POLITICAL STABILITY: The rule of the Al Saud family is expected to remain secure in 2011-15, and, although there is a risk that the wave of social unrest that has swept across the region could reach Saudi Arabia, thus far the kingdom has remained largely untouched by the so-called Arab Spring. The personal standing of the king, Abdullah bin Abdel- Aziz al-Saud, is bolstered by his reputation for piety—domestically, the king uses the title of Custodian of the Two Holy Mosques—but there is believed to be considerable resentment of Al Saud rule, owing to perceptions of corruption, vast inequalities of wealth, high youth unemployment and the government’s strong ties with the US. Alarmed by the potential for discontent, the king announced a raft of welfare handouts and public-sector wage increases in February and March. However, beyond an announcement that the delayed second municipal elections will take place in September, the government will not instigate any meaningful political reform. Instead, it appears determined to act as a bulwark against the social upheaval that has swept the region: cracking down at home, while providing financial and material assistance to its allies. Nevertheless, smaller groups, emulating the tactics of protesters elsewhere (notably their use of social networking websites), are likely to mobilise in protest against specific issues, such as youth unemployment or the plight of prisoners held without trial or charge. However, they will refrain from directly challenging the position of the Al Saud.
ELECTION WATCH: There is unlikely to be any democratic reform or any move to an elected parliament before 2015, and political parties are expected to remain illegal. (An attempt in February to launch a political party, the Islamic Umma Party, resulted in the arrest of seven of its founders.) The king appoints the Council of Ministers and the Consultative Council, which has advisory powers. There are no parliamentary elections. However, in a sop to liberals, in March it was announced that the country’s second municipal elections (the first took place in 2005) will be held in September. These had originally been scheduled for 2009, but were delayed to enable further “studies” to be carried out. However, despite some minor alterations, the councils’ role will continue to be restricted to an advisory capacity. Women will not be allowed to vote, but the Consultative Council has called for their participation in subsequent municipal elections.
INTERNATIONAL RELATIONS: Saudi Arabia will pursue a relatively active foreign policy, focused on promoting regional stability. As demonstrated by its decision to send 1,000 troops into Bahrain in mid-March (after an invitation from the Bahraini king), Saudi Arabia will take an active role in countries it deems to be within its sphere of interest, even if this occasionally runs counter to the wishes of the US (its most important strategic partner). This interventionist approach will extend to Yemen, where Saudi Arabia has sought to oversee the peaceful removal of the president, Ali Abdullah Saleh, and his replacement by a transitional, unity government (although thus far the president, who is convalescing in Riyadh after an assassination attempt, has refused to step down). Away from its “near abroad”, however, the Saudi leadership will generally defer to the US on wider regional security issues, notably regarding any military strike on Iran’s nuclear facilities.
POLICY TRENDS: The government will remain a major force in the economy, and the long-term drive to encourage a greater role for the private sector will be tempered by the urgent political need to provide employment for the country’s mass of young unemployed. The state will maintain a monopoly over oil production, although private firms will have some involvement in gas exploration and joint-venture refineries. Despite the government announcing new spending measures worth a combined US$130bn in early 2011, the fiscal account is likely to return a large surplus this year, allowing Saudi Arabia to boost oil output without fearing a commensurate decline in oil prices. Indeed, in June Saudi Arabia indicated that it is willing to break OPEC consensus and unilaterally provide “whatever the market needs”—a pledge that it has made good on, with Saudi output surging in July. Even if oil prices were to fall suddenly, substantial savings built up in recent years will allow 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 (notably petrochemicals and plastics), and creating jobs in manufacturing, tourism and other services.
ECONOMIC GROWTH: Saudi economic growth will receive a substantial boost in the wake of the two massive fiscal spending packages announced by the king earlier this year, worth a combined US$130bn (30% of 2010 GDP). These will include a huge increase in social spending outlays, including wage rises and unemployment benefits, which should boost private consumption. In addition, the massive house-building programme announced by the king in March should boost the construction sector throughout the forecast period. Economic growth will also be lifted in the near term by the increase in Saudi oil production, implemented to compensate for the supply interruptions in Libya, and as a result the Economist Intelligence Unit expects real GDP growth to surge to 6.7% this year—slightly above our previous forecast, owing to an increase in our oil production projections. With most Libyan oil output expected to be back on stream by end-2012, Saudi oil output growth will slow that year, although GDP growth will remain robust at 5.3%.
INFLATION: The jump in international foodstuffs prices earlier this year has had a surprisingly minimal impact in Saudi Arabia, in part because of the plentiful supply of subsidised foodstuffs and other essentials, with consumer price growth averaging just 4.8%, year on year, in the first six months of the year. However, narrow money (M1) has leapt in recent months, as the government’s recent generous public-sector pay handouts have boosted liquidity, indicating potential demand-push pressure, and we thus expect inflation to pick up to an average rate of 5.6% this year. With global food and non-oil commodity prices expected to decline from 2012, and rents set to be depressed by an increase in the supply of new housing, the rate of inflation is likely to slow significantly next year and to remain subdued for the remainder of the forecast period. We expect consumer price growth to average 4.1% in 2012-15. There remains a risk, however, of a renewed inflationary spike, as in 2008, given the weakness of the policy tools available to contain inflationary pressures. A weakening dollar, and thus a weakening riyal, will add to the risk of imported inflation.
EXCHANGE RATES: Saudi Arabia, Bahrain, Kuwait and Qatar remain committed to plans for a Gulf monetary union, despite the withdrawal from the project of the UAE and Oman. A joint monetary council has been set up, with the governor of the Saudi Arabian Monetary Agency (SAMA, the central bank), Mohammed al-Jasser, as its chairman, and this is likely to evolve into a central bank by the end of 2012. However, the countries still need to agree on various technical issues, and the euro area’s present problems will deter them from proceeding for the time being; we do not expect a single Gulf Co-operation Council currency to be set up until after the forecast period. Meanwhile, the downgrade by the US rating agency, Standard & Poor’s, of the US’s credit rating is unlikely to prompt a shift in the kingdom’s peg, nor in the country’s foreign-exchange holdings. Despite the recent near debt default in the US, Saudi Arabia has remained an active buyer of US Treasury bills, and, given the paucity of alternatives, we expect it to
Arabia has remained an active buyer of US Treasury bills, and, given the paucity of alternatives, we expect it to
continue to amass US sovereign bonds.
EXTERNAL SECTOR: We expect Saudi Arabia to return large but narrowing current-account surpluses over the forecast period, as strong domestic demand sucks in imports. High international oil prices should be sufficient, combined with gradually rising oil production, to keep the trade balance comfortably in surplus. This will offset persistent deficits on the services and current transfers accounts. Income from investments abroad has been sustained through the global economic slowdown, and we expect the income account to return widening surpluses over the forecast period. Rising domestic fuel consumption, weak global demand for oil and declining international oil prices will lead to a fall in export earnings (although this will be offset to a degree by rising petrochemical exports) from next year. The current-account surplus is forecast to widen to 26.1% of GDP in 2011, but to narrow steadily in subsequent years, to 5.7% of GDP in 2015.
SOURCE: Country Outlook