Saudi Arabia: Risk Assessment
Country Rating1
Rating: A4
Business Climate Rating1
Rating: B
Risk Assessment2
Growth supported by hydrocarbons and public spending
After a fairly exceptional year in 2011, growth in 2012 is likely to be sustained by a slight increase in oil production and the continuation of high hydrocarbon prices. Moreover, activity will be driven by the ongoing five-year $386-billion public investment programme (2010-2014), as well as by the package of measures introduced in early 2011 totalling $130 billion aimed at defusing social tensions.
Over time, the social measures initiated in 2011 will continue to boost household consumption. Furthermore, despite a grim global economic environment, private and foreign investment is expected to be boosted by ongoing or planned projects: refineries, petrochemical plants, new offshore gas fields.
Inflation is likely to rise in 2012, mainly because of the impact of higher public and private sector salaries in 2011. Nonetheless, planned construction of a social housing scheme comprising 500 000 homes will slow the rise in rents, rent accounting for a high proportion of the consumer price basket.
Sustained large twin surpluses and solid financial position
Public finances remain dependent on oil revenues (which generate 90% of fiscal revenues). Despite the high level of spending on social housing and hospitals, and the creation of 60,000 public-sector jobs, the fiscal surplus is likely to persist in 2012, thanks to the modest scheduled increase in oil production and the continuation of high oil prices.
As a result, the revenues derived from exports of hydrocarbons and petrochemicals will remain high and the trade balance solidly in surplus, despite the rise in imports on the back of vigorous domestic demand. This will largely offset the persistent deficits in services and transfers, resulting in a substantial current account surplus.
In this context, the Saudi Arabia Monetary Agency will continue to accumulate extensive financial assets abroad, estimated to reach $580 billion at the end of 2012, equivalent to the country’s GDP or more than two years’ imports. This makes the Saudi State a net external creditor, despite steady increases in the breakeven oil barrel price, on which the fiscal equilibrium is based.
Political weaknesses
Saudi Arabia is exposed to weaknesses even though it is a key beacon of stability in the region and for the safety of the world’s energy supply. It looks as if the country will be spared by the political and social events affecting several Arab countries since 2011, as oil income can be used to defuse the social tensions linked to huge inequalities, high youth unemployment and corruption. Moreover, King Abdullah is cautiously modernising the kingdom, although the question of his succession is becoming critical on account of his age and precarious state of health. The reform process could be thrown into doubt by the accession of a conservative king, at a time when the population seems to be hoping for someone younger to take over.
Business environment has room for improvement
The growth of the private sector in 2012 is expected to be comparable to that of the overall economy, The financial health of companies is likely to continue to improve, even if payment defaults cannot be ruled out due to problems with access to bank credit. The highly concentrated Saudi banking system, the most important in the Middle East, is well capitalised, liquid and profitable.
Moreover, despite progress on improving the business climate, the legal system does not offer all the safeguards necessary to enable creditors to assert their rights effectively. Corporate accounts, too, are often opaque, which complicates risk assessments. The payment behaviour of private companies is nonetheless expected to remain slightly better than the world average as observed by Coface.
Strengths
- Leading OPEC producer with one quarter of global oil reserves
- Leading regional economic and political role
- Economy more diversified and open since joining the WTO in late 2005
- Solid financial position
Weaknesses
- Strongly dependent on the hydrocarbon sector
- Unsuitable education system resulting in high unemployment, particularly among young people
- Business climate undermined by governance weaknesses and conservatism
- Unstable geopolitical environment