Saudi Arabia 

 Saudi Arabia 

 
EFIC Country profile - map of Saudi Arabia

Saudi Arabia has the world's largest oil reserves and is the largest oil producer and exporter. The country has benefitted enormously from the commercialisation of these resources, but is now using the proceeds to diversify the economy and secure a future beyond hydrocarbons.

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Contact: Benjamin Ford, Senior Economist EFIC
bford@efic.gov.au

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Overview

February 2013

Saudi Arabia has the world's largest oil reserves and is the largest oil producer and exporter. The country has benefitted enormously from the commercialisation of these resources, but is now using the proceeds to diversify the economy and secure a future beyond hydrocarbons. In this sense, the Saudis are treading a similar path to the United Arab Emirates. The government is also keen to boost living standards – the ninth national development plan (2010-2014) aspires to eliminate poverty and increase development in infrastructure, medical services, educational capacity, and residential housing.

Sovereign risk is low. Saudi Arabia has a high investment grade rating on its government debt (S&P: AA, Fitch: A+ and Moody’s: A1). However, such solid sovereign creditworthiness depends heavily on oil revenues. In fact, the oil sector dominates Saudi Arabia’s economy – in 2011, it accounted for roughly 89% of exports and almost all (93%) government revenues. This reliance on oil means it is hard to shield the economy from the oil price cycle.

Freedom House, the political and civil rights monitor, rates Saudi Arabia ‘Not Free’. The central institution of government is the monarchy, a role which was codified in a Basic Law adopted in 1992 – it declared that Saudi Arabia is a monarchy ruled by the sons and grandsons of King Abdul Aziz Al Saud. There are no officially recognised political parties. The King exercises power through a Council of Ministers, a 28 member body elected by him. Though autocratic, he must take account of the wishes of the several hundred princes plus the religious establishment, and keep an eye on his legitimacy in the eyes of the public. All legislation must be compatible with Shari’a law.

The centrality of the monarchy appears immutable. Despite the likelihood of political change in Saudi Arabia given the mature age of both King Abdallah and his likely successor, Crown Prince Salman, such change is unlikely to lead to any significant leaps in the political reform process started by King Abdallah in 2005, when men were allowed to vote for half the members of the 179 municipal councils.

While private business is allowed, a significant number of businesses are connected to members of the ruling family or the government. State-owned firms operate in many sectors, including five subsidised credit institutions which provide funding to private industry, agriculture and real estate. The oil sector is primarily run by the state-owned Saudi Aramco, although there is significant foreign investment in the downstream Saudi energy sector. In these circumstances, firms can be at a disadvantage without high-level contacts.

The country’s labour market is highly segmented, with Saudi citizens accounting for only about 10% of employment in the private sector and there are large wage differentials between Saudis and expatriates. The source of these differences appears to relate to skill mismatches and high wages for nationals — in part due to the availability of secure employment and a generous compensation package in the public sector — alongside a ready supply of expatriates. Such segmentation has created an unemployment problem for Saudis, especially among youth – a major problem for a country whose population is growing at around 2.5% a year, more than four times faster than the advanced economy average.

The strength of Saudi Arabia’s internal security forces reduces the risk of widespread civil unrest. However, foreign embassies continue to warn of a high terrorist threat. Foreign workers, government facilities, tourists and capital assets are all at risk. There were several anti-western attacks in 2003 and 2004, led by the Al-Qaida in the Peninsula (QAP) group, including an attack on the American consulate in Jeddah. Since then, however, the number of terrorist attacks has fallen sharply, helped by significantly strengthened internal security. The government has reportedly marginalised remaining jihadist elements in the kingdom, but it is still possible that they are strong enough to mount individual attacks.

Saudi Arabia is an important regional player, at least in financial terms. The kingdom’s petrodollars have long been used to fund its foreign policy ambitions, including currently being used to support regional allies, such as Egypt. Relations with Iran have been strained since the 1979 Iranian revolution. The countries vie for influence in Iraq, Palestine, Lebanon and among Saudi Arabia’s own Shia minority.

EFIC Country profile Saudi Arabia chart 1: Saudia Arabia at a glance

Saudi Arabia outranks other Middle East and North Africa (MENA) countries on key dimensions of economic performance, particularly per capita income, but its growth rate has lagged.

EFIC Country profile Saudi Arabia chart 2: Key risks to exporters and investors

Interpreting Chart 2

Business cycle risk. A volatile business cycle can be a special headache for exporters and investors, because it means that downturns will be steep – and corporate casualties will be high.

Currency risk. In today's world of widely floating exchange rates and sophisticated currency hedging techniques, some degree of currency volatility is quite acceptable, and presents little risk. But where a country has a weak balance of payments or is prone to wide swings in capital flows, it can suffer sudden and dramatic currency moves that can bankrupt large swathes of its corporate and banking sectors.

Currency inconvertibility risk. If the country suffers from a weak balance of payments, not only is it prone to steep currency depreciation, but there is a temptation for the government to impose exchange controls that prevent importers from converting local currency into foreign currency in order to make trade payments.

Systemic banking risk. Weak balance sheets and poor lending practices can sometimes trigger sector-wide banking crises.

Sovereign default risk. Fiscal mismanagement can put governments under financial strain to which they respond by running up arrears with, or defaulting on, overseas suppliers and creditors. With the sovereign cut off from credit, a sovereign default also increases the likelihood of sharp downswing in the economy, currency inconvertibility and a systemic banking crisis.

Difficulty/cost of enforcing contracts. If you get into a contractual dispute, will the country's legal and judicial system help or hinder you in pursuing a claim? Drawing upon World Bank data on the cost and time involved in enforcing contracts (at www.doingbusiness.org) we seek to measure the degree of help or hindrance.

The measure scale runs from negligible to extreme.

Economy

February 2013

EFIC Country profile Saudi Arabia chart 3: Real GDP and inflation

On paper, the economy looks to be travelling well – growth is solid, but not spectacular, inflation is low, the current account is in substantial surplus and the country has a substantial foreign exchange reserve buffer. But the economy faces numerous medium-term challenges, including the need to reduce dependence on oil and boost the pace of employment growth.

EFIC Country profile Saudi Arabia chart 4: External balance

Politics

February 2013

According to the World Bank, Saudi Arabia ranks in the second bottom quartile of countries for political stability and in the bottom quartile for voice and accountability.

EFIC Country profile Saudi Arabia chart 5: Political indicators

Business

February 2013

The World Bank ranks Saudi Arabia in the second top quartile of countries on three dimensions of governance that matter to foreign investors: control of corruption, rule of law and regulatory quality.

On the World Bank’s Doing Business gauge, Saudi Arabia is the highest ranked country in the Middle East, even though its ranking on ‘enforcing contracts’ is in the bottom quartile of countries. This probably reflects the backward state of Saudi commercial law.

EFIC Country profile Saudi Arabia chart 6: Business climate indicators

Society

February 2013

Though Saudi Arabia is a ‘high income’ country with a per capita GDP of around US$21,000, there is a vast income gulf between Saudis and workers from Bangladesh, Egypt, India, Pakistan, The Philippines and Yemen that fill most low-skilled service and construction jobs.

EFIC Country profile Saudi Arabia chart 7: Per capita GDP

Security

February 2013

The strength of Saudi Arabia’s internal security forces reduces the risk of widespread civil unrest. However, foreign embassies continue to warn of a high terrorist threat. Foreign workers, government facilities, tourists and capital assets are all at risk. There were several anti-western attacks in 2003 and 2004, led by the Al-Qaida in the Peninsula (QAP) group, including an attack on the American consulate in Jeddah. Since then, however, the number of terrorist attacks has fallen sharply, helped by significantly strengthened internal security. The government has reportedly marginalised remaining jihadist elements in the kingdom, but it is still possible that they are strong enough to mount individual attacks.

Relations with Iran have been strained since the 1979 Iranian revolution. The countries vie for influence in Iraq, Palestine, Lebanon and among Saudi Arabia’s own Shia minority.

Saudi Arabia could be affected by the deteriorating political and security climate in Yemen – al-Qaida has established a presence in southern Yemen and is getting stronger on the back of the chaos created by that country’s political crisis.

Saudi Arabia - Selected indicators*

February 2013

People   
Population 26
Official language Arabic    
UN Human Development Index** High

Economic***
GDP ($US bn) 597
GDP per capita ($US) 21,196
Real GDP growth (15 year average, %) 3.4
Fiscal balance 14.0
Public debt 6.1
Foreign direct investment 3.0
Current account 26.6
External debt 16.4
Foreign reserves 89.6
S&P foreign currency debt rating AA-/Stable
OECD country risk rating 2

Governance
World Bank - Ease of doing business 22/185
Freedom House - Political rights and civil liberties Not free
Transparency International - Corruption Perception Index 66/176                 

*All 2011 figures unless specified

**The HDI is composite measure of human development: long & healthy life (life expectancy), education (literacy & education enrolment) and income (GDP per capita)

***Expressed as % of GDP unless specified

This report is published for general information and does not comprise advice or a recommendation of any kind. Readers should consider their own circumstances and rely on their own enquiries in relation to matters contained in this report. While EFIC endeavours to ensure it is accurate and current at the time of publication, EFIC makes no representation or warranty as to the reliability, accuracy or completeness of this report. To the maximum extent permitted by law, EFIC will not be liable to you or any other person for any direct or indirect loss or damage suffered or incurred by you or any other person arising from any act or failure to act on the basis of information and/or the opinions contained in this report.





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