Saudi Arabia: Risk Assessment
Country Rating1
Rating: A4
Business Climate Rating1
Rating: B
Risk Assessment2
Growth still driven by public sector investment
The upturn in oil prices and production drove the economic recovery in 2010 with public-sector investment continuing to underpin the non-oil sector. The recovery of private investment lagged, however, due notably to the greater prudence exercised by banks in granting loans in the wake of the payment difficulties experienced by two large family-controlled groups, Al Gosaibi and Saad, in 2009.
Economic growth will likely continue in 2011 at a relatively strong pace. The economy will be especially buoyed by the on-going five-year $386-billion public investment programme (2010-14) focused on oil infrastructures (particularly refineries), and on a broad range of projects in the non-oil sector: water purification; road, rail, seaport, and airport infrastructure, living conditions, universities, and phosphate factories. With the gradual restoration of confidence moreover, the private sector is expected to benefit from a gradual recovery of lending by banks, which are more demanding in terms of transparency and guarantees.
Large twin surpluses and a solid financial position
Public finances remain dependent on revenues derived from hydrocarbon production, which generates nearly 90% of fiscal revenues. After running a deficit in 2009, for the first time in several years, public accounts were back in a surplus position by 2010 thanks to the upturn in oil prices and production. Despite the scale of the projects financed by the public sector, a fiscal surplus is likely to persist in 2011 thanks to the increase expected in world oil prices.
As a result, the revenues derived from exports of oil and petrochemicals will increase. Meanwhile, the expected decline in world prices for certain raw materials will contribute to a reduction in the cost of imports with the trade balance likely to remain solidly in surplus, which is expected to largely offset the persistent deficits in services and transfers. A substantial current account surplus will result in consequence.
In this context, the Saudi Arabia Monetary Agency has continued to accumulate extensive financial assets abroad, estimated in 2010 to be equivalent to the country's GDP - about $450 billion - which provide Saudi Arabia with the means to cope with possible financial turbulence.
Business environment with room for improvement
King Abdullah has been going forward very prudently with reforms, but their implementation has been impeded by limited institutional capacity, cumbersome bureaucracy, and foot-dragging in the more conservative circles. The question of the king's succession within the reigning Al Saud family has been moreover posed due to the state of his health. The situation in Saudi Arabia is also marked by profound social inequality and high youth unemployment That can be a cause of social unrest. Moreover political protests in Bahrain could have a contagion effect especially among the shia population of the eastern coast of Saudi Arabia.
The growth of the private sector in 2011 is expected to be comparable to that of the overall economy. The financial health of companies will likely continue to improve, even if payment defaults remain a possibility due to the problems with access to credit. Despite the progress made on improving the business climate moreover, the legal system does not offer all the safeguards necessary to enable creditors to assert their rights effectively. And corporate accounts are often opaque, which complicates matters in assessing risk. The payment behaviour of private companies is nonetheless expected to remain slightly better than average in the world as reflected in Coface payment monitoring records.
Strengths
- Leading OPEC producer with one quarter of global oil reserves
- Preponderant regional economic and political role
- More diversified and open economy since joining the WTO late 2005
- Solid financial position
Weaknesses
- Dependence on hydrocarbon sector
- Unsuitable education system resulting in high unemployment
- Unstable geopolitical environment
- Business climate undermined by governance weaknesses and conservatism