Saudi Arabia Business Forecast Report Q2 2008

Publication Date	April 2008
Publisher	Business Monitor
Product Type	Report
Pages	49
ISBN Number	1745-0683
Product Code	BMI01224

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Summary

A Positive Outlook But Key Risks Remain

Saudi Arabia's healthy economic performance is likely to continue over the next five years, as high oil prices and increasing oil production will support healthy fiscal and trade balances. In addition, the government's efforts to diversify away from the hydrocarbons industry and improve the business environment look set to continue, which will ensure healthy real GDP growth. However, this positive view will not filter into the political arena, where rising prices will remain a key risk.

Going forward, further work is needed to root out corruption and reduce bureaucratic procedures in order to attract foreign investment.

With Saudi Arabia currently awash with oil revenues and the government continuing to develop the non-oil sector, the outlook for the economy is good and we expect annual real GDP growth to stay above 4.0% over the next five years. The oil sector is continuing to attract foreign investment from companies wishing to tap into the Kingdom's extensive reserves, and with the price of oil at record highs we expect the trade balance to remain in the region of US$180bn over the forecast period. However, as in many other countries in the region, accelerating inflation presents a key risk: CPI hit a 27-year high of 8.7% y-o-y in February 2008, and the issue looks set to remain the key problem for the Saudi economy going forward.

On the political front, the outlook is not so benign, as a number of pressures are starting to take their toll on the domestic scene. Inflation has now become a political phenomenon, as the government is seeking to neutralise public unrest by introducing a number of measures aimed at reducing the effects of price rises on Saudi citizens. The government's Saudisation policy is also causing problems, as the authorities are trying to strike a balance between maintaining stability in the short term and their longer-term objective of job creation. Finally, the risk of sectarian violence is an underlying issue, and shi'a allegations that the government is planning to build up the Sunni population of Najran could provoke further public unrest.

In spite of being the largest economy in the Middle East, Saudi Arabia's business environment has been highly underdeveloped over the last few years. However the government is now starting to address these problems and has embarked on a number of programmes aimed at opening up the economy to foreign investors and improving investment rules and regulations. Indeed, since joining the World Trade Organization in December 2005, the Kingdom has eased restrictions on foreign investment, reduced tariffs and eliminated import prohibitions in certain sectors. However, a number of issues remain. Terrorism is still a threat, a number of sectors are closed to foreign investment while corruption and the extensive bureaucracy are major drawbacks for companies doing business in the Kingdom.

Content

Executive Summary
- A Positive Outlook But Key Risks Remain
Chapter 1: Political Outlook
- SWOT Analysis
- BMI Political Risk Ratings
- Domestic Politics
- Inflation, Saudisation and Politics: Pressure Still On
- The political implications of the inflation story are as compelling an argument for exchange rate revaluation as
- any, particularly from the point of view of the authorities.
Chapter 2: Economic Outlook
- SWOT Analysis
- BMI Economic Risk Ratings
- Economic Activity
- Economic Diversification To Support Strong Growth
- We expect real GDP growth to bounce back in 2008 and come in around 4.3%, after which it will stay above 4.0%
- for the following five years, on the back of an increase in oil production and strong growth in the non-oil sector.
- Monetary Policy
- No Respite From Inflation As Government Resists Revaluation
- Inflation will continue to trouble Saudi Arabia's economy in the short term: we are forecasting end-year CPI of
- 5.0% y-o-y in 2008, as abundant liquidity from petro-dollar inflows, further rate cuts and global food price rises
- will continue to put upside pressure on domestic prices.
- Trade Policy
- Liberalisation And Diversification Characterise Trade Policy
- Although oil remains the leading source of export revenues for Saudi Arabia, the easing of trade restrictions
- within the Gulf region and efforts to diversify the Kingdom's export base will lead to a shift in trade patterns
- over the forecast period.
Chapter 3: Special report
- Looking Beyond 2008
- US: The rebalancing act
- Unwinding The Imbalances
- We believe that a substantial, multi-year shift in the US external accounts is under way. A weak US dollar and
- subdued domestic consumption should lead to a narrowing in the US's structural current account deficit.
- China: What if We're all Wrong?
- Our Core Scenario For China
- We are retaining our positive headline growth projections for China across the forecast period to 2012, with
- our expectations of the continued success of the urbanisation process and export-driven growth model
- underpinning our assumptions.
- Japan: Immigration Key To Long-Term Growth
- Demographic Woes Portend Long-Term Decline
- Immigration remains the only realistic way that Japan can overcome its long-term economic challenges.
Chapter 4: Business Environment
- SWOT Analysis
- BMI Business Environment Risk Ratings
- Business Environment Outlook
- Institutions
- Infrastructure
- Market Orientation
- Operational risk
Chapter 5: Key Sectors
- Defence
Executive Summary
- Considering the size and wealth of the country, Saudi Arabia's defence industry is small and
- underdeveloped. Despite previous efforts to create a degree of self-sufficiency in its defence
- production, the country still relies heavily on arms imports.
- Autos
- Saudi Arabia Retains Autos Sector Momentum
- Total automotive sales in 2007 are estimated at over 545,000 units. While GDP growth is set to
- rise to an average of 4.0% over the next five years, BMI believes that automotive sales growth
- will be modest in regional terms.
List of Tables
- Table: Economic Activity
- Table: Monetary Policy
- Table: balance Of Payments
- Table: BMI Legal Framework Ratings
- Table: Saudi Arabia Annual FDI Inflows
- Table: BMI Trade Ratings
- Table: Top Export destinations
- Table: Saudi Arabia Defence Sector Size of Armed Forces