Saudi Arabia: Reform continues (page 2 of 2)

After the OPEC meeting in October, Saudi Arabia has indicated it will cut oil output by up to 380,000 b/d from November. Saudi has also indicated further cuts to output levels might be required in OPEC's December meeting to support the oil price. Meanwhile, the import bill is forecast to increase with the higher investment level. As a result, we forecast that real GDP growth in 2007 will slow to 5.0%.

On the reform front, the plans for Saudi Arabian Airlines have been redefined and bids have already been solicited for the catering arm of the airline. The government has also indicated it plans to reorganise the postal service and sell 49% of some operations. The government also has announced the expansion of King Abdullah Economic City, the development of four new economic cities in different areas and tax breaks for foreign firms investing in underdeveloped regions.

With regards to the financial sector, the government plans to develop a new financial centre in Riyadh by 2010. In order to increase Saudi employment linked to the centre, a new financial academy is planned to boost skill levels. The Kingdom's accession to the WTO is also driving financial reform; in October, the cabinet approved the licencing of 13 insurance companies to compete against the National Company for Co-operative Insurance, which had a monopoly.

Although there has been progress on the economic front, political reform has been slower. However, in October 2006, the Allegiance Committee was established, which will determine the future succession process. Although the succession after King Abdullah has been agreed, there is still a need to define the process beyond that point.

The Allegiance Committee, which comprises the sons and grandsons of Saudi Arabia's founder King Abdelaziz al-Saud, will vote on the eligibility of future kings and crown princes. The measure institutionalises consensusbuilding within the royal family by giving different branches of the ruling al- Sauds a say in the selection of kings. This has tended to happen in practice in the past, but has never been formalised. The Allegiance Committee could pave the way for the eventual emergence of younger rulers and the continuation of the reform program. The committee also aims to prevent infighting among the next generation of princes, which is vital for political stability. Furthermore, the formation of the committee aims to avoid the situation where the king is ill and unable to rule effectively, yet he remains on the throne.

Overall, 2006 has been a strong year for Saudi Arabia. The economic fundamentals have remained robust and the government has also made progress on its reform program and investment plans, which will help to develop economic capacity. The reduction in debt, build up of reserves and tapping into private investment will support investment levels going forward, despite the fall in oil price and output levels. Although these are positive developments, implementation is vital. Goals such as the development of financial centres, which will be important for increasing employment opportunities, are shared by other countries in the region that have progressed further down this path. Improving the investment environment and attractiveness of Saudi labour remains central to Saudi Arabia realising its full potential of the reform and investment measures announced this year.