RaboResearch - Economic Research

Country Report Saudi Arabia

Country Report


Saudi Arabia flag

Economic growth is estimated to slow in 2013, as the impact of the massive fiscal stimulus of 2011 diminishes. The recent increase in oil production is sustainable given Saudi Arabia’s spare capacity, while succession risks have stabilized this year.

Strengths (+) and weaknesses (-)

(+) Strong external position

Saudi Arabia’s continuously high oil export revenues have resulted in years of subsequent external surpluses and a large amount of FX-reserves.

(+) 'Central bank of oil'

Saudi Arabia is the world’s only 'swing producer' of oil given its large spare oil production capacity. As such, it can influence global oil prices, giving it significant international clout.

(-) Hierarchical feudal political systemlimits democratic progress

Promises of reforms towards more democracy since 2003, such as a broadening of the electorate and provincial elections have never been implemented. Real democratic progress is limited.

(-) Narrow economy is overly dependent on the hydrocarbon sector

The economic base of Saudi Arabia is very narrow with a high dependence on the hydrocarbon sector and no significant progress towards further diversification.

Key developments

1. Slower growth in 2013

We estimate economic growth in 2013 at around 3.5%, down from 5.1% in 2012. The main reason for the slowdown is the steady diminution of the impact of the massive fiscal stimulus in early 2011. This highlights the dependency of the economy on government spending, which is worrisome. Government spending growth has exceeded expenditure growth from the private sector in 13H1 even though Saudi Arabia’s non-oil sector performed well in the period. This was reflected by steady growth in manufacturing, construction and retail and wholesale sectors. The construction sector is set to see higher growth over the coming few years, as the massive 500,000-unit affordable homebuilding program, first announced in March 2011, finally begins to take off - a contract for the first 40,000 homes was signed in August 2013. Indeed, with the funds for this program already set aside in an account at the central bank, the affordable housing scheme should be untouched by any slowdown in government spending in the coming years. Growth of the oil-sector was low due to lower production in 13H1, as oil output averaged 9.55m barrels a day (b/d), which was lower than the 10m b/d recorded in 12H1. As such, we estimate that overall oil production has slowed in 2013. However, oil output has been at record highs since July 2013, we expect this to boost growth in 13H2. And given that it is likely high oil production is sustainable, economic growth is forecast to pick up to around 5% in 2014.

2. Increased oil output is sustainable

Saudi Arabia increased its oil output to 10.03m b/d in July and to 10.19m b/d in August, which is the highest level since the 1970’s. The background to the recent increase largely mirrors the situation in both mid‑2011 and 2012, when the kingdom also raised output. In 2011, the civil war in Libya halted all oil exports out of the country, and, in order to ensure the market was sufficiently supplied, Saudi Arabia increased its output to a peak of around 9.8m b/d in June and July of that year. In 2012, Saudi Arabia stepped in to cover fast‑falling Iranian oil exports, which were hit after a host of Iran's major customers reduced their purchases in the face of US sanctions. At this moment, the culprit is once again Libya, where oil output has dropped from 1.6m b/d to barely a trickle, in the face of workers' strikes and sabotage by tribal elements.

Figure 1: Slower economic growth in 2013
Figure 1: Slower  economic growth in 2013Source: EIU
Figure 2: Oil output is increasing
Figure 2: Oil output is increasingSource: IEA, Bloomberg

Any uncertainty about Saudi Arabia's ability to maintain its current elevated levels of output has been lessened after the Manifa heavy oilfield came under steam in April. Current output is around 500,000 b/d, with production set to be ramped up to around 900,000 b/d by end‑2014. In the longer term, Saudi Aramco, the national oil company, has announced that it will add 550,000 b/d of crude oil production capacity by 2017 to its two currently producing onshore fields of Khurais and Shaybah. On top of the current expansion of the kingdom's crude capacity, the International Energy Agency estimates that Saudi Arabia still has spare capacity of 2m b/d, which makes the current output easily sustainable.

3. Succession risks have stabilized

The appointment of Prince Muqrin bin Abdulaziz al-Saud as second deputy prime minister on 1 February 2013 brought stability to the succession process. The position is widely regarded as unofficially reserved for the second in line to the throne. His appointment has eased concerns about political stability in the immediate future,  given the advanced ages and ill health of the king and crown prince. Succession risks were a  threat to political stability last year, when two crown princes died in a timeframe of only eight months while the princes that were next in line are very old (60-80 years) and would thus be unlikely to remain in power for very long. Now, should the king and the crown prince both die in quick succession, Muqrin will be able to smoothly fill the temporary gap. His appointment offers no guarantees, however. He remains close to the king and may merely be a stopgap while others from the younger generation are given time to gain vital experience. Crown prince Abdullah has sought to reduce the risk of a destabilizing succession and announced the establishment of the Allegiance Council in 2006. Although it has the power to vote on the eligibility of future kings and crown princes, it remains untested and may become marginalized. The appointment of third-generation princes to senior roles on the basis of meritocracy is likely to continue.

Factsheet of Saudi Arabia
Factsheet of Saudi ArabiaSource: EIU, CIA World Factbook, UN, World Economic Forum, Transparency International, Reporters Without Borders, World Bank.

Background information

Saudi Arabia has an oil-based economy under strict government control. The petroleum sector accounts for roughly 45% of GDP, 90% of export earnings and 80% of budget revenues. The country possesses about 25% of the world's total proven petroleum reserves, ranks as the world’s largest exporter of petroleum and plays a leading role in OPEC as ‘swing producer’ with excess production capacity. It has huge financial reserves to survive oil revenue declines. Saudi Arabia is commonly referred to as the 'central bank of oil', since it has the market power to influence global oil prices, which is the basis for its international clout. Saudi Arabia is making slow progress in encouraging growth of the private sector in order to diversify its economy and to employ more Saudi nationals, since less than 5% of the workforce is employed in the state-dominated oil-related businesses. Diversification efforts are focusing on power generation (including nuclear), telecommunications, natural gas exploration and petrochemical refineries.

Saudi Arabia has no political parties, its monarchy is hereditary and the political decision-making in the country is dominated by the al-Saud clan. Royal decrees of 2003 and 2006 promised some form of elections instead of an appointment of a next king, a broadening of the electorate and even free provincial elections. So far, however, no such elections have been held or even announced. Councilors are appointed by the monarch in what is basically a hierarchical feudal political system. Similarly, the legal system is far from modern and is largely based on Islamist sharia law. In line with the belief in Islamic religious supremacy, the country has not committed itself to accept any jurisdiction of the International Court of Justice.

Economic indicators of Saudi Arabia
Economic indicators of Saudi ArabiaSource: EIU

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