Saudi Arabia

Published October 18th, 2000 - 02:00 GMT

 

Indicators: 

1998 

1999 

2000e 

GDP real growth rate (%) 

1.6 

1.6 

4.2 

Inflation (%) 

-0.3 

1.5 

2.5 

Budget Balance (% of GDP) 

-9.4 

-8.8 

-3.5 

Total Exports (US$bn) 

42.25 

35 

52.6 

Total Imports (US$bn) 

24 

23 

30.0 

Trade balance (US$bn) 

18.25 

12 

22.6 

e - Al-Bawaba forecasts 

 

 

 

 

 

Political Outlook 

 

As the elderly King Fahd becomes increasingly disconnected from the Kingdom’s daily affairs, Crown Prince Abdullah continues to consolidate his role as Saudi Arabia’s ruler.  

 

In recent months, Japan has demonstrated the most conciliatory line during multiple rounds of talks on Saudi Arabia's WTO accession. This stand contrasts with the firm position taken by American and EU negotiating teams, which demand that Riyadh remove trade barriers and reduce the scope of subsidies enjoyed by petrochemical producers. This past April, the WTO's deputy director general stated that it was unlikely that Saudi Arabia would join the international trading club during the current year.  

 

While complicated hurdles must still be overcome prior to Saudi Arabia's WTO induction, the direct short-term benefits from trade liberalization are likely to be scant. As import tariffs are inevitably diminished, the long-term advantages will depend on the degree to which the economy's production structure is diversified. Although the process of reducing Saudi Arabia’s dependence on oil has already begun, non-oil exports still represent merely 5 percent of GDP.  

 

Economic Outlook 

 

Saudi Arabia's new investment law has altered the manner in which business is conducted and should provide a boost to the Kingdom's bid to gain membership in the World Trade Organization. The legislation's primary goal is to allure increasing flows of international capital, yet analysts warn that several details remain ambiguous and predict that large foreign inflows will not arrive immediately. 

 

In April, the Saudi cabinet approved a bill that grants foreign investors the right to 100 percent ownership of industrial projects and related property. Additionally, the bill promises to strengthen judicial protection for investments, foster greater public disclosure in financial dealings and lower corporate taxes (from 45 percent to 30 percent) on multinationals with profits exceeding $26,000.  

 

Until now, international investors have had to contend with numerous legal and bureaucratic intricacies if desiring to conduct business in the Middle East's largest economy. For example, they were required to locate a local partner who held at least a 51 percent stake in any joint venture. Due in large part to such obstacles, between 1984-1997 Saudi Arabia attracted merely $4 billion of private foreign investment, one-twelfth the amount that flowed to Singapore or Malaysia. Of the capital that did arrive, only 20 percent was directed to the Saudi private sector. 

 

The Kingdom's economic prospects will be tied to the new law's ability to augment capital inflows. Revised forecasts put this year's economic expansion at over 4 percent. Nevertheless, the local population is swelling at roughly 4 percent per year, and university graduates are pouring into the labor market. With real GDP growth below 2 percent in each of the past four years, it is crucial that foreign investors employ more Saudis. The objective of attracting a larger number of Saudis to the private productive sectors of the economy now underpins all policy goals. By alluring greater and better quality FDI flows, the country aims to secure a new source of private capital to generate growth. 

 

In early June, Saudi Arabia’s General Investment Authority (GIA) started accepting applications for foreign investment licenses as part of the drive to open up the Kingdom’s economy. The GIA was established in April to provide the investment mechanism for the country’s new foreign investment law. 

 

Conclusion 

 

Many observers still question the Saudi government's desire to overcome decades of suspicions about outsiders and to initiate such liberal foreign investment laws. While it remains premature to evaluate whether the new legislation will accomplish its desired targets, it does signal that there are powerful forces for reform at the top of the Saudi leadership, particularly Crown Prince Abdullah. Foreign investors should begin to perceive the Saudi market with increased confidence, especially as Abdullah continues to take on a wider role in the Kingdom's affairs. 

 

© 2000 Mena Report (www.menareport.com)

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