Saudi Arabia Defence and Security Report Q2 2009

The economic outlook has worsened in Saudi Arabia, with our latest oil price and production figures having been revised down, and the global climate continuing to deteriorate. Interbank lending remains very tight, and private sector projects continue to be cancelled. However, we are relatively positive on Saudi Arabia compared with some of its neighbours: it will suffer less from the population shrinkage we expect for the UAE and Qatar, and strong domestic need for housing will keep its real estate sector from experiencing the same degree of correction. We are forecasting real GDP growth of 2.1% this year, and 2.8% in 2010, followed by a recovery to 3.5% in 2011-12 and 4.2% in 2013.

Economic risks are the main threat to stability in Saudi Arabia as we move into 2009, with a rise in unemployment and a decline in living standards having the potential to destabilise the Kingdom.

However, in the absence of any evidence of unrest so far, either in the way of terrorism or industrial action, we have left our short-term political risk ratings unchanged in this area. We are forecasting an increase in government spending this year, and this, in our view, should be enough to ensure ongoing stability.

However, domestic terrorism still remains an issue. In late June 2008, the government said it was holding 520 suspects of the 701 arrested since the beginning of the year for planning car bomb attacks against oil and security installations. At the same time, authorities stepped up their publicity campaign against al- Qaeda and Islamic extremism. The country's top religious official, Grand Mufti Sheikh Abdul-Aziz Al al- Sheikh, issued a statement warning Saudis and foreign residents that concealing information about extremists would be 'a great sin'. 'Aggressions against Muslims and occupations of land... cannot be a justification for explosions, denouncing other Muslims as infidels, and disobeying the Muslim social consensus,' the Grand Mufti said. Analysts were, however, in some doubt as to whether the arrests reflected a genuine upsurge in al-Qaeda activity, or simply a government reaffirmation of its successful counter-insurgency campaign.

It was also reported in July 2008 that Saudi Arabia was assembling a new border security force of 30,000 to protect its 6,500km (4,038 miles) of borders with Jordan, Iraq, the United Arab Emirates, Qatar, Oman and Yemen against infiltration by militants, illegal immigrants and arms traffickers. In addition to training and equipping the members of the force, the contract is expected to provide for the construction of radar stations to monitor ground movement, the building of infrastructure such as roads, and the installation of a countrywide communications network. Much of this work is expected to be contracted out to either Raytheon or France's Thales For the time being, we continue to expect that the Saudi government will increase defence spending by 5% annually, in real terms, over the coming years. Absolute increases will depend in part on how the country's economy fares in the face of the Global Financial Crisis. Thus far, the economy has avoided recession, but our oil price forecast for 2009 at US$75.00/bbl implies a significant but not disastrous downturn for the Saudi economy.