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Economic Trends

Saudi Customs Information

 

 

Saudi Arabia Economic Trends     Saudi Arabia Economic Trends     Saudi Arabia Economic Trends

Also See
The Saudi Business Center

 

Author - U.S. Department of Commerce

Source:
STAT-USA on the Internet
US Department of Commerce
(202) 482-1986

 

Major Trends and Outlook

The Saudi economy showed a strong performance in 1997,  primarily 
on the strength of high oil prices and revenues for the second
consecutive year.  While oil prices in 1997, averaging about
$18.50 per barrel for Saudi oil, were about $1 lower than in
1996, Saudi production increases in 1997 offset the lower price,
yielding one of the best years since the early 1980s for oil
revenues.  Early 1998, however, saw a substantial drop in oil
prices.  At their low point in mid-March, the price for Arab
light dropped below $10 per barrel.  A Saudi-brokered production
cutback by OPEC and non-OPEC producers in late March reversed the
price decline.  By April 15, the price for Arab light was just
under $12 per barrel. 

With fundamental oversupply factors continuing to affect the
market, the Embassy anticipates that oil prices will not rebound
overall for the year much above current levels.  Nor will they
decline, however, nor persist at the lows of earlier in March.  A
trading range of $11 to 15 per barrel for Saudi oil is likely.

Saudi Arabia agreed in March to cut production by 300,000 barrels
per day (b/d), and another cut which took their quota to
approximately 8 million b/d.  This combination of lower 1998
prices and lower production will mean significantly lower oil
revenues in 1998 than in 1997. 

Government finances remain heavily dependent on oil revenues, and
the economy in general somewhat less so.  Thus, already in 1998,
low prices have affected Government spending plans for the year
and steps being taken to keep the deficit from growing
dramatically.  The impact has yet to pass through to the economy
in general, although the business community is expressing growing
concern, particularly those companies that depend heavily on
business with the Saudi Government. 

According to official statistics, GDP grew 7.05 percent in
nominal terms in 1997 to $145 billion.  Real GDP growth, although
not announced, was probably  similar.  The gain resulted from a
balanced combination of increased oil revenues, increased
Government spending, and growth in the non-oil private sector.
The non-oil private sector grew by 4.5 percent and comprised 34
percent of GDP, a sign that Saudi Government efforts to broaden
economic activity beyond oil are making progress. 

Nonetheless, oil continues to dominate economic activity.  The
oil sector accounted for 42 percent of GDP and the Government,
which received about 75 percent of revenues from oil, another 24
percent of GDP.  Even the non-oil private sector is not entirely
non-oil, and not entirely private.  For example, the largest
company in the Kingdom, petrochemical giant SABIC, whose
activities are considered part of the non-oil private sector, is
70 percent owned by the Saudi Government and is tightly
integrated with the petroleum sector (natural gas is used as a
feedstock in many petrochemical processes). 

The year 1997 was the second year in a row that GDP grew at a
faster rate than the population, resulting in a slight
improvement in per capita GDP.   After several years of decline,
Saudi Arabia's per capita GDP rose from $6,700 in 1995 to $6,800
in 1996 and $7,200 in 1997, an estimate based on extrapolations
from official data from the 1992 census.  Still, per capita GDP
has eroded substantially since 1981, when the United States and
Saudi Arabia had comparable per capita GDP figures of about
$15,600.  At year-end 1997, U.S. per capita GDP stood at about
$32,000. 

Assuming an average price in 1998 for Saudi oil of $13 per
barrel, versus $18.50 in 1997, the Embassy estimates that GDP
will shrink by 12.6 percent to $127 billion. 

We also assume that actual Government spending will be flat and
that the non-oil private sector will grow 1 percent, reflecting
optimism that the non-oil private sector is developing some
resilience independent of oil markets.
Should Saudi oil prices average $14 per barrel, GDP will decline
by 10.6 percent, according to our calculations.  Such a decline
in GDP would also reduce per capita GDP in 1998 to an Embassy
estimated $6,200.  The long-term decline in per capita GDP in
Saudi Arabia underscores the need for the Saudi Government to
continue policies aimed at spurring private sector growth, as
neither the oil sector nor the Government sector can be relied
upon to grow faster than the population and absorb many new
entrants into the job market. 

Saudis now number over 14 million and expatriates number about
6.5 million, based on extrapolations from the 1992 census, an
assumed growth rate of over 3 percent, and Ministry of Interior
figures for expatriates.  In the labor force, Saudis number about
2 million, according to Embassy estimates, while expatriates
number 5.5 million. 

Saudi Arabia has just begun to feel the pressures of unemployment
among Saudi males in recent years.  There is no available
unemployment rate figure for Saudi Arabia, but published data
suggest that employed Saudi males as a percent of the total male
working age population are about 60 percent; the Embassy
estimates that about 5 percent of Saudi women of working age are
formally employed.  According to a report published by the Jeddah
Chamber of Commerce, there are 240,000 working women Kingdomwide. 

One option to deal with the employment problem is substitution of
Saudis for foreigners in the labor force.  Clearly sensing the
need to find work for Saudis before the problem becomes critical,
the Saudi  Government has put teeth over the past two years in
its long-standing Saudiization programs by compelling private
sector firms to gradually increase the percentage of Saudis they
employ.  While this may provide some short-term relief to Saudi
job seekers, in the long run, market forces in a robust private
sector with strong labor needs will be more effective at
providing jobs for Saudis than Government attempts to compel
companies to hire Saudis. 

Realizing that private sector performance needs to become the
engine of economic growth, the Government has taken several first
steps to inject more competition and invite more foreign
investment and repatriation of Saudi capital to Saudi Arabia.
These steps include: 

Saudi Accession to the World Trade Organization (WTO).  Saudi
Arabia continues negotiations for accession to the WTO and
continues to participate actively in working party meetings
required for membership.  The next Working Party Accession
meeting is scheduled for early fall 1998.  Accession will require
the Saudis to place upper limits on tariffs, remove protective
barriers to trade, open services sectors, such as banking, to
greater foreign participation, and improve the business climate
in areas such as intellectual property rights protection. 

Opening of Capital Markets.  The Saudi stock market, with the
largest capitalization in the Middle East, continues to mature.
Trading volume has rebounced and there are a number of new mutual
funds licensed by the central bank.  In 1997, the Saudi Arabian
Monetary Agency (SAMA) approved an offering by Saudi American
Bank of a mutual fund of Saudi stocks that can be purchased by
foreigners, marking the first entry of foreign portfolio
investment into Saudi Arabia

Revision of Laws Affecting Foreign Investment.  The Saudis are
revising their 30-year-old law governing foreign direct
investment in the Kingdom with an eye to attracting more foreign
capital as well as the repatriation of Saudi assets that are
invested abroad.  One major issue associated with these changes
has to do with the marginal tax rate on profits of foreign
investments, as well as the tax incentive system. 

Privatization.  At the end of 1997, the Saudi Government
announced the first major privatization, involving the
telecommunications services of the Ministry of PTT.  After two
years of operations as a corporate entity, shares of Saudi
Telecom will be offered to the public.  A ministerial level
privatization committee, we understand, is reviewing other
sectors to determine which should be privatized.
These are important first steps, but much remains to be done
before markets in Saudi Arabia are free and transparent, and
foreign investors are accorded "national treatment"--the same
rights, privileges, and obligations as Saudi businessmen.  The
early 1998 drop in oil prices underscores the need for the
Kingdom to press ahead with measures to stimulate higher growth
in the non-oil private sector. 

Principal Growth Sectors
Manufacturing
The industrial sector recorded the strongest growth in 1997 at
8.6 percent including petrochemicals and cement manufacturing.
Real growth is expected to be lower in 1998.  The 1997 current
account registered a surplus amounting to $232 million, mainly
due to the growth in exports.  The private sector's non-oil
exports registered 10 percent growth in 1997 reaching more than
$7 billion in 1997.  Commercial bank credit to the manufacturing
sector increased four percent to $3.85 billion in 1997. 

The cement sector now suffers from considerable excess capacity
but is seeking to expand overseas markets to create new outlets.
Domestic demand for cement is likely to be sluggish as depressed
oil prices drag down GDP and thus new construction.  The
completion of the "Two Holy Mosques" construction project also
reduced domestic demand. 

The latest Government figures revealed that there were 2,537
factories in Saudi Arabia capitalized at more than $42 billion.
Total investments in Saudi Arabia's petrochemical and plastics
industries exceeded $36 billion, and petrochemical exports
accounted for 42 percent of the country's non-oil exports.  The
petrochemical industry is undergoing a major expansion phase. 

Agriculture
Despite the goal of the Saudi sixth development plan (1995-2000)
to reduce water consumption by two percent annually over the
plan's period, many sources do not believe this target will be
met. 

The wheat and  barley production quotas remained unchanged in
1998 from 1997  (1.8 MMT for wheat and 1.0 MMT for barley).
GSFMO is the Government agency responsible for  setting
production targets, distributing wheat and barley quotas to
farmers, buying barley from foreign and local suppliers,
organizing the collection of wheat and barley,  milling wheat,
and organizing the discharge, bagging and distribution of these
grains.  GSFMO policy over the  past few years has been to target
wheat production to meet domestic needs only.  Despite the 1 MMT
barley quota, farmers again are not expected to produce more than
400,000 metric  tons in 1998, due to a narrowing of the gap
between production support prices and production costs. 

Saudi Arabia is the world's largest importer of barley, yet
1997/98 imports by the Kingdom are not expected to exceed 4.5
million MT, down from 5.6 MMT.  Saudi Arabia experienced record
rains in the Fall of 1997 which created exceptional pasture
conditions in the central and northern parts of the country,
thereby lessening the demand for imported barley.  Barley is used
predominantly for feeding of sheep, camels, and  goats.  Many
Saudi bedouins depend on subsidized barley for  their
livelihoods. 

Domestic production of alfalfa for use by Saudi dairies and those
in neighboring countries continues to increase.  Livestock and
poultry farming are growing steadily in Saudi Arabia.  

The two largest poultry producers, Al Watania and Al Fakieh,
completed expansion projects in 1996, causing broiler output to
jump 30 percent in 1998 compared to 1996.  This has resulted in a
25 and 30 percent increase in U.S. corn and soybean meal exports
respectively to Saudi Arabia in 1997 compared to 1996.   Despite
the increase in output, Saudi Arabia remains a significant
importer of frozen broilers, hence there remains much room for
expansion. 

The three largest dairy producers Al-Marai, Al-Safi and NADEC
have been engaged in exporting significant quantities of liquid
milk and dairy products to Yemen and the Gulf Cooperation Council
(GCC) countries.  GCC countries do not assume import duties on
one another for locally produced products. 

Despite significant gains in locally-produced fresh fruits and
vegetables, demand for imported food products remains strong,
about $5 billion annually.  With a growing population and an
increasing demand by Saudi consumers for new food products, the
number of large Western-style supermarkets continues to expand,
exceeding 250 Kingdom wide. 

Many local food processors rely extensively, if not entirely, on
imported raw ingredients, and the demand for institutional-size
food products by the catering sector remains strong. 

Mining

Saudi Arabia has substantial deposits of a number of minerals,
including iron ore, phosphates, bauxite, copper, and other
precious and non-precious metals.  The Sixth Development Plan
seeks to further encourage private-sector  investments into that
sector, which is expected to grow 9 percent annually to the year
2000. 

Studies conducted by the Directorate General of Mineral Resources
(DGMR) have revealed large quantities of minerals in 42 fields
spread throughout the Western and Central regions of the Kingdom. 

In April 1997, the Saudi Government established the state-owned
Saudi Arabian Mining Company (Ma'aden).  The company is expected
to organize the Saudi mining sector and consolidate all mining
projects in which the Government is involved.
The latest official figures show overall investments in the
mining sector totaling $6.6 billion.  During 1996, the Saudi
Ministry of Petroleum and Mineral Resources gave mining rights to
a Saudi-American joint venture, the Arabian Shield Company Ltd.,
to exploit some concessions in southern Saudi Arabia.   The
company will construct factories and establish the necessary
facilities to produce copper and zinc. 

In 1998, the Ministry of Petroleum and Mineral Resources offered
tender documents for bauxite and copper mining concessions.  The
Government provides many incentives to attract foreign investors,
such as a tax exemption for five to 10 years, and a 30-year
extraction concession. 

Construction

The private sector is taking the lead in the Saudi construction
sector.  In Riyadh, a number of private-sector construction
projects are already moving forward, including the Al-Faisaliyah
complex at a total cost of $320 million, the Kingdom Trade Center
at a total cost of $533 million, the Qasr Al-Murabba complex at a
total investment of $166 million, the National Company for
Cooperative Insurance office complex at a total cost of $110
million, the Saudi Arabian Basic Industries Corporation (SABIC)
office building at a total cost of $160 million, Riyadh Downtown
project (Ta'ameer) for a total cost of $500 million, and the
Saudi Consolidated Electric Company project at a total cost of
$130 million. 

In addition, many projects are currently being implemented in the
oil and petrochemical sectors.  The list of new petrochemical
ventures is expected to increase as the private sector moves
ahead into downstream manufacturing. 

Construction and expansion in the power, water, and
telecommunication sectors are also moving forward with a number
of projects already being implemented and others in the  planning
stage.  Housing starts and expenditures on urban development
projects are expected to increase to cater to a growing
population and an increased number of new households. 

The construction sector grew four percent in 1997, and commercial
banks' credit to the building and construction sector rose more
than 12 percent to $4.186 billion by the end of 1997, up from
$3.72 billion a year earlier. 

SABIC, the quasi-Government petrochemical firm, is expanding
capacity to 28 million tons by the year 2000.  Other private
companies also plan to pursue a number of petrochemical projects
and expansions at a total investment of several billion U.S.
dollars. 

The Saudi Government is also committed to expanding the country's
power generation capacity to more than 30,000 MW by building more
power plants and expanding existing ones.  The Government is
presently developing plans to initiate Build-Own-Transfer and
Build-Own-Operate schemes for power generation.  This sector will
need $120 billion of new investment over the next 20 years.
Likewise, water desalination capacity is bound to grow to more
than 800 million gallons a day. 

 

Banking

The profits of Saudi Arabia's 11 commercial banks continued to
rise in 1997.  Collectively the banks earned $1.48 billion in
total net profits last year, up 12 percent from the $1.32 billion
earned in 1996.  For the third straight year, the Al-Rajhi
Banking and Investment Corporation had the highest net profits,
$346 million. 

At the end of 1997, the cumulative size of the banks' balance
sheets had grown by 6.5 percent over year-end 1996 to $101.8
billion.  The net foreign assets of the commercial banks stood at
$14.3 billion at year-end 1997, marking a decrease from the
year-end 1996 level of $18 billion.  Foreign assets of the banks
were probably repatriated in 1997 to satisfy growth in domestic
loan demand. The major development in the banking sector in 1997
was the merger of two of the 12 local banks.  Prince Al-Walid bin
Talal, the major shareholder in both United Saudi Commercial Bank
and Saudi Cairo Bank, merged the two banks into the new United
Saudi Bank. 

The loan-to-deposit ratio of the consolidated banking system
stood at 59.1 percent at the end of 1997.  With strong and
conservative oversight by the central bank, Saudi Arabia's
commercial banks have shown an ability to sustain profitability
even during years of sluggish economic performance.  During 1997,
as well as previous years, the banks stood out as among the
strongest performers in the private sector.  That profitability
should be sustained in 1998. 

The Saudi stock market, as measured by the NCFEI (National Center
for Financial and Economic Information) index turned in a 28
percent gain over 1997.  Adding the high dividends paid by Saudi
companies, actual returns for the overall market in 1997 totaled
about 32 percent.  The strongest performing sectors were banking
and manufacturing.  The market has been weak so far in 1998,
however, declining 12.3 percent as of April 15, reflecting
concern about the oil price decline and its impact on the
economy.  The drop in SABIC share prices has had the greatest
impact on the index in early 1998, due to concerns about earnings
on petrochemical sales. 

Oil and Gas

Saudi Arabia possesses 261.5 billion barrels of proven oil
reserves or one-fourth of the world's total and 204 trillion
cubic feet of natural gas reserves.  Oil accounts for about 40
percent of the GDP and more than 85 percent of Saudi exports. 

The keystone of the Government's plans for the oil sector is the
expected completion of the Shaybah oil field.  The high-value
crude from Shaybah will enable the Saudi Government to raise oil
revenues without affecting the overall production level.  The
Shaybah field will also bring with it 500,000 barrels/day of new
production capacity.  The overall cost of developing Shaybah is
estimated at $1.7 billion, including a 240-mile road, an
airfield, a network of pipelines, and processing and storage
facilities. 

Saudi Aramco, the national oil company, will also continue its
exploration efforts for oil and gas, particularly gas not
associated with crude reserves.  Those efforts will help meet the
power and gas feedstock needs of Saudi industries and utilities.
Already, plans are under way to convert power stations that
currently burn crude oil to utilize natural gas which has far
lower maintenance costs and a lower environmental impact. 

Overseas, the trend has been expanding into new regions of the
world.  That trend began in 1988 when Saudi Aramco established a
joint venture company, Star Enterprises, with Texaco in the
United States. 

Aramco also acquired a 50 percent interest in a Greek refining
and marketing firm, Motor Oil (Hellas) Corinth Refineries and
Avinoil Industrial Commercial and Maritime Oil Company. 

In recent years, Aramco went ahead with a number of investments
in Asia.  The company bought the Korean affiliate Ssangyong; it
also has a 40 percent share of Petron, the largest oil refiner in
the Philippines.  In October 1997, Aramco announced a deal with
Exxon and a Chinese entity to set up a joint petrochemical
project in southeastern China.  Finally, in November of that same
year, Aramco and Shell announced an alliance to invest into
India's downstream oil sector. 

Water Desalination

Saudi Arabia has more than 25 water desalination plants that
provide approximately 520 million gallons of potable water daily
accounting for 70 percent of Saudi Arabia's supply of drinking
water.  That figure is expected to reach 800 million gallons once
a number of projects and expansions are completed.  The most
pressing projects include a second station at Shuaiba and another
at Yanbu, both on the Red Sea, plus a third station at Al-Khobar
plant on the Arabian Gulf coast.  The Ministry of Agriculture and
Water is currently working on a national water plan study.  Based
on the plan, the Ministry will allocate more than $4 billion in
order to provide water to all regions of the Kingdom over the
next 10 years.  The Kingdom has a comprehensive network of water
pipelines extending over 1,250 miles and includes 98 reservoirs with a
total capacity of 105 million cubic feet. 

The Saudi Government already provides water at a highly
subsidized rate, 60 to 70 percent of its actual cost, close to
three cents per cubic meter, which is a fraction of the average
rate paid in industrialized countries.  The Government is
considering raising the rate for water. 

Government Role in the Economy
High oil prices over the past two years contributed to improved
fiscal results in 1996 and 1997, but we expect low oil revenues
in 1998 to produce a fiscal deficit that is at least double the
projected budget deficit. 

Actual Government revenues in 1997 were 24 percent higher than
budgeted revenues, and the Government overspent the budget by 16
percent, ending the year with a modest fiscal deficit of $1.6
billion, the lowest deficit in 15 years and a mere 1 percent of
GDP. 

The Embassy estimates that the total stock of Government debt by
year-end 1997 stood at $114 billion, 78 percent of GDP.  By
comparison, U.S. Government debt was 47 percent of GDP. 

The Saudi Government easily financed the deficit in 1997 by
borrowing from domestic financial markets via Saudi Government
Development Bonds sold to the commercial banks, the Government
pension fund, and the social security system.
The Government introduced new Floating Rate Notes in early 1997,
for which the interest rate is adjusted quarterly at a rate that
includes a small premium over LIBOR.  The notes have been popular
among the Kingdom's 11 commercial banks, helping to drive up bank
claims on the central Government by 27 percent over the course of
1997, an increase of $4.8 billion. 

The Government continued in 1997 to close out arrearages to
private sector contractors.  The most notable move was a $4.3
billion loan package brokered by J.P. Morgan to cover payments to
Boeing for aircraft purchased by Saudi Arabian Airlines (Saudia).
The Embassy estimates that remaining arrearages still total $2 to
3 billion.  Much of this consists of payments owed by the
Ministry of Health and by public sector enterprises for work
contracted outside their authorized budgets in the past. 

The 1998 budget is relatively austere, slowing the rate of growth
in all major categories of expenditure.  The budget puts total
spending about 8 percent higher than 1997 budgeted expenditures.
However, the Embassy predicts that the Government will again tend
toward overspending, with the result that  actual spending this
year will likely reach levels similar to actual spending in 1997,
about 7 percent over the 1998 budget. 

This year the pressure on the deficit will come from the revenue
side of the ledger.  Based on an average Saudi oil price for the
year of $13 a barrel, the Embassy forecasts actual Government
revenues of $45.1 billion, about 5 percent less than budgeted
revenues. 

Early indications are that the Government has reacted to reduced
oil revenues in 1998 by deferring some capital projects and some
purchases, such as new cars and equipment.  Recent history
suggests, however, that the Government will not be able to brake
spending through the entire year. 

For instance, in 1997, the Government reacted to soft oil prices
early in the year by slowing spending.  Later in 1997, when
prices firmed up, the Government chose not to use the higher oil
revenues to retire the deficit but rather to spend well above the
budget. 

The Embassy expects that the Saudi Government will again be able
to finance its 1998 deficit readily by borrowing on domestic
financial markets.  There is ample liquidity in the banking
system, and local bankers have shown no loss of appetite for
Saudi Government debt. 

Perhaps the greater damage of a marked increase in the deficit
this year will be the psychological drag on the Government's
efforts to eliminate the budget deficit by 2000: 

--   Population pressures and infrastructure requirements will
     continue to demand substantial expenditures, while oil
     revenues may remain low. 

--   The deliberate pace of privatization efforts in the
     telecommunications and aviation fields means they probably
     will not have progressed to the point where they are saving
     the Government money in time for the 2000 budget. 

--   Likewise, the Government has only begun to explore the
     build-operate-transfer approach to project finance, so it is
     unlikely that it will suddenly expand approvals of BOT
     financing schemes to the point where foreign capital will
     replace Government funding for new power plants and other
     major infrastructure projects on a scale large enough to tip
     the budget balance. 

Balance of Payments Situation
The country's current account balance was slightly in surplus in
1997 for the second year in a row, but the Embassy forecasts that
lower oil export earnings in 1998 will push the balance as deeply
as $12.6 billion into the red: 

--   The Embassy expects that non-oil exports will grow only
     modestly or remain flat, in light of the slump in demand for
     petrochemicals in Asia and other markets. 

--   Remittances abroad, which traditionally represent the
     largest services outflow, will probably rise only modestly,
     if at all, since the Government's Saudiization policy and
     straitened times will not support significant increases in
     foreign workers; the Government also repatriated hundreds of
     thousands of foreign workers last fall. 

--   The Embassy forecasts that imports may decline slightly as
     new capital projects are delayed and the domestic
     manufacturing sector continues to expand its market
     presence. 

The expected current account deficit will probably be financed by
a combination of means.  The Embassy expects commercial banks to
repatriate some foreign assets to lend domestically.  An
interesting variable in Saudi finances is the foreign holdings of
private Saudis, estimated in the hundreds of billions of dollars.
These accounts were drawn upon earlier in the decade to help
address current account deficits.  The Embassy expects that some
of these assets will be repatriated this year to improve
corporate balance sheets.  The Government likewise will probably
harvest some of its overseas holdings to pay for imported
purchases. 

The net foreign assets of the commercial banking system dropped
sharply in 1997, falling 21 percent to $14.3 billion--the low
point of the decade.  The Embassy believes this resulted from the
bank's repatriating assets in order to fund domestic lending. 

Commercial banks' claims on the private sector and on the
Government both rose by much larger margins in 1997 as compared
to 1996.  Net foreign assets had shot up sharply in 1996, rising
16 percent to $18 billion. 

The Embassy estimates that the Government's foreign asset
position rose slightly in 1997 to about $75 billion.  Of this
total, probably about $24 billion is held by the Government
pension fund and the social security system.  Approximately $51
billion of the remainder is managed by the Saudi Arabian Monetary
Agency (SAMA). 

The quality of SAMA's foreign assets is difficult to determine.
Article 6 of the Kingdom's currency law requires that all riyals
be covered fully by gold or foreign exchange convertible to gold.
Consequently, we estimate that roughly $20 billion of the $51
billion managed by SAMA is set aside in SAMA's issue department
as backing for the currency.  SAMA lists its foreign assets in
its banking department as deposits with banks abroad, investment
in foreign securities, and gold and silver.  Questions remain as
to how much of the roughly $30 billion in foreign assets in the
banking department are available for use to finance future
current account deficits, as most of them are reportedly held
against letters of credit or commercial bank deposits, or include
claims against developing countries, such as Iraq. 

Inflation and Monetary Policy
The Saudi economy ended 1997 with signs of slight deflation,
which the Embassy attributes to a combination of sound monetary
policy by SAMA and the beginnings of the economic pinch caused by
falling oil revenues. 

The ten-city cost of living index fell 0.4 percent over the 12
months ending in December 1997, with the wholesale and retail
import price indices behaving similarly. 

The Embassy expects slight deflation or flat prices to continue
through 1998, as long as oil prices remain depressed.  There is,
however, ample liquidity in the Saudi economy, which should
forestall any large-scale deflation, in the Embassy's judgment.
M2 (essentially, cash, checking accounts, and passbook savings
accounts) grew 7 percent in 1997, a rate consistent with that of
recent years. 

The risk premium Saudi banks pay on riyal deposits over dollar
deposits was unusually high during the last half of 1997,
breaking the 400-basis-point mark on 1-month deposits in November
for the first time in two years.  This sign of speculative
pressure on the riyal may have reflected the crisis with Iraq and
hedging against the prospect of Asian economic troubles
threatening the world oil market and the crisis with Iraq.
However, SAMA's sizable reserves and evident determination not to
alter the riyal/dollar exchange rate--set at 3.745 riyals to the
dollar since 1987--appears to have stifled pressure on the
currency, since the interest rate spread returned to more typical
levels in the first months of 1998. 

The Oil and Gas Sectors

Although Saudi Arabia controls more than one-quarter of the
world's reserves, it pumps only 11 percent of the world's current
daily production.  Oil price and production stability remain the
goal of the Saudi Government.  For the previous two years, oil
prices had been relatively stable and high.  By early March of
1998, however, the situation became grave as the nominal price of
Saudi oil dropped to its 1977 levels, dipping to below $10 per
barrel in mid-March. 

This compares to average prices of around $18.50 per barrel in
1997 and over $19 per barrel in 1996.  The drop in the price of a
weighted average barrel of Saudi crude reflects the magnitude of
the general market trend.  The recent downward pressures on crude
prices underscore the prudence of the Saudi Government's
conservative approach to projecting oil income. 

Recognizing the vulnerability of their national economy to oil
price swings, Saudi Government planners have long taken a
cautious view of the oil market, as shown by the 1998 budget,
which appears to be based on an average price of around $14.50
per barrel.  With identifiable market factors suggesting
continued downward pressures on prices, the Saudi Government's
attention will remain focused on cost-cutting measures. 

Saudi Arabia agreed in March 1998 to cut production by 300,000
barrels per day below its OPEC quota of 8.76 million barrels per
day to support prices.  The Saudis subsequently agreed to a
further cut, which as of July 1998, takes daily production to 8
million barrels per day.  However, the Embassy anticipates that
oil prices will not rebound overall for the year and will trade
between $11-15 per barrel. 

Over the last 21 years, the Saudi petrochemical industry has
grown from virtually nothing to supplying five percent of the
world's market for petrochemicals.  Total investments in Saudi
Arabia's petrochemical and plastic industries exceeds $36 billion
and involve a number of joint ventures with renowned companies
such as Shell, Mobil, Exxon, Neste Oy, and others.  The Saudi
petrochemical conglomerate, SABIC, has grown to great importance
in the Saudi economy with more than two-thirds of its production
exported.  The company is boosting its production to 28 million
tons by the year 2000, including a doubling of the methanol
production.  In addition to SABIC, a variety of independent
projects are under way.  Chevron is completing a $600 million
aromatics plant in Jubail which should be operational in May
1999.  In addition, there is another $1.3 billion worth of
private sector investment in process. 

Infrastructure

Saudi Arabia possesses a good network of infrastructure to
facilitate the distribution of goods and services.  The business
centers of Riyadh, Jeddah, and Dammam/Al-Khobar/Dhahran each have
an international airport served by a variety of international
airlines with passenger and cargo capabilities. 

These airports are designed to meet a growing traffic in cargo
and passengers; although work has already been completed at King
Fahd International Airport in the Eastern Province, it is
unlikely it will be operational during 1998. 

Air travel is preferred for inter-Kingdom passenger travel with
public service restricted to the sole national airline, Saudi
Arabian Airlines.  Most inter-Kingdom freight is hauled by truck
over a good highway system linking the major business centers.
There is a total of 175 airports and four heliports. 

The network of asphalted roads and highways has expanded to reach
a total distance of 151,532 kilometers in 1996, 40 percent of
which are paved.  One rail link carries passengers and freight
between Dammam and Riyadh, and other rail links are expected to
be built to connect major mining sites with seaports. 

Jeddah and Dammam are the main international seaports for moving
containerized and bulk cargo.  Other ports are specially
configured for more specialized uses, e.g., Ras Tanura for oil
shipping, and Jubail and Yanbu for serving the petrochemical
sector and heavy industry.  A new port at Dhiba was inaugurated
during 1996 to handle both passengers and cargo, especially from
Egypt.  Moreover, a new terminal was also added at Jeddah Islamic
Port for receiving pilgrims.  The volume of cargo handled at
these ports reached 78 million tons in 1997, 11 percent higher
than in 1996.  The increase in capacity was accompanied by the
lowest operational cost over the past 12 years. 

Modern communications facilities are available including
telephone, facsimile, telex, and courier services.  U.S. database
log-on is available through a Ministry of Post, Telephone and
Telegraph trunk line service, Al-Waseet. 

In addition, a number of agreements have already been signed
between various U.S. Internet service providers and Saudi
companies to launch the service before the end of 1998 or early
1999. 

Use of private satellite communications transponders is not
allowed.  Facsimile machines are heavily utilized in the conduct
of business.  A cellular phone system based on the Global System
for Mobile (GSM) standard is operational, while radiophones are
restricted.  The Government is embarking on a large-scale
telecommunications upgrade program, and the shortage is expected
to be resolved by the end of 2002 with the expected Telephone
Expansion Project 8, or TEP 8, to provide an additional 4 million
lines and the issuance of a second cellular license. 

 

 

 

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