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- 3. 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: london@eiu.com
Next report: To request the latest schedule, e-mail schedule@eiu.com
Country Report October 2010 www.eiu.com © The Economist Intelligence Unit Limited 2010
- 4. 2
Main railway
Turayf Main road
Al Qurayyat IRAQ International boundary
Arar
Ar'ar
Province boundary
JORDAN IRAN
AL JAWF Main airport
Sakakah
Rafha Capital
KUWAIT
Country 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
- 5. 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 government's 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 Arabia's 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
- 6. 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 king's 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 government's 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 country's 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 Abdullah's
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-Aziz's 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 be
Country Report October 2010 www.eiu.com © The Economist Intelligence Unit Limited 2010
- 7. Saudi Arabia 5
attempted, possibly from Yemen, although Saudi Arabia's 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 Arabia's most
important strategic partner and the two countries' interests will remain broadly
aligned in terms of containing Iran and advancing the Arab-Israeli peace
Country Report October 2010 www.eiu.com © The Economist Intelligence Unit Limited 2010
- 8. 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 UAE's 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 country's 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 global
Country Report October 2010 www.eiu.com © The Economist Intelligence Unit Limited 2010
- 9. 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. Aramco's 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 Aramco's 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
- 10. 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 Aramco's
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 Unit's oil
Country Report October 2010 www.eiu.com © The Economist Intelligence Unit Limited 2010
- 11. 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 currency's 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 3.8
Country Report October 2010 www.eiu.com © The Economist Intelligence Unit Limited 2010
- 12. 10 Saudi Arabia
Economic growth Saudi Arabia's 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 4.3
Country Report October 2010 www.eiu.com © The Economist Intelligence Unit Limited 2010
- 13. 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 riyal's 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$78/barrel in 2010-14. Revenue from oil
exports and from the main non-oil export, petrochemicals, will remain lower
than in 2007-08, but with lower world commodity prices also helping to ease
the cost of imports, the trade balance is expected to remain comfortably in
surplus. This should be sufficient to offset persistent deficits on the services and
current transfers accounts. Income from investments abroad has been sustained
through the global economic slowdown and there is a small surplus on the
income account. Rising domestic fuel consumption, weak global demand for oil
and weakening international oil prices will lead to stagnant export earnings in
2012-14 and a contraction in the current-account surplus. The current-account
surplus is forecast to average 7.8% of GDP in 2010-14, although it will narrow to
4% in 2014.
Country Report October 2010 www.eiu.com © The Economist Intelligence Unit Limited 2010
- 14. 12 Saudi Arabia
Forecast summary
(% unless otherwise indicated)
2009 a 2010 b 2011 b 2012 b 2013 b 2014 b
Real GDP growth 0.6 3.4 3.7 3.8 3.7 3.7
Crude oil & NGL production ('000 b/d) 9,778 c 9,845 10,058 10,422 10,713 10,967
Oil exports (US$ 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
- 15. 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-15's 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 Obama's
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 kingdom's 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 Arabia's 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.
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- 16. 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 Arabia's 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 Arabia's Typhoon aircraft are due to be built and maintained
inside the kingdom.
The deal's 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
Arabia's 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 UAE's 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 Arabia's 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 station's owner, Sheikh Walid
al-Ibrahim, the brother-in-law of the late King Fahd bin Abdel-Aziz al-Saud. By
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- 17. Saudi Arabia 15
Saudi standards al-Arabiya is a relatively balanced news channel and is part of
Sheikh Walid's 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 country's
religious traditions as Wahhabi, a term more widely used in the West to
describe Saudi Arabia's strict and conservative version of Islam. The
programme implied that Wahhabism is partly to blame for the kingdom's
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 Alwaleed's 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 Arabia's 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 world's 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.
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- 18. 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 Maaden's 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. Modon's 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 SAMA's website,
and the government-run Saudi Press Agency (SPA) had also quoted a number
of figures. The report said that the kingdom's 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
- 19. Saudi Arabia 17
The services sector contributed some 37.9% to the kingdom's 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
- 20. 18 Saudi Arabia
Data and charts
Annual 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 b
GDP
Nominal GDP (US$ bn) 315.6 356.6 384.9 476.3 375.8 446.4 471.9
Nominal GDP (SR bn) 1,182.5 1,335.6 1,442.6 1,786.1 1,409.1 1,674.0 1,769.6
Real GDP growth (%) 5.6 3.2 2.0 4.2 0.6 3.4 3.7
Expenditure on GDP (% real change)
Private consumption 8.8 10.2 11.7 7.3 c 4.1 c 4.0 4.2
Government consumption 12.9 12.0 5.0 5.2 c 5.5 c 5.8 4.5
Gross fixed investment 18.5 17.0 18.3 8.4 c 6.0 c 5.9 5.8
Exports of goods & services 14.0 3.4 3.0 6.0 c -10.0 c 1.7 2.8
Imports of goods & services 32.8 25.2 21.6 13.4 c 1.8 c 5.5 5.5
Origin of GDP (% real change)
Agriculture 1.2 1.1 1.9 0.7 0.6 0.6 0.0
Industry 6.4 2.0 -0.2 4.4 -2.8 3.1 3.6
Services 5.0 4.4 4.2 4.3 4.0 4.0 4.1
Population and income
Population (m) 23.2 24.0 24.7 25.5 26.3 27.1 27.9
GDP per head (US$ at PPP) 21,127 21,817 22,195 22,906 22,606 22,906 23,468
Fiscal indicators (% of GDP)
Central government budget revenue 47.7 50.4 44.6 61.6 36.2 c 41.2 39.3
Central government budget expenditure 29.3 29.4 32.3 29.1 42.3 c 38.8 38.0
Central government budget balance 18.4 21.0 12.2 32.5 -6.1 c 2.5 1.2
Public debt 42.9 30.9 24.7 18.7 22.6 17.0 16.2
Prices and financial indicators
Exchange rate SR:US$ (end-period) 3.745 3.745 3.750 3.750 3.750 3.750 3.750
Exchange rate SR:€ (end-period) 4.418 4.942 5.476 5.213 5.375 4.613 4.331
Consumer prices (av; %) 0.6 2.3 4.1 9.9 5.1 5.7 6.0
Producer prices (av; %) 2.9 1.1 5.7 9.0 -3.0 4.5 3.8
Stock of money M1 (% change) 4.5 10.3 22.6 10.9 22.6 20.0 9.0
Stock of money M2 (% change) 11.6 19.3 19.6 17.6 10.7 4.6 9.8
Deposit rate (av; %) 3.8 5.0 4.8 2.9 0.6 0.5 0.8
Current 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 -109,877
Services balance -21,710 -35,380 -46,693 -65,858 -63,882 -65,215 -69,692
Income balance 432 3,835 6,396 9,165 8,612 8,573 8,533
Current transfers balance -14,778 -16,781 -17,043 -23,012 -27,172 -27,444 -27,718
Current-account balance 90,061 99,065 93,392 132,322 22,766 50,730 35,897
External debt (US$ m)
Debt stock 43,738 c 49,540 c 70,523 c 79,163 c 72,769 c 82,923 93,296
Debt 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 4,470
International reserves (US$ m)
Total international reserves 155,259 226,277 305,709 442,664 410,109 455,719 495,906
a 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
- 21. Saudi Arabia 19
Quarterly data
Pl ea se se e g ra p hi c b el ow
2008 2009 2010
3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr
Prices
Consumer prices (2000=100) 117.8 120.0 120.7 121.3 122.8 124.7 126.1 127.7
Consumer prices (% change, year on year) 10.8 9.8 6.9 5.3 4.2 3.9 4.5 5.2
Wholesale prices (2000=100) 120.2 113.2 111.4 112.1 113.8 114.6 115.1 n/a
Wholesale prices (% change, year on year) 11.8 3.3 -2.5 -5.3 -5.3 1.2 3.3 n/a
OPEC basket (US$/barrel) 113.4 52.5 42.9 68.1 74.3 67.7 67.7 n/a
Financial indicators
Exchange rate SR:US$ (av) 3.750 3.750 3.750 3.750 3.750 3.750 3.750 3.750
Exchange rate SR:US$ (end-period) 3.750 3.750 3.750 3.750 3.750 3.750 3.750 3.750
Deposit rate (av; %) 3.104 3.783 2.520 1.673 0.281 0.399 0.265 n/a
M1 (end-period; SR bn) 417.9 425.5 459.8 476.1 492.7 521.6 542.0 576.9
M1 (% change, year on year) 18.1 10.9 11.7 10.9 17.9 22.6 17.9 21.2
M2 (end-period; SR bn) 888.5 929.1 965.6 1001.9 999.9 1028.9 1010.5 1035.6
M2 (% change, year on year) 19.4 17.6 15.8 16.4 12.5 10.7 4.7 3.4
TASI stockmarket index (end-period;
Feb 1985=1,000) 7,459 4,803 4,704 5,596 6,322 6,122 6,801 6,094
Sectoral trends
Crude petroleum (m barrels/day)a 9.5 8.8 8.0 8.2 8.2 8.2 8.2 8.2
Foreign tradeb (US$ m)
Exports fob 89,398 60,346 36,218 41,653 49,524 49,216 n/a n/a
Imports fob 31,858 28,120 21,122 23,938 24,679 24,925 n/a n/a
Trade balance 57,540 32,225 15,095 17,715 24,846 24,291 n/a n/a
Foreign reserves (US$ m)
Reserves excl gold (end-period) 437,319 442,249 415,167 394,598 384,871 410,109 420,236 429,859
a Including half share of Neutral Zone production. b Direction of Trade Statistics estimates, figures are subject to revision.
Sources: International Energy Agency, Oil Market Report; IMF, International Financial Statistics, Direction of Trade Statistics; Bloomberg; Platts.
Country Report October 2010 www.eiu.com © The Economist Intelligence Unit Limited 2010