A guide to doing business in Saudi Arabia: economy

This article is from MEED.com

National oil company Saudi Aramco is the largest in the world and manages 95 per cent of the country's oil production. Saudi Arabia can produce up to 12 million barrels a day (b/d) of oil and is the swing producer for Opec, meaning it can increase or decrease its oil production. Last year, the kingdom raised its output in order to compensate for the loss of production in Libya, which was embroiled in civil war for much of the year.

Output averaged 11.2 million b/d in 2011, a sharp rise from 9.8 million b/d in 2010. The increased production coupled with higher prices meant the kingdom's oil export revenues amounted to about $302bn last year, while imports totalled $98.7bn, leaving a trade surplus of $244.5bn.

Nominal GDP was $578bn in 2011, making Saudi Arabia by far the largest economy in the Middle East and one of the wealthiest in the world. At current rates of production, the kingdom's reserves will last another 65 years.

The trend towards higher oil prices has helped drive down government debt to about 6 per cent of GDP. In comparison, the US' gross debt is more than 100 per cent of GDP, Italy's is about 123 per cent and the UK's is about 88 per cent. The central bank, Saudi Arabian Monetary Agency (Sama), has seen its coffers swell. By the end of 2012, its total foreign assets are expected to exceed $600bn.

Despite its wealth, the Saudi economy is not growing fast enough to generate sufficient employment for the kingdom's rising population, which is expanding at about 2-3 per cent a year. The oil sector is traditionally a small employer. The Organisation for Economic Cooperation and Development estimates youth unemployment in the kingdom to be as high as 30 per cent.

State spending is the main engine of the non-oil economy and is likely to remain so for the foreseeable future. In mid-2010, the government announced a SR1.4 trillion ($385bn) five-year development plan from 2010-14. It aims to improve living standards and infrastructure, enhance labour skills, and diversify the kingdom's industrial output. This has since been followed up with further spending measures focusing on housing and social welfare programmes. Government spending is expected to be the equivalent of 36 per cent of GDP this year.

Efforts are being directed at diversifying the kingdom's industrial base into more labour-intensive areas. The Supreme Economic Council was established in 1999 to steer the economy away from oil, and this was followed in 2000 by the formation of the Saudi Arabian General Investment Authority (Sagia) to encourage foreign direct investment in the kingdom.

Major investments are now being made in metals manufacturing and petrochemicals production, and other targeted capabilities include vehicle manufacturing and solar technologies. Saudi Arabia has been spared the unrest that has destabilised many other countries in the region over the past 18 months, but the government in 2011 announced increases in public sector wages, pensions and subsidies in response to the protests. The increased current expenditure means that the budget breakeven oil price for the kingdom remains high. For 2012, it is estimated at $71 a barrel, and it was $91 in 2011.

Local analysts expect state spending to rise by 7 per cent a year up to 2025, which would mean Riyadh would need oil prices to be $175 a barrel just to break even. By 2030, the breakeven level could jump to $320 a barrel based on projected spending. This will leave the kingdom increasingly vulnerable to fluctuations in oil prices.

Spending growth should start to moderate in the future as a result of these pressures and the need to expand the non-oil private sector will become more urgent.

GDP growth is forecast to fall to 6 per cent in 2012, from 6.8 per cent last year, on expectations the kingdom's oil output will reduce now that production in Libya has been restored. Inflation is less than 5 per cent, with the main drivers being food imports and rent.

This article is part of MEED magazine's Doing Business in Saudi Arabia Guide, for more information please visit MEED.com