Country Profile
Saudi Arabia has a total area of 2.15 million square kilometers. With a total population of 28.08 million (data.worldbank.org, 2012), Saudi Arabia is inhabited by Arabs and 8.5 million foreigners. The official language is Arabic; English is spoken in business circles. Its capital city is Riyadh w6ith a population of 4.725 million. Other major cities include Jeddah, Mecca, Medina and Ad Dammam.
The World Bank classifies the Kingdom of Saudi Arabia as a high income nonOECD economy. In 2011, the nominal GDP is reported at $576.8 billion. It is an oli-based economy with strong government controls over major economic activities. The economy remains the leading producer of oil and natural gas and holds more than 20% of the world’s proven oil reserves (www.cia.gov). The country is also the leading oil exporter in the world. The economy is heavily dependent on its revenues from oil to finance the spending of the government. The economic policy is highly sensitive to developments international oil markets; e.g. the oil minister adjusts oil output in response to market shortages. Oil production in 2011 is at 10mbd.
The country has membership of international groups/organizations like World Trade Organization, Arab League, Gulf Co-operation Council, Organization of the Islamic Conference, United Nations, Organization of Petroleum Exporting Countries, International Monetary Fund and World Bank.
Strengths
“Saudi Arabia sits on more than 25% of the world's known oil reserves. It is capable of producing more than 10 million barrels per day; that figure is set to rise.”(http://www.bbc.co.uk/news/world-middle-east-14702705)
“Saudi Arabia is the world's dominant oil producer and owner of the largest hydrocarbon reserves; rapidly growing unemployment is a major challenge.” (http://www.bbc.co.uk/news/world-middle-east-14702705)
The strengths of the Saudi Arabia’s economy lies on its decent GDP growth rate, strong public finance ratios, large current Account surplus, and sizeable fiscal and international revenues.
Decent GDP growth rate. The gross domestic product or GDP, as defined, is the total value of all goods and services produced in an economy over a time period. It is a key indicator in measuring the health of an economy, that is, a healthy economy is characterized by low unemployment and increase in wage, while an unhealthy economy is characterized by high unemployment and decrease in wage.
The GDP growth rate is the measure of how fast the economy grows. Since GDP is the gauge of the economy’s health, the growth in GDP depicts improvement in the economic health of the country over time. Figure 1 illustrates the annual GDP growth of the Saudi Arabia’s economy. The economy’s real GDP is expanding after a very low growth in the year 2009. In 2010, a growth rate of 4.6% was attained and further increased to 6.8% in 2011. This suggests that Saudi Arabia’s economy is getting stronger as the government expands oil output and spending along with increasing oil prices.
Figure 1: GDP Growth (2003 – 2012)
Source: The World Bank, 2012
Strong public finance ratios. The rise in oil prices since the late 1990s has helped the government pay down public debt from roughly 120% of GDP to less than 10% in 2011. The budget surplus was 12.7% in 2011, despite a 25% increase in public spending. Given the large reserves held by SAMA (government deposits in SAMA reached 55% of GDP in 2011), the main short-to-medium-term threat to Saudi Arabia’s public finances comes from a prolonged fall in the price of oil, a prospect that currently looks unlikely. However, over the medium to long term, population growth (currently between 2.3% and 2.5%), rising spending on social services, and expanding public sector employment may threaten the sustainability of public finances. Making matters worse is that the ratchet up of public spending — not only in Saudi Arabia, but all across the Gulf Cooperation Council (GCC) — on public sector employees, as well as housing projects and unemployment benefits risks becoming permanent and crowd out private sector development. Estimates of the fiscal breakeven price of oil vary between $70 and $90 per barrel. The breakeven price has risen sharply since social unrest broke out in North Africa, but could be leveling off if government spending growth slows and production increases.
Official unemployment is 8.5%, but the number of claimants of unemployment benefits indicates that the rate may be double. In addition, youth unemployment is close to 40%, a level that appears unlikely to come down any time soon. With almost half of the population under 21 years old, roughly 400,000 young Saudis enter the workforce every year. However, private sector employment creation is only around 200,000 per year, a fraction of which are taken by Saudi nationals, as public sector employment pays more and unemployment benefits are higher than private sector salaries.
Large current account surplus. The current account recorded a surplus of 27% of GDP in 2011, up from 15% in 2010. The widening was driven by a near 40% rise in the average price of oil and a 6.3% rise in production. With prices staying high in 2012, the current account will likely post a surplus of more than 20% of GDP. Saudi Arabia does not publish data on its net international investment position. Nevertheless, assets (including reserves) held by the Saudi Arabian Monetary Authority (SAMA), which have increased to around 90% of GDP, provide an indication of the substantial resources at the authorities’ disposal. The government owes no foreign debt. Gross external debt is low at close to 15% of GDP.
The strength of Saudi Arabia’s external payments position is further underscored by the regular net inflow of foreign direct investment (FDI), averaging roughly 6% of GDP since 2007. Saudi Arabia ranks highly in 12th place in the World Bank’s “Doing Business” index and have worked to attract investment in the non-oil sectors such as manufacturing (including oil refining), healthcare, and utilities.
Sizeable fiscal and international revenues
Weaknesses. The weaknesses of the Saudi Arabia’s economy lies on the following: low economic diversification, monetary policy tied to the United States, low GDP per capita, highly discriminatory society, undemocratic political system, and high youth unemployment.
Low economic diversification. Saudi Arabia holds almost 20% of the world’s known reserves of crude oil, representing the largest share of any single country. Oil has allowed Saudi Arabia to build vast amounts of wealth and awarded the country with a pivotal geostrategic role. Barring a catastrophic event, Saudi Arabia’s standing is unlikely to change for the foreseeable future, as reserves will last for roughly 80 years at current production levels. However, dependence on a single commodity has also come with its own set of problems. The oil sector accounts for half of GDP, but oil production and refining are capital intensive, leaving the regime in charge of creating job opportunities for the vast the majority of the population. The public sector employs an excessive 70% of the Saudi workforce. Oil also accounts for 80% of government revenue and 95% of exports. As a result, changes in the price cause volatility and unpredictability in public finances and the balance of payments.
Monetary policy tied to the US. The peg to the US dollar limits SAMA’s monetary policy tools. Yearly inflation has trended upward since May 2011, when it bottomed at 4.6% y/y, reaching 5.4% in March 2012. The annualized month-on-month increase in March was lower at 3.5%, but is unlikely to herald significantly lower inflation in 2012. Monthly inflation tends to be cyclical with rates peaking in the middle — and towards the end — of the year. Inflation is likely to average 5% or more in 2012 fuelled by quickening money (M2) growth, reaching 17.3% in February 2012, higher oil prices, and fiscal stimulus.
Monetary policy is determined by the peg of the Saudi riyal to the US dollar, which has been in place since 1986. One benefit of the peg is that it tends to reduce volatility in the riyal value of oil earnings. It has also increased predictability and credibility of SAMA’s monetary policy. However, it leaves the authorities with fewer tools to conduct monetary policy needed when Saudi Arabia’s business cycle diverges from that of the US. The run up in inflation in 2008 to more than 10% is a case in point. While inflation has come down since then, it exceeds that of the US, thus hampering the development of non-oil (export) industries.
