Oil has made Saudia Arabia rich. In fact, this Arab nation has lots of it as they can command the attention of the Western economies as the Kingdom holds 25 percent of global oil reserves. The country is mostly sandy desert for its 25 million citizens plus 5 million foreigners who call this Arab Kingdom home. Saudia Arabia provides for generous benefits to its people including a modern health care system with state of the art equipment, luxury is evident throughout Saudi Arabia, elaborate shopping centres, skyscrapers including a 66-storey building and excellent infrastructure ie. highways.
POLITICS: monarchy, no political parties. The country is ruled by the al-Saud royal family with Crown Prince Abdullah as leader, age 78 since 1995 who then replaced King and Prime Minister Fahd bin Abd al-Aziz Al Saud who was leader since 1982. Crown Prince Abdullah is considered a moderate, he wishes to balance Western lifestyle with Islamic views in order to maintain domestic stability. The royal family continues to rule by strict Islamic Law, conservative values. Independence for Saudia Arabia came in 1932. The country is 100 percent Muslim.The royal family, the al-Saud family have an estimated 30,000 royals within the family, majority of whom receive monthly subsidies from state oil revenues. For the ruling royal family, many monthly subsidies average between $4K USD/month to $100K USD/month for each family member. Opposition voices claim that upwards of 25 percent of oil revenues go to the royal family.
ECONOMY: wealthy oil-based, essentially is closed and controlled by the royal family. The Saudi economy was badly hurt during 1998 at a time of very low world oil prices in the $10 USD/barrel range, the Kingdom was then flirting with bankruptcy. As an influential member of OPEC, in the early 2000’s, Saudi Arabia spearheaded OPEC oil cuts to drive the oil price higher. This has been successful coupled with growing international demand for petroleum. By year 2003, Saudi Arabia with high oil prices recorded an extra $30 billion USD cash windfall in oil revenue.
Today with significantly higher oil prices prices, Saudia Arabia is becoming flush with hard currency resulting in a better economic performance. The government is deeply in debt although to domestic creditors (ie. Saudi companies), years of continual budget deficits.resulted in the public debt peaking at 120 percent of GDP in year 2000 including monies allocated for its huge miltary budget. Although budget deficits have persisted for years, with no personal income tax, Saudia Arabia has tremendous room to raise revenues if required by modest taxation. Further, privatization of state assets will provide the national treasury with additional monies to help pay off public debts.
Typically, Saudi Arabia runs trade surpluses and a deficit in the income account as expatriate foreign workers transfer funds back home. Foreign workers within Saudia Arabia is a large component of output with over 4 million expatriates working with the majority stationed in the oil & petroleum services sectors. The Saudi government is now starting to allow privatization in order to diversify the economy away from its dependency on oil. Industries include crude oil production, oil refining, petrochemicals, construction & cement, plastics & fertilizers and potential in mining (gold, aluminum/bauxite, phosphate). Saudia Arabia is presently one of the world’s most generous nations by providing 5.5 percent of its GDP for foreign aid assistance to developing countries, major global contributor.
Of interest to the economy is the demographic structure as Saudia Arabia’s population in 1980 stood at 9 million, today the Saudi population stands at 25 million plus 5 million foreigners. This reflects a very high birth rate of 6.2 children per woman resulting in 60 percent of the population now under the age of 20, similar to Iran. The United Nations projects a population of 36 million by year 2020. The two major difficulties for the economy is the growth of the royal family and the poor. The subsidies to support the royal family are increasing while much discontent amongst the poor continues. In 1980, Saudia Arabia’s GDP/Capita peaked at $28,600 USD. Today, this figure for market GDP/Capita is one quarter at $7,650 USD.
GDP as measured by purchasing power parity is at $270 billion USD (2002) with corresponding GDP/Capita at $11,400 USD. Market GDP fo 2003 at $191 billion USD. GDP declined in 1999 by 0.7 percent due to low oil price, GDP 2000 at positive 4.5 percent, GDP 2001 at 1.3 percent, 2002 at 1 percent, year 2004 GDP growth is estimated at 2 percent, year 2005 projected at 3.2 percent. Inflation during the 1990’s was low averaging zero to 2 percent, year 2000 was negative at 0.6 percent, 2001 at zero, 2002 at 1 percent, inflation at 2004 at 1 percent, 2005 is also projected low at 0.9 percent. Current account surplus for 2003 at 11 percent of GDP, year 2002 at 6 percent surplus, conversely in 1998 the current account was in deficit at $13 billion USD reflecting low oil prices at that time. Exports at $78 billion USD for year 2003 (U.S., Japan, South Korea) while imports came in at $30 billion USD (U.S., Japan, Germany). Fiscal deficit for year 2002 at 6 percent of GDP, 2000 at 7.5 percent of GDP. During the 1990’s, the fiscal deficit shortfall came in from 2.7 to 11.5 percent of GDP. Extensive military budget at $18 billion USD (2001). Unemployment is high at 25 percent. Year 2003 external debt came in at a modest $25.9 billion USD, year-end 2002 domestic debt amounted to a more serious figure of 97 percent of GDP.
Oil and Natural Gas
Saudia Arabia is the world’s largest oil exporter representing 10 percent of global production. Proven oil reserves are at 260 billion barrels approximately and corresponding proven natural gas reserves at 6.39 trillion cu m. There is an estimated 85 years of oil reserves remaining for Saudi Arabia not including new discoveries. March 2003 oil output during the time of Gulf War II was increased to 9.5 million bpd. By March 2004, Saudia Arabia was pumping 8.42 million bpd following OPEC quota commitments. Domestic consumption at 1.452 million bpd (2001). The oil economy represents 75 percent of government revenues, 40 percent of GDP and 90 percent of export earnings. Extensive oil & natural gas pipeline system is in tact. The Saudi Kingdom is also home to the world’s fourth largest deposits for natural gas. Saudi cost of extraction for a barrel of oil is very low at only $1 USD, one of the lowest in the world. More recently, the government is allowing for foreign investment participation into development of Saudi’s natural gas fields, providing for foreign tax credits. It is quite possible that upwards of $100 billion USD equivalent will be invested over the next 20 years from foreign investment into the Kingdom’s petroleum industry, this will certainly help to create jobs for many young Saudis.
At present, Asia as a region with 3.6 billion people consumes approximately 20 million bpd of oil. Comparatively, the United States & Canada with 320 million people consume 25 million bpd of oil. It is forecasted that over the next 10 years, Asian oil consumption will double with increased exponential demand from countries like China, India. Pre-Gulf War II Iraqi oil production was recorded at 2 million bpd, it has now fallen to 1 million barrels due to insurgency difficulties. However, the potential is great for Iraqi oil production once stability arrives to eventually provide upwards of 10 million bpd oil capacity if required placing short term downward pressure on the crude oil price although likely to be offset with rising demand. Recent supply problems have resulted from countries like Venezuela having labor strife which have aided higher oil prices in 2002-04.
POSITIVE: tax system is being reformed to make foreign investment more attractive, trade agreement with the European Union coupled with a plan to enter the WTO, modern telecommunication system. CONCERN: relatively low FDI, literacy level, high levels of unemployment, increase in population growth rate, water shortages, increase in domestic drug use, minimal women’s rights & freedoms.
BANKING SYSTEM: stable and profitable. Money supply growth has increased over the last couple years recently measured at 15 percent annual growth. The banking system is opening up to foreign banks, modern and efficient with over 1000 ATM’s. All major credit cards are accepted. Current interest rate, the official Repo Rate is at 1.75 percent, slightly higher than the United States at 1 percent Fed rate. Foreign exchange reserves were recently measured at $17.6 billion USD. Overseas investments by Saudis are extensive estimated at $500 billion USD ie. US equity and bond investments.
REGIONAL ANALYSIS: Middle East, Yemen, Iraq, Egypt, Iran
Very volatile, high risk region. Iran is divided from those who wish to implement more Western reforms and the hard-line Islamic clerics. Iraq is still a looming question, possibility of civil war? BI.C does not think so, the United States military is determined and will stay for years until stability is achieved. Saudi revolution? BI.C thinks unlikely. But if the royal family were to be overthrown, U.S. troops that are stationed in Iraq can quickly move into Saudi Arabia to ensure stability prevails.
KNOWLEDGE: Terrorism & Stability of Political Structure
Huge demographic change as the median age of the Saudia population is only 19 years, very young population. Will the monarchy stay or will Saudi Arabia reform? Discontent with the wealth distribution framework of the Kingdom’s economy may lead to future social instability as many in the lower masses revolt against the jet-setting royal family. Domestic political pressures include rising Islamic fundamentalism, future possible political instability with succession of political power, expanding underclass, al Qaeda terror threats and bombings, etc. How real is the threat of a widespread revolution similar to what happened to Iran in the late 1970’s? Perhaps but BI.C thinks unlikely since Saudi Arabia already has strict Islamic law in place. However, changes to Saudi leadership structure is imminent with time as Saudi Arabia embraces more democratic reforms and freedoms particularly in light of the demographic structure of a very young population of whom many seek Western ways. Although some analysts say that 30 percent of the Saudi population live in poverty and many of the young University graduates cannot find work, the truth is quite revealing. There are jobs, but they are not the suitable white collar jobs that man of the young Saudis desire.
Terrorism question? More recently Islamic extremists were blamed for the April 21, 2004 suicide bombing at the Saudi national police headquarters in the capital city of Riyadh which killed 10 and injured 150. In May 2003, suicide bombings further killed 50 and another terror attack bombing in November 2003 in Riyadh. Is Al Qaeda targetting the royal family - power struggle underway? Essentially, Al Qaeda is acting as political opposition to the ruling House of Saud family. It has also been reported that Al Qaeda may have had training camps within Saudi Arabia of which 15 of the 19 hijackers in the New York terrorist attacks on 9/11 were Saudi nationals. Further Saudi involvement involve Saudi banks and charities acting as a vehicle and source of funding for the Al Qaeda network prior to September 11, 2001 terror attacks.
A potential risk to the Saudi royal family and the government is that they maybe a potential target for a class action lawsuit for responsibility for the 9/11 terror attacks in the United States. Some figures have this claim seeking upwards of $1 trillion USD.
CURRENCY: ISO symbol ‘SAR’, Saudi Arabian riyal. At time of review on April 21, 2004, the riyal is fixed at 3.750228 SAR to the US-dollar ‘USD’. The riyal is fully convertible with no currency controls. The USD is also widely accepted. The Saudia Arabian Monetary Agency (SAMA) is responsible for issuing national currency and managing the Kingdom’s financial reserves.
CURRENCY HISTORY: pegged at 3.75 SAR to 1 USD since June 1, 1986. Other historical quotes include: November 1995 at 3.7498, March 2004 at 3.7505.
CURRENCY FORECAST: the strength of the USD peg is largely dependent upon the world oil price. BI.C in the short to medium term sees greater risk related to domestic political variables, risk for internal uprisings, both domestic & regional terrorism risks to Saudi Arabia rather than the world oil price. It is quite possible that the domestic al Qaeda terrorism threat has just started within Saudi Arabia. Many Islamic extremists view the Kingdom as to aligned closely to the United States and other Western interests. Ironically, it is the United States itself who may pose a large threat to the long term viability of the royal family as the U.S. is attempting to bring democracy to the Middle East. Saudi oil production is vulnerable to terror attacks and disruptions from pipelines, wells, refineries, etc. being bombed. Investors should not discount this form of currency risk. BI.C believes that the fiscal deficit shortfall is not a serious economic threat to Saudi Arabia although closing the shortfall will help to keep the USD peg stable. The Kingdom has great flexibility to move on the taxation side of the equation to raise revenue if required. The peg is further supported by expected further USD depreciation in the second half of 2004 to a trade weighted basket of hard currencies.
In the long term, six Gulf Arab states of whom control 50 percent of the world’s oil reserves signed an agreement in December 2001 to establish a single currency by 2010 (Saudia Arabia, United Arab Emirates, Oman, Qatar, Oman, Kuwait, Bahrain). BI.C forecasts higher oil prices ahead as the global purchasing power of the current USD oil price is below that of 20 years ago coupled with a dramatic increase in demand from both the rising population of the Middle East and increased consumer demand from Asia. A higher USD oil price is required to account for the USD depreciation, a 35 percent rise alone on currency adjustment over the last 2 years. In order to keep domestic stability, Saudi Arabia requires an oil price of at least $20 USD/barrel of which BI.C believes will be attained in this upcoming commodities bull market. This $20 USD oil price is the key marker for the ruling royal family to maintain power and keep a satisfactory standard of living to its citizens thus avoiding dissent and revolt. BI.C forecasts Saudi Arabia to continue with modernization, democratic reforms including an elected parliament, this all bodes well for the riyal in the years ahead although short to medium term currency risk is evident from al Qaeda and other opposition forces to the ruling royal family.
UPDATED: April 21, 2004