Saudi Arabia has the world's largest oil reserves and is the largest 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.

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

Two key risks facing exporters and investors are difficulty enforcing contracts (high) and business cycle risk (moderate). Enforcing contracts is both more time consuming and costly than the OECD average and GDP growth has recently experienced a moderate slowdown and rebound.

The oil sector dominates Saudi Arabia’s economy – in 2010, it accounted for roughly 56% of GDP, 86% of exports and almost all (90%) of government revenues. This reliance on oil means it is hard to shield the economy from the oil price cycle, and so the economy has a business cycle that is geared to the oil one. The economy is on track to expand by around 6.5% in 2011, but growth will probably moderate in 2012 and 2013

As in the UAE, the Saudi government is keen to diversify the economy. It 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.

It has initially focussed on energy-intensive petrochemical manufacturing and aluminium smelting, which can draw upon the kingdom's phosphate and bauxite deposits. But it also has plans to increase oil refining and to establish six ‘economic cities’ as service and manufacturing hubs.

Despite the improved macroeconomic situation, medium term challenges loom, notably ensuring that public finances are sustainable – the IMF estimates that the fiscal ‘break even’ oil price is around $80/b and could rise to close to $100/b by 2016 if current fiscal policies are maintained. Such a rise could amplify the budget’s exposure to adverse oil price movements.

After a subdued year of growth in 2009, the economy bounced back strongly in 2010. The economy is on track to expand by 6.5% in 2011, the fastest pace since 2003. The IMF expects the pace of GDP growth will ease to 3.6% in 2012 before picking up again to 4.4% in 2013.

The country has a high investment grade sovereign risk rating (AA- from S&P and Fitch and Aa3 from Moody’s). The country's creditworthiness is underpinned by external current account surpluses, declining public debt and swelling official net foreign assets. The central bank has net foreign assets worth an estimated US$444 billion, which is enough to cover more than 2 years worth of imports.

Freedom House, the political and civil rights monitor, rates Saudi Arabia ‘Not Free’. The central institution of Saudi Arabian Government is the monarchy, a role which was codified in the 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 recognized 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.

King Abdullah has pursued some modest political reforms. In 2005, men were allowed to vote for half the members of the 179 municipal councils. In 2010, during a cabinet reshuffle, the king appointed reformists to the judiciary and education system. And women have been allowed to vote in the next municipal elections in 2015. Still, the need to build consensus within the ruling family and the conservative religious elite suggest any change will be gradual.

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.

While private business is allowed, a significant number of businesses are connected to members of the ruling family or the government. State owned firms also 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.

Over the past decade, the government has displayed a commitment to improving the investment climate. For example, its Foreign Investment Act provides ‘national treatment’ for non-Saudi firms (same treatment as Saudi companies), guarantees the repatriation of profit and capital and streamlines the investment process through a one-stop investment agency. In addition, gas extraction and mining were opened to foreign investment in 2003 (although oil exploration, drilling and extraction remain off-limits).

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 (right hand panel, Chart 6).

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 another World Bank gauge – ease of doing business, which attempts to measure ‘regulation and red tape relevant to a domestic small to medium-size firm’ – Saudi Arabia is the highest ranked country in the Middle East and in the top quartile of countries worldwide. However, Saudi Arabia ranks in the bottom quartile of countries for ‘enforcing contracts’ – according to the US Commercial Service, Saudi commercial law is still developing and Saudi litigants have an advantage over foreign parties in almost any investment dispute.

As a ‘high income’ country with a per capita GDP of around US$16,300, Saudi Arabia has living standards on par with countries such as the Slovak Republic and Trinidad and Tobago, another petroleum exporting country. But this high level does not capture the vast income gulf between Saudi nationals and workers from Bangladesh, Egypt, India, Pakistan, the Philippines and Yemen that fill most low-skilled service and construction jobs.

The country is struggling to cope with rapid population growth in the order of 2.5% pa – almost twice the average rate for emerging and developing economies and four times that of the average for advanced economies - and the accompanying strong growth in labour force entrants. Unemployment among Saudi nationals is around 10% and has been elevated for a number of years. However, this isn’t because the economy hasn’t created jobs – there is almost full employment of men aged 29 years or older and a large expatriate workforce.

As a ‘high income’ country with a per capita GDP of around US$16,300, Saudi Arabia has living standards on par with countries such as the Slovak Republic and Tinidad and Tobago, another petroleum producing and exporting country.

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.

*All 2010 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