Current Economic State of Saudi Arabia
Saudi Arabia boasts the largest economy in the Gulf and is represents the world's largest oil producer and exporter. It has the world's greatest proven oil reserves, 25 percent, equaling some 261.5 billion barrels. The Kingdom has approximately 25 percent of the GDP of all Arab states, between US$ 130-140 billion. Saudi Arabia has 60 percent of the population of the Arab Gulf states, just over 20 million people, and 50 percent of the population is less than 18 years of age.
The government continues to try and wean the country off of its reliance on oil. There are signs of greater private sector productivity, increased industrial investment, continued positive performance in banking and a higher level of returns on investment. This has been accomplished in an economic environment of price stability, free enterprise, an open economy and an exchange system free of any restrictions.
The Saudis also intend to alter the foreign capital law in order to introduce more incentives that will lure foreign investors. There is also concern, however, that the oil revenue may diminish the perceived need for continued economic reform. In a major policy change, the government early in 1995 began to cut subsidies and to impose charges for public services, belatedly hoping to trim its chronic budget deficit, to heal the erosion of foreign assets and to strengthen public finances.
A growing labor force and an unexpected 35 percent drop in oil prices in 1998 forced the Saudi government to begin implementing various economic reform programs that will place the private-sector as the main engine of economic diversification and growth as well as job creation.
With 70-75 percent of the government's income dependent on oil revenues, the kingdom's overall economic health can rise or fall with oil prices. And in 1998 a drop in prices deflated nominal GDP by 10.8 percent to $130.1 billion, caused a 20 percent deficit in expected revenues to $38.1 billion and pushed the fiscal deficit to $12.3 billion, two-and-a-half times expected. The reduction in oil prices also pushed per capita GDP to $6,600, its lowest level of the 1990s, reversing a three-year growth trend. Per capita GDP has fallen significantly from its peak in 1980, when it reached $15,700, $2,500 more than the U.S. figures. That reversed with U.S. per capita GDP at the end of 1998 of $31,500 dwarfing the kingdom's by $24,900.
For short-term compensation of the lost revenue the government implemented stringent measures and reforms. All unsigned government procurements were suspended, hiring of almost all new government employees halted and operations and maintenance contracts were cut by 10 percent. Of cuts to the budget, defense spending took the biggest hit with an estimated 22 percent reduction. Social services, such as health and education, were reduced by 6 percent. Other revenue-generating steps included extending payment to contractors and increasing gas prices by 50 percent, which can yield an extra $1 billion a year. While the government remains committed to economic reform, the rise in oil prices in 1999 may reduce the incentive to reform and slow the process.
Over-reliance on oil is not the kingdom’s only problem. It also faces series job shortages. According to 1997 data, only 2.5 million of workers in a labor force of 7.2 million were Saudi citizens. Half the Saudi population, which is growing at a 3.4 percent rate, is under 18-years-old. This means hundreds of thousands of citizens enter the workforce each year. The government has introduced some measures to address the problem in the short-term, such as requiring firms to increase the number of nationals it hires.
It also doubled to SR 2,000 ($533) the cost of work permits for foreigners. This hike can increase government revenues by several hundred million dollars and simultaneously create jobs for Saudis. The government also made it more expensive for foreigners to enter and leave the country, raising visa prices to SR 500 ($133).
These measures, however, will only create jobs in the short term. The long-term solution -- like the solution for economic growth and diversification -- rests in restructuring the economy with the private sector at its heart. The strategy for doing so includes privatizing government-owned industries and revising both a 30-year-old law on foreign direct investment and a code that taxes foreign corporate profits up to 45 percent. Other important steps include its negotiations to join the World Trade Organization and opening its capital markets.
In late 1999, the government announced a conservative budget for 2000, with a deficit of $7.467 billion. Revenues for the year are projected at $41.867 billion, an augmentation of approximately $2.667 billion on actual 1999 revenues. Expenditures in 1999 amounted to $48.3 billion.
1999* 1998 1997
Real GDP Growth (percent) 1.6 1.6 3.0
Per Capita GDP $6,500 $6,600 $7,600
Consumer Price Inflation (percent)1.5 -0.3 -0.2
Budget Balance (percent of GDP) -8.8 -9.4 -3.8
Current Account Balance (% of GDP)-3.2 -12.9 -0.2
Exports (US$bn) 35.00 42.25 59.68
Imports (US$bn) 23.00 24.00 26.15
Trade Balance (US$bn) 12.00 18.25 33.53
Balance on Goods & Services (US$mn)-2,000 2,250 12,537
Every five years for the last three decades, the government releases a 5-year strategic plan outlining economic objectives. During the current plan, the government’s 6th, which concludes at the end of 1999, the government had hoped to erase its deficit. While it did not accomplish this, the government successfully reduced the budget by 25 percent from $111 billion (five years earlier) to an estimated $28 billion. Furthermore, the government’s budget revenues are expected to reach $250 billion, up from $167 billion five years ago.
The focus of the recently unveiled seventh-five year plan is further economic diversification and privatization. Special attention is also placed on human resource development, increasing employment and replacing foreign workers with Saudis.
During the last decade, the Saudi economy has stood on three main pillars: the oil sector, comprising 36 percent, the private sector, also 36 percent, and government spending, 26 percent.
Private sector growth during that period grew at an average rate of 4.1 percent a year, never declining. The non-oil private sector growth dropped from 4.4 percent growth in 1997 to 2.1 percent in 1998.
Oil comprises roughly 75 percent of the government’s revenue and despite the price collapse, the proportion dropped only to 70 percent. The collapse did, however, deflate the oil portion of GDP by 34.8 percent.
The oil price reduction also pushed the current account balance into a deficit following two years of surpluses. The 1998 current account deficit was $13.1 billion, compared with a surplus of $254 million in 1997 and $681 million in 1996. In an effort to raise oil prices OPEC cut production, reducing the kingdom’s daily production quota to 7.438 million barrels.
In 1999, total government spending is expected to reach $51 billion, up $600 million from the previous year but not near its 1997 level of $56 billion. In 1998, government expenditures was the fastest growing GDP component, rising an estimated 8.8 percent. Much of the spending went toward schools, hospitals and other projects needed to keep pace with a fast growing population. Although the Saudi government has committed itself to economic reform it does not desire to do as such at the expense of social services.
The government has financed some spending through loans. Its 1998 loans marked the 17th consecutive year of borrowing and pushed its public debt burden to 110 percent of GDP.
The Central Bank was busy in 1998 protecting the Riyal from speculators. The currency has been pegged to the dollar since 1986 and has remained since at SR 3.7450 to $1. Inflation has not been a problem. In 1998 and 1997 there was deflation of 0.4 percent and 0.2 percent respectively. Inflation of 1-2 percent is expected in 1999 however. There have been calls in late 1999 to allow the market to determine the currency’s value, claiming that it will add stability to the Saudi economy.
Saudi Arabia's budget deficit is structural in nature. Petroleum continues to be the critical source of revenue, averaging 70-75 percent of all revenues over recent years, with customs duties and investment receipts comprising much of the remaining government revenue.
The income and profits of Saudis are not taxed with the exception of a voluntary 2.5 percent annual religious donation. The government grants tax holidays to many foreign investments and, therefore, receives limited fiscal benefit from the growing private sector. At the same time, the government continues to spend on a broad social support program, which includes free or heavily subsidized basic utilities, social services and agricultural products. Spending on these services, on both a recurrent and capital basis, is increasing because of the rapid population growth.
Principal Economic Sectors
Saudi industry continues to grow, raising the number of workers, factories and value. In 1998, there were more than 31,000 factories with a $61.9 billion value and employing 282,000. Some local business leaders believe that the country's abundance of gas, oil and minerals, financial and other resources make the kingdom ripe for industrial development.
Major products of Saudi Arabia's manufacturing sector include refined petroleum, petrochemicals, plastics, processed food, clothing, fertilizer and cement. Manufacturing grew considerably during and after the Gulf War, as many firms took advantage of subsidies and soft loans from the government.
Mineral mining has been identified as an important sector the country should target for economic diversification. The kingdom’s exportable minerals include iron ore, phosphates, bauxite, copper and other precious and non-precious metals. Forty-two fields containing large mineral deposits have been located in the country’s western and central regions.
The government-owned Saudi Arabian Mining Company, Ma'aden, plans to consolidate all projects in which the government is involved. It obtained rights to mine three sites for gold and silver as well as to search the entire country for minerals.
The government is also attempting to use this sector as a lure for foreign investors. It offers 5-10 year tax exemptions and 30 year extraction concessions.
The Saudi Ministry of Petroleum and Mineral Resources is spearheading an initiative to develop new mines to produce iron, phosphates, bauxites and precious metals. The Ministry has started negotiating contracts with Western mining companies.
Food & Agriculture
Saudi Arabia’s long dependence on food imports has turned agriculture into a key sector for development. Limited water resources -- primarily irrigated lands near oases -- leaves the country with less than 1 percent of farmable land.
Responsibility for establishing agriculture policy rests with the Grain Silos and Flour Mills Organization (GSFMO). This government agency sets production targets, distributes grain quotas to farmers and determines import and export policy.
One GSFMO policy explicitly bans wheat imports and implicitly bans exports. Imports are forbidden and farmers have been issued guidelines to produce only what is needed to meet domestic consumption. There is speculation, however, that the ban on wheat imports will end if the government privatizes its 17 flourmills, something currently under discussion with IMF officials.
Saudi Arabia's leading crops are wheat, watermelons, dates and tomatoes. Other major crops are sorghum, onions, grapes and citrus fruit. Furthermore, the kingdom is the world's leading importer of barely that is primarily used for feeding livestock.
Corn, soybean meal, rice, processed fruits and vegetables, snack foods and breakfast cereals have been identified (in that order) as the Best Business Prospects the agricultural sector. Corn and soybean meal exports from the U.S. in 1998 and 1997 averaged more than $200 million each year.
A growing population and their increasing demands are driving demand for imported processed and packaged food items. The popularity of Western-style supermarkets continues to grow with the number exceeding 250. Also growing is the number of domestic and international food processing companies that manufacture such products as snack foods and fruit juices.
Food processing has started significant growth, but remains modest. Investment in food processing, handling and storage equipment is continuing. Saudi agriculture has shown rapid growth in production over the last several years, while food processing has only recently begun significant expansion. The growth in agricultural output has been led until recently by wheat, but notable increases have also taken place in livestock, vegetables and fruits. Much of the expansion has relied on imported technology and production inputs. Wheat production is now declining, but output continues upward for most other crops and livestock. Thus, the prospective demand for inputs is mixed, with a weak near term outlook for large machinery and irrigation equipment, but likely growth in demand for inputs related to the livestock or fruit and vegetable segments. Imports of most food and bulk agricultural products, other than a few items such as wheat, eggs and dates, are continuing at a strong pace.
Livestock and poultry farming are also growing fields. An expansion project of the country's two largest poultry producers led to a 30 percent increase in poultry output in 1999 versus 1996. The country, however, remains a large importer of frozen poultry.
Saudi banks control approximately one-third of total Arab capital. Several significant developments occurred in 1998 and 1999 in the Saudi banking system, a sector that has been among the country's strongest.
The most significant development was the July 1999 merging of Saudi American Bank (SAMBA) and United Saudi Bank (USB). Their combined assets totaled roughly SR 80 billion ($21 billion). SAMBA'S management will control the assets of the larger institution, which will benefit from the USB's reputation for cost control. Moody's, however, did not believe the banks complement one another, nor that there exists many opportunities for synergy. The company issued a financial strength of C+ to SAMBA, the highest classification ever issued to a Saudi bank; USB received a D rating.
Another development, this one with regional implications, was the agreement by Gulf Cooperation Council members to open their countries to one another's banks.
In general, the Saudi banking system has been strong. This sector is the most actively traded on the Saudi stock market. It also showed the strongest performance of the private sector during the oil-price collapse. Profitability in the country’s 11 commercial banks rose more than 10 percent in 1998 to $1.63 billion from $1.48 billion in 1997.
The electric power needs of Saudi Arabia are large and growing fast. Demand has been rising at an average annual rate of 10.5 percent from 1985-1995, far exceeding the Kingdom's average GDP growth rate. The country is expecting a doubling in demand for electricity during the next 20 years.
In 1998, the government announced plans to streamline all regional electric companies into a single entity, the Saudi Electric Company. This move is seen as the first step toward privatizing this industry.
Demand for electricity is projected in the Sixth Development Plan (1995-2000) to rise at an annual rate of 6.4 percent reaching 5,081 kwh by the turn of the century. This necessitates an additional generating capacity of 9,000 MW in the next five years at a total cost of US$ 8.8 billion or US$ 1.6 billion annually.
The main challenge facing the electricity sector in Saudi Arabia is to put in place the required power generation capacity needed. Because of budgetary constraints and the ongoing public sector retrenchment, the government can no longer be expected to provide all the required investment. The private sector will be called upon to participate in financing power projects. For that to happen, the electricity sector needs to be restructured and electricity tariff rates to be adjusted further.
Oil comprises more than 85 percent of the country's exports. Non-oil exports, including petrochemicals, accounted for 14 percent of total exports in 1997, the last year for which data is available.
Exports in 1997 totaled nearly $60 billion, creating a $33.53 billion trade balance. In 1998 exports declined nearly $20 billion over the previous year, reducing the trade balance to $12 billion.
In 1996, the country had it first surplus in 13 years at $187 million. Low oil prices and reduced oil production are expected to drive down export figures 35 percent between 1998-2000 from 1997 numbers.
Saudi imports of cars have increased, along with spare parts and other transportation equipment. These imports rose 47 percent to SR 15.7 ($4.2) billion during the first 9 months of 1998 compared to the same time period in 1991.
Imports of consumer goods have decreased -- foodstuffs by 2.5 percent and medicines by about 1 percent. Jewelry imports declined by about 14 percent during the first nine months in 1998 compared with an 87 percent rise in 1997. Imports of jewelry declined to SR 5.8 ($1.5) billion in 1998 versus SR 6.9 ($1.8) billion during the same period in 1997.
The U.S. is Saudi’s leading trade and investment partner as well as top supplier of services and defense equipment. In 1998, the kingdom imported more than $10.5 billion in goods, a 25 percent increase over 1997 figures. Major imports from the U.S. are parts for airplanes, motor vehicles, industrial machinery, electrical and electronic goods, medicines, foodstuffs, furniture and household appliances.
1998 Industry Trade Figures*
TMS TLP TE TI
Telecommunications 108 3 0 105
Electrical Power Systems 1,104 104 12 1,012
Water Desalination Equipment 357 70 17 304
Computer Software 440 21 0 419
Auto Parts & Service Equipment 613 87 54 580
Computers & Peripherals 257 0 0 257
Medical Equipment 265 18 0 247
Pollution Control Equipment 46 6 0 40
Security & Safety Equipment 102.9 0.0 0.0 102.9
Apparel 906 75 13 844
*Source: U.S. and Foreign Commercial Service and U.S.
TMS=Total market size; TLP=Total Local production; TE=total Exports; TI=Total imports
Department of State
Saudi firms are now incorporating export plans into their business strategies. They are driven by the need to reduce their dependence on the domestic market, which, though fundamentally strong, is prone to a swing in response to periodic government spending cuts.
Although the Gulf states are the main foreign markets for Saudi goods, some Saudi exporters compete in the sophisticated European markets. Main destinations of exports outside the Gulf are Japan, the United States, South Korea, Singapore, France, the UK, Netherlands, Germany, Italy and India.
© 2000 Mena Report (www.menareport.com)