arabia, Bahrain, Kuwait and Qatar remain committed to plans for a Gulf monetary union despite the withdrawal of Oman and the UAE, and a joint monetary council has been established with the governor of SAMA as its chairman. However, the countries still need to agree on various technical issues and meet the convergence criteria. Recent debt concerns in the euro zone have made the riyals existing peg to the US dollar more attractive. A single currency is therefore unlikely to be introduced before 2014, if at all. We expect the peg to remain in place in 2010-14 at the current level, although it could be altered in the latter part of the forecast period to prepare for a single currency. A single currency would probably also initially be pegged to the dollar, although a currency basket might be introduced later. External sector The current account is forecast to remain in surplus in 2010-14. Oil revenue will remain the primary factor determining current-account trends, and changes in oil prices and production will continue to be the main risks. International oil prices are expected to average US$78/barrel in 2010-14. Revenue from oil exports and from the main non-oil export, petrochemicals, will remain lower than in 2007-08, but with lower world commodity prices also helping to ease the cost of imports, the trade balance is expected to remain comfortably in surplus. This should be sufficient to offset persistent deficits on the services and current transfers accounts. Income from investments abroad has been sustained through the global economic slowdown and there is a small surplus on the income account. Rising domestic fuel consumption, weak global demand for oil and weakening international oil prices will lead to stagnant export earnings in 2012-14 and a contraction in the current-account surplus. The current-account surplus is forecast to average 7.8% of GDP in 2010-14, although it will narrow to 4% in 2014.Country Report October 2010 www.eiu.com © The Economist Intelligence Unit Limited 2010
12 Saudi Arabia Forecast summary (% unless otherwise indicated) 2009 a 2010 b 2011 b 2012 b 2013 b 2014 b Real GDP growth 0.6 3.4 3.7 3.8 3.7 3.7 Crude oil & NGL production (000 b/d) 9,778 c 9,845 10,058 10,422 10,713 10,967 Oil exports (US$ bn) 142.2 171.1 168.3 183.2 176.9 0.0 Consumer price inflation (av) 5.1 5.7 6.0 5.2 5.5 5.7 Consumer price inflation (end-period) 4.2 7.4 5.6 5.4 5.6 5.8 Deposit rate (3-month; av) 0.6 0.5 0.8 1.2 2.7 4.5 Government balance (% of GDP) -6.1 c 2.5 1.2 3.2 3.0 1.2 Exports of goods fob (US$ bn) 192.3 234.0 234.7 255.4 260.7 253.0 Imports of goods fob (US$ bn) -87.1 -99.2 -109.9 -117.0 -124.9 -133.1 Current-account balance (US$ bn) 22.8 50.7 35.9 46.7 41.5 23.6 Current-account balance (% of GDP) 6.1 11.4 7.6 8.9 7.4 4.0 External debt (end-period; US$ bn) 72.8 c 82.9 93.3 104.4 114.5 123.8 Exchange rate SR:US$ (av) 3.8 3.8 a 3.8 3.8 3.8 3.8 Exchange rate SR:¥100 (av) 3.6 4.0 a 4.2 4.3 4.2 4.2 Exchange rate SR:€ (av) 5.5 5.2 a 4.8 4.5 4.6 4.6 a Actual. b Economist Intelligence Unit forecasts. c Economist Intelligence Unit estimates.Country Report October 2010 www.eiu.com © The Economist Intelligence Unit Limited 2010
Saudi Arabia 13 Monthly review: October 2010 The political scene The US Congress is asked to In mid-September the US president, Barack Obama, was reported to have approve a Saudi arms deal submitted a list of defence items for Saudi Arabia worth a total of US$60bn to the US Congress for approval. Reports cited anonymous US officials, but no formal announcement has been made. If the sale goes ahead it would represent the biggest arms deal in US history; one that will provide a welcome boost to the flagging US defence industry. The intended supply by Boeing (US) of 84 new F-15 strike aircraft and the upgrade of 70 others, as well as the separate purchase of state-of-the-art Typhoon combat aircraft from BAE Systems (UK), are a long overdue enhancement of Saudi capabilities. However, the F-15s are essentially based on an old mechanical structure from the 1970s. Furthermore, the F-35, the latest Boeing stealth aircraft, is being supplied to Israel. This, and the potential covert US supply to Israel of the F-15s software codes (which could hamper effective delivery of missiles), should forestall Israeli pressure on Congress to veto this part of the deal. There are doubts, however, about whether there are enough Saudi pilots to fly these aircraft and the helicopters that are also included in the deal. Mr Obamas notification to Congress also listed 70 Boeing AH64 Apache attack helicopters, 72 Sikorsky "Blackhawk" troop-transport helicopters and 36 MD Little Bird surveillance helicopters. An industry insider told the Economist Intelligence Unit that he doubted Congress would approve the Apache helicopters as they would give Saudi Arabia an edge over Israel, which only has around 40 Apaches. There is also a possible second phase to the deal, worth a further US$30bn, which would include missile defence (possibly a similar system to that approved by Congress for the UAE), radar and naval craft upgrades. The Saudis have been discussing the aircraft deal, in broad terms, with successive US administrations since 2007. The king, Abdullah bin Abdel-Aziz al-Saud, reportedly decided to pursue it in July 2010, possibly finding the resolve to bolster the kingdoms military capability after the difficulties the Saudi army faced in skirmishes with rebels from northern Yemen earlier this year. The helicopter component of the proposed package will be particularly useful in this respect as it will enhance Saudi Arabias ability to target rebel fighters. A number of press reports have focused on the rising nuclear threat from Iran as the motivating factor in arms deals with Gulf states. However, the five- to ten-year timeline for the delivery of the aircraft to Saudi Arabia alone raises questions about what these purchases are intended to achieve. Gulf Co- operation Council (GCC) concerns about being caught up in a possible Iranian response to a US or Israeli attack against its nuclear facilities are not likely to be addressed by the proposed sales. A deliverable Iranian nuclear weapon could conceivably be developed in a much shorter timeframe.Country Report October 2010 www.eiu.com © The Economist Intelligence Unit Limited 2010
14 Saudi Arabia From a US perspective the arms deal with Saudi Arabia, along with large training contracts, signals a desire to ensure that the kingdom has a technological advantage over Iran at a time of growing concern about the strategic impact of the planned US withdrawal from Iraq by end-2011. This suggests a valuable commitment from the US to Saudi Arabias defence. The US is also committed to the defence of the whole Gulf region. Sales of US military equipment have also been made to the UAE, Oman and Kuwait with a total value of over US$50bn. Saudi Arabia could also enjoy spillover benefits from the arms deal through the transfer of technology. The Al Salam airframe maintenance factory was established in the 1980s through an offset programme that was connected to the sale of Boeing airborne warning and control system (AWACS) aircraft. For example, Saudi Arabias Typhoon aircraft are due to be built and maintained inside the kingdom. The deals cost has, however, raised eyebrows in Saudi Arabia. This is mainly because past arms deals have allegedly involved senior Saudi officials securing enormous commissions from foreign defence companies. King Abdullah is reported to have been monitoring defence contracts closely in an attempt to exert greater domestic control. Completion of GCC customs A meeting of GCC finance ministers in Jeddah in early September decided to union postponed postpone the full implementation of the customs union for what a Kuwaiti minister predicted would be two or three years from now. The opposition of the UAE is assumed to have played an important part in frustrating Saudi Arabias desire to move forward on this component of economic integration. Similarly, the UAE withdrew in May 2009 from the proposed currency union. Opposition from Abu Dhabi, the pre-eminent emirate, to the decision to locate the headquarters of the GCC central bank in Riyadh, the Saudi capital, played a large part in the UAEs decision to join Oman in opting out of the planned single currency. There are also ongoing sensitivities in Abu Dhabi about the drawing of its borders with Saudi Arabia (May 2010, The political scene). This may have been behind its frustration of Saudi Arabias efforts to complete the implementation of the customs union. Although not yet fully implemented, the customs union is in place. It was launched in 2003 and has a common external tariff of 5% with non-GCC states. The UAE strongly objected to having to increase its tariffs to this level. A GCC common market was launched in 2008, but there remain unresolved issues around tariffs and other barriers to trade in the region. More positively, the GCC meeting in Jeddah agreed to introduce electronic collection of the customs tariff by end-2010. This could in theory overcome some of the tensions associated with the operation of the customs union, provided there are no disputes about the amounts being transferred between states. Religious debate provokes Abdulrahman al-Rashed, the director of al-Arabiya, a Saudi satellite TV station, tensions tendered his resignation in mid-September to the stations owner, Sheikh Walid al-Ibrahim, the brother-in-law of the late King Fahd bin Abdel-Aziz al-Saud. ByCountry Report October 2010 www.eiu.com © The Economist Intelligence Unit Limited 2010
Saudi Arabia 15 Saudi standards al-Arabiya is a relatively balanced news channel and is part of Sheikh Walids Dubai-based MBC network. The station announced that Sheikh Walid had rejected the resignation of Mr Rashed. However, Sheikh Walid added that he appreciated his taking responsibility for a programme in the series, "Islam and the West". A segment of this programme referred to the countrys religious traditions as Wahhabi, a term more widely used in the West to describe Saudi Arabias strict and conservative version of Islam. The programme implied that Wahhabism is partly to blame for the kingdoms association with terrorism in the minds of some in the West. The comments angered some sections of opinion in Saudi Arabia. It is noteworthy that the owner of Asharq al-Awsat, an international Arabic daily newspaper, Prince Salman bin Abdel-Aziz al-Saud, had recently condemned the use of the term Wahhabi to describe Saudi religious traditions, advocating instead the use of the term Muwahidun (which translates as Unitarian). This fuelled rumours that Mr Rashed had also been dismissed as a correspondent for Asharq al-Awsat, which he used to edit. The Saudi satellite media are currently expanding, raising the potential for similar tensions over content in the future. It is expected that al-Arabiya will face competition from a 24-hour news channel being planned by Prince Alwaleed bin Talal, a renowned and particularly wealthy Saudi prince who owns 94% of Kingdom Holding, an investment company and one of the largest conglomerates in Saudi Arabia. Prince Alwaleeds news channel is expected to be run by another controversial Saudi media personality, Jamal Khashoggi. Mr Khashoggi resigned from Al Watan, a leading Saudi reformist newspaper, shortly after it published an article—not written by Mr Khashoggi himself—that criticised the salafi fundamentalist Islamic theology that is closely connected to Wahhabism for prohibiting visits to the shrines and graves of important Islamic figures. Economic policy Ras al-Zour power and water Two major construction contracts for a power and water desalination complex contracts are awarded at Ras al-Zour, on Saudi Arabias Gulf coast, were awarded in September by the state-owned Saline Water Conversion Corporation (SWCC). Doosan, a South Korean firm, said in a statement to the Korea Exchange that it had won a US$1.46bn contract to build a desalination plant with a projected capacity of 1.025m cu metres/day. The plant is expected to be completed in 2014 and, according to Doosan, will be the worlds largest seawater desalination facility. The plant will be integrated with a new 2,700-mw power plant to be built by a consortium consisting of the Saudi-based Al Arrab Contracting Company and a Chinese firm, Sepco III Electric Power Construction Corporation, which were awarded the contract by the SWCC in September. According to industry sources quoted in the local and international press, the contract was worth US$2.4bn and the plant is expected to be operational in early 2014. According to the governor of the SWCC, Fehied Farhad al-Sharif, the total cost of the complex is 20-25% below the initial estimate of US$6bn, which was made when the project was originally being planned.Country Report October 2010 www.eiu.com © The Economist Intelligence Unit Limited 2010
16 Saudi Arabia The SWCC has said that it will take 1bn litres/year of desalinated water, and the government-controlled Saudi Arabian Mining Company (Maaden) will use 1,350 mw a year of electricity from the power plant. The majority of this is likely to be consumed by Maadens planned aluminium smelter at Ras al-Zour, which is being developed in partnership with the US-based Alcoa and is due to begin production in 2013-14. The Saudi Electricity Company (SEC) has said that it will take a further 1,050 mw a year of electricity from the plant. To meet growing demand for utilities in Saudi Arabia, the government plans to expand power generation capacity by 30 gw, from around 50 gw at present. Industrial zone planned The Saudi Industrial Property Authority (Modon) announced in September that for Taif it would lead the development of a new industrial zone at Taif, located in the province of Mecca in western Saudi Arabia. Modons director-general, Tawfig Fawzan Alrabiah, said that the new zone would cover an area of 11m sq metres, with a first phase to be built over 18 months. This would include 3m sq metres and road infrastructure and have sufficient capacity for up to 150 factories. Modon already manages 18 industrial zones across Saudi Arabia and in the past two years has announced that similar zones will be developed in Jeddah, Jizan, Arar and Al Kharj. Mr Alrabiah said that the authority had allocated more than 500 plots of land to industrial projects in 2008 and that this figure rose to 800 plots in 2009. The government is investing heavily in new economic cities and industrial zones. The aim of this policy is to diversify the economy away from a dependency on hydrocarbons, create jobs for the rapidly growing labour force and create new economic centres for greater regionalisation in the kingdom. Economic performance SAMA annual report released In late September Mohammed al-Jasser, the governor of the Saudi Arabian Monetary Agency (SAMA, the central bank), presented its 46th annual report to King Abdullah. The full report was made public on September 26th, although provisional statistics had already been issued in August on SAMAs website, and the government-run Saudi Press Agency (SPA) had also quoted a number of figures. The report said that the kingdoms real GDP growth was 0.6% in 2009, compared with 4.2% in 2008, with the oil sector shrinking by 6.7% and the non-oil sector growing by 3.8%, down from 4.3% in 2008. Speaking at a conference in Riyadh in late September, Mr Jasser said that he expected the Saudi economy to grow by 3.5% in 2010. Real gross domestic product by sector (% of GDP; 1999 prices) 2006 2007 2008 2009 Oil sector 32 30 30 28 Non-oil sector 67 69 69 71 Private sector 45 47 47 48 Government sector 22 22 22 23 Import duty 1 1 1 1 Source: Saudi Arabian Monetary Agency, annual report, 2010.Country Report October 2010 www.eiu.com © The Economist Intelligence Unit Limited 2010
Saudi Arabia 17 The services sector contributed some 37.9% to the kingdoms GDP in 2009, up from 27.9% in 2008, as lower crude oil prices and output reduced the contribution of the primary sector, and overall government spending reached a record high of SR596.4bn (US$159bn). This resulted in a provisional budget deficit of SR87bn in 2009, compared with a record surplus of SR581bn in 2008. Gross domestic product by sector (% of GDP) 2008 2009 Government Import duty, 1.0 Government Import duty, 1.0 sector, 14.0 sector, 19.0 Oil sector, 48.0 Oil sector, 61.0 Private Non-oil sector, 39.0 Private Non-oil sector, 51.0 sector, 25.0 sector, 32.0 Source: Saudi Arabian Monetary Agency, annual report, 2010. Annual inflation fell to 5.1% in 2009 from 9.9% in 2008, although prices have inched steadily higher during 2010. The most recent figures from the Central Department of Statistics indicated that the cost of living index rose by 6.1% year on year in August 2010, its seventh consecutive monthly increase. The wholesale price index, which measures the cost of a range of raw materials, foods and manufactured products, actually fell by 3% year on year in 2009, according to SAMA. SAMA has also provided figures on unemployment, which it said was 10.5% among Saudi nationals in 2009, up from 9.8% in 2008. The data showed that unemployment was just 0.3% among non-Saudis, mainly because foreign nationals without full-time employment are in theory not permitted to be resident in the country. Total bank credit fell by 1.4% in 2009 to SR737bn. In a breakdown by economic activity, the largest single category of credit was "miscellaneous", at 38.9% of the total ("commerce" was the second-largest, at 23%). Net lending by specialised government institutions increased in 2009, by 13% year on year, although only because lending by the Public Investment Fund, which is part of the Ministry of Economy and Planning, more than doubled from SR6.2bn in 2008 to SR13.4bn in 2009. Lending by other institutions, including the Saudi Credit and Savings Bank, the Agricultural Development Fund and the Real Estate Development Fund, fell in 2009.Country Report October 2010 www.eiu.com © The Economist Intelligence Unit Limited 2010
18 Saudi ArabiaData and chartsAnnual data and forecast Pl ea se se e g ra p hi c b el ow 2005 a 2006 a 2007 a 2008 a 2009 a 2010 b 2011 bGDPNominal GDP (US$ bn) 315.6 356.6 384.9 476.3 375.8 446.4 471.9Nominal GDP (SR bn) 1,182.5 1,335.6 1,442.6 1,786.1 1,409.1 1,674.0 1,769.6Real GDP growth (%) 5.6 3.2 2.0 4.2 0.6 3.4 3.7Expenditure on GDP (% real change)Private consumption 8.8 10.2 11.7 7.3 c 4.1 c 4.0 4.2Government consumption 12.9 12.0 5.0 5.2 c 5.5 c 5.8 4.5Gross fixed investment 18.5 17.0 18.3 8.4 c 6.0 c 5.9 5.8Exports of goods & services 14.0 3.4 3.0 6.0 c -10.0 c 1.7 2.8Imports of goods & services 32.8 25.2 21.6 13.4 c 1.8 c 5.5 5.5Origin of GDP (% real change)Agriculture 1.2 1.1 1.9 0.7 0.6 0.6 0.0Industry 6.4 2.0 -0.2 4.4 -2.8 3.1 3.6Services 5.0 4.4 4.2 4.3 4.0 4.0 4.1Population and incomePopulation (m) 23.2 24.0 24.7 25.5 26.3 27.1 27.9GDP per head (US$ at PPP) 21,127 21,817 22,195 22,906 22,606 22,906 23,468Fiscal indicators (% of GDP)Central government budget revenue 47.7 50.4 44.6 61.6 36.2 c 41.2 39.3Central government budget expenditure 29.3 29.4 32.3 29.1 42.3 c 38.8 38.0Central government budget balance 18.4 21.0 12.2 32.5 -6.1 c 2.5 1.2Public debt 42.9 30.9 24.7 18.7 22.6 17.0 16.2Prices and financial indicatorsExchange rate SR:US$ (end-period) 3.745 3.745 3.750 3.750 3.750 3.750 3.750Exchange rate SR:€ (end-period) 4.418 4.942 5.476 5.213 5.375 4.613 4.331Consumer prices (av; %) 0.6 2.3 4.1 9.9 5.1 5.7 6.0Producer prices (av; %) 2.9 1.1 5.7 9.0 -3.0 4.5 3.8Stock of money M1 (% change) 4.5 10.3 22.6 10.9 22.6 20.0 9.0Stock of money M2 (% change) 11.6 19.3 19.6 17.6 10.7 4.6 9.8Deposit rate (av; %) 3.8 5.0 4.8 2.9 0.6 0.5 0.8Current account (US$ m)Trade balance 126,117 147,391 150,732 212,027 105,206 134,816 124,775 Goods: exports fob 180,712 211,305 233,330 313,481 192,307 233,982 234,651 Goods: imports fob -54,595 -63,914 -82,598 -101,454 -87,101 -99,167 -109,877Services balance -21,710 -35,380 -46,693 -65,858 -63,882 -65,215 -69,692Income balance 432 3,835 6,396 9,165 8,612 8,573 8,533Current transfers balance -14,778 -16,781 -17,043 -23,012 -27,172 -27,444 -27,718Current-account balance 90,061 99,065 93,392 132,322 22,766 50,730 35,897External debt (US$ m)Debt stock 43,738 c 49,540 c 70,523 c 79,163 c 72,769 c 82,923 93,296Debt service paid 3,702 c 4,463 c 5,460 c 7,304 c 5,963 c 6,649 7,640 Principal repayments 1,913 c 2,012 c 1,950 c 2,007 c 2,189 c 2,665 3,170 Interest 1,789 c 2,452 c 3,510 c 5,297 c 3,774 c 3,984 4,470International reserves (US$ m)Total international reserves 155,259 226,277 305,709 442,664 410,109 455,719 495,906a Actual. b Economist Intelligence Unit forecasts. c Economist Intelligence Unit estimates.Source: IMF, International Financial Statistics.Country Report October 2010 www.eiu.com © The Economist Intelligence Unit Limited 2010
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