KINGDOM OF SAUDI ARABIA

Submitted By:

Shubhangni Pandey
10BSPHH010760
Seat no. 33
ACKNOWLEDGEMENT

“If the only prayer you ever say in your whole life is "thank you," that would
suffice”,
-Meister Eckhart

I would like to express a deep sense of hearty and special gratitude to Dr. C.S. Shylajan for his
valuable suggestions and constant help, encouragement throughout the preparation of this
project, without whose help this project would have not attained it present shape. He was the
driving force right from beginning till the submission.

A special thanks to everyone who guided me towards the right path in this project and made the
humongous task very easy and a great learning process.

I would also like to thank all those who have contributed to greater or lesser extent in completion
of this project

I convey a special thanks to all fellow batch-mates for their morale boosting and co-operation in
preparation of this project smoothly.
INDEX

INTRODUCTION
LITERATURE REVIEW
TOPICS DISCUSSED

 GROWTH OF ECONOMY
 SECTORAL ANALYSIS
 MONETARY POLICY
 FISCAL POLICY
 EFFECT OF RECESSION
 EFFECT OF INFLATION

CONCLUSION
BIBLIOGRAPHY
INTRODUCTION
Saudi Arabia is an oil-based economy with the largest proven oil reserves in the world, 266.8 bn
barrels, representing 54.5% of the GCC reserves, 28.4% of the OPEC and 20% of the world’s
total reserves. It ranks as the largest producer and exporter of petroleum in the world and plays a
leading role in OPEC, producing 28% of the total OPEC oil production. An average oil
production stood at 9.113 mn barrels/day in 2008 compared to 8.654 mn barrels/ day in 2007. Oil
sector represented 90% of total export earnings. Oil and gas sector accounted for roughly 80% of
government’s budgeted revenues and 45% of its GDP. About 40% of GDP comes from the
private sector.

The average OPEC basket oil price stood at US$ 42.98/barrel in the 1st quarter of 2009
compared to US$ 92.50/barrel in the same quarter of 2008, recording an annual decline of
-53.5% attributed to global economic slowdown, global financial crisis, decrease in world energy
demand and lowered consumer confidence. The average OPEC basket crude oil price stood at
US$ 51.07/barrel on 14 April, 2009. The OPEC basket price rose more to US$ 84.13 on 12
March, 2010. The average OPEC basket price in 2010 was US$ 77.45/barrel and is expected to
climb upto US$ 95/barrel by 2012. A peak level of oil price touched US$ 147.27/barrel in the
international market on 11 July, 2008 due to geo-political uncertainties in the Middle East and
increased global energy demand. But the oil prices plunged sharply thereafter due to global
financial crisis. As part of its efforts to attract foreign investment and to diversify the economy,
Saudi Arabia had launched mega projects, including establishment of six economic cities in the
Kingdom to achieve balanced development of Kingdom's regions. The momentum of growth is
likely to slow down amid slowing the pace of implementation of the ongoing projects.

Saudi Arabia has recorded strong economic growth during 2003 to late 2008 on the back of
increasing oil production and high oil prices. The non-oil sector, especially construction and real-
estate industries, has also played an important role in the economy. Both the private and the
public sectors have contributed, as FDI and increased government spending supported the
development of an effective and sustainable non-oil economy. After six years of exceptional
growth in oil revenues driven by external factors, world energy demand declined due to global
financial crisis, resulting in a sharp decline in oil prices. All countries of the world have been
affected adversely by the crisis including Saudi Arabia however, the Kingdom is the least
affected country in the GCC region due to its wise and timely policies.
LITERATURE REVIEW

There have been numerous studies on the oil economy of Saudi Arabia. One among them is by
Matthew Simmons and he claims that Saudi Arabia’s oil fields are not in great shape. Oil
production in Saudi Arabia looks like it is in a state of permanent atrophy.

Saudi Arabia has always been very responsible oil producers for the world and it had always
responded positively to new demands for increased production whenever there have been
problems with oil supply in other parts of the world. Even during the First Gulf War, when there
was no oil production from Iraq and Kuwait, Saudi Arabia had stepped in to guarantee supply of
oil.

Simmons says that Saudi Arabia’s oil fields are aging, they are often over produced and have an
indefinite future. Added to this is the secrecy of the Saudi regime: we simply have no clear cut
idea of how much oil is really left in their reserves. Simmons ends his book with an urge that we
start thinking very soon about alternative energy ideas.

There was another study on the banking system of Saudi Arabia by Al-Karasneh and Fatheldin in
2005 in which it was found that promoting merger and allowing new entrants to the banking
market is more likely to lead to more competition and hence, higher efficiency.

Supinah in 2008 suggested that convenience factors are the most influential drivers if branch
channel adoption and that are of assurance for internet banking . Another study suggested that it
is always better to have large banks instead of small banks in the Gulf region. It was also
revealed that the parameters such as higher total capital, deposits, credits, or total assets are not
always the indicators of better profitability. Financial performance of the banks is strongly and
positively influenced by the operational efficiency and asset management, along with the bank
size.

It was also stated by M Abaam Hashmi in 2007 that domestic banks revealed a high growth rate
healthy spread over the deposit rate, and also there was no banking fraud during the 2001-2004
periods. It is due to the contradictions among banking laws of all the six emirates and the
inconsistencies between their federal and banking laws pose more problems for the country.
GROWTH OF THE ECONOMY

Saudi Arabia Baseline Forecast 2010-12

The Kingdom’s economy grew by two and a half times during 2002 to 2008, which was
attributed to strength of the oil sector till late 2008; better domestic geo-political environment;
acceleration of reform measures; Kingdom's membership of the WTO; growth of foreign assets
of SAMA (Saudi Arabian Monetary Agency); increased liquidity in the market; a strong private
sector growth; and a high corporate earnings. Saudi Arabia remains vulnerable to oil price
movements, contributing to a volatile pattern of economic activity. 

An extraordinary strong upturn in oil prices and production in 2008 has resulted in a robust
growth for the Saudi economy as the nominal GDP grew strongly in 2008 to US$ 465 billion
compared to a 7.1% growth to 379 billion in 2007. The nominal GDP declined sharply by 26.4%
to US$ 368 billion in 2009 but it grew by 13.3% in 2010 to US$ 416 billion.

Real GDP grew by a 4.6% in 2008 compared to a 3.5% in 2007. It declined marginally by 0.9%
in 2009 but it grew by 2.9% in 2010. A growth of 4.1% in real GDP is expected in 2011 and of
4.4% in 2012. By the end of 2010, the economy is expected to be worth $510 billion. These data
portray the fact that the economy experienced downturn because of uncertainties in the financial
markets and lowered consumer confidence, but it is now recovering.
SECTORAL ANALYSIS
The percentage contribution of each sector to the GDP:

Primary (Agriculture):   2.9%

Secondary (Industry):  59.7%

Tertiary (Services):  37.4% (2009 est.)

Primary Sector: Agriculture

Saudi Arabia has shown astonishing agricultural growth in last decade. A large area of desert has
been turned into agricultural field – a big accomplishment for a country which receives about
four inches of rain per annum. Historically, agriculture in Saudi Peninsula is limited to Date
farming or small scale production of vegetables in oases. During 1970s, government launched
extensive programs to promote modern farming. A phenomenal growth can be seen in all basic
foods. In fact, Saudi Arabia now exports dairy products, dates, wheat, vegetables, and flowers to
many countries.

The Ministry of Agriculture in Saudi Arabia is primarily responsible for agricultural policy. Few
other government agencies like Saudi Arabian Agricultural Bank (SAAB), Grail Silos and
Flourmills Organization provides grants and interest free loans and purchases and stores wheat
constructs flourmills and produces animal feed. Government also provides land distribution and
reclamation programs and projects for fund researches. The private sector seems to be the key
player in the Kingdom’s agricultural development, mostly due to government programs for long
term interest-free loans, incentives such as free fertilizers, technical services, low cost fuel, water
and electricity and duty-free imports.

Agriculture engaged nearly 6.7% of labor force. Only about 1.1% of Saudi Arabia's land area is
cultivated, although 40% is suitable for grazing. Small owner-operated farms characterize Saudi
Arabia's land-tenure system. About 96% of the farm area is owned, and only 4% rented. Only a
small fraction of land holding is 20 acre or more in size and 45% is less than 1 acre in size.
Two-third of the cropped land is now used for vegetables, fruits and cereals.

Over the years Saudi camels and horses, once famous, have lost their importance, but white
donkeys are still well known. Sheep are found where pasture is available; they are raised for
milk, meat and wool. Saudi Arabia has more than 150 million poultry and is sufficient in milk
production.
Secondary Sector: Industry

Although Saudi economy is synonymous with Oil, it is now restructuring its industry segment.
Products like cement, steel, glass, automotive parts, building materials along with petroleum
refinery products and petrochemicals are also produced. The industries which supply goods to
the local market rely heavily on the imported raw materials. The most notable growth has
occurred in food processing which includes meat-packing plants, flour mills, ice cream, yogurt
and other dairy processing plants, and vegetable canneries.

Oil

Saudi Arabia has proven oil reserves of more than $266.8 bn barrels located in the largest
onshore and offshore fields in Ghawar and Safaniya. Saudi’s oil production varies according to
the norms of OPES to ensure stability in international market by eliminating any fluctuation in
price. As a founder member of OPEC and being largest producer, Saudi Arabia often acts as a
principal moderating force. Saudi Arabia has nine refineries that produce fuel, gasoline, LPG, jet
fuel, diesel oil, kerosene oil, and other petroleum products, mainly for export. Considered to be
the most advanced in the world, these refineries produce about 9 mn barrels/day of petroleum
products. Saudi Arabia continues to invest in its refineries, and increased its refining capacities
by 8 million barrels per day. The Kingdom entered into many joint ventures as well for refining,
distributing and marketing oil products in US.

Natural Gas

Saudi Arabia possesses vast reserves of natural gas, which it uses as an environmental friendly
energy source for development of urban and industrial use. Some important facilities use gas as a
feed stock to produce steel, fertilizers, petrochemicals and other products which feed the thriving
industrial sector. Until few decades ago, natural gas produced in Saudi was in association with
crude-oil production flared off at the well. But an ambitious project known as Master Gas
System allowed Saudi Aramco to collect and pipe the gas around whole country. Till today new
sources of natural gas are being explored and major deposits have been discovered in Eastern
Province. SA also promotes foreign investment in natural gas. An agreement was signed with
Royal Dutch/Shell and France’s Total and China’s Sinopec for developing upstream gas
operations.

Mining

SA also mines copper, gold, silver, zinc, iron, basalt, barite, clays, phosphatic fertilizer, granite,
gypsum, lime, limestone, marble, nitrogen, nitrogenous fertilizers, pozzolan, salt, sand and
gravel, silica sand, scoria, sodium hydroxide (caustic soda), and sulphur. SA has vast mineral
resources, of which gold is estimated to be 40 million tons at a grade of 1 gram per ton of
gold. Bauxite deposits are estimate to be at 102 million tones.
Tertiary Sector: Services

Service sector produced 37.4% of GDP last year and employed roughly 70% of the labor
workforce. The rate of Saudi Arabian employment in the industrial sector is 4% and in
the services sector at 12%.

Banking and Finance

Until the mid of the last century, SA had no formal money and banking system and people used
coins having a metallic content equating its value and that too in limited transaction in urban
areas. Development of banking system was hampered by the Quranic injunction against interest,
and a few banks did exist, but with low or no value at all. Banking sector flourished in SA only
to protect the income from petroleum. It is only after the establishment of SAMA (Saudi Arabian
Monetary Agency). The maintenance of the internal and external value of currency started. The
agency issues notes and coins and convertible foreign exchanges and regulates all the banks and
exchange dealers.

The banking sector comprises of 13 Saudi-owned banks and more than eight branches of foreign
banks. The country’s largest bank, the National Commercial Bank, operates under Islamic rules
and is headed by the Saudi government. Now, Saudi banks provide all sorts of facilities which
any modern bank provides. The government has now established five specialized credit
institutions to provide loans to citizens for development projects in various fields – the Saudi
Industrial Development Fund (SIDF), the Saudi Arabian Agricultural Bank (SAAB), the Real
Estate Development Fund, the Public Investment Fund and the Saudi Credit Bank.

Transportation

The Kingdom has all the modern facilities of transport like rail, roads, airport etc. SA has
comprehensive road network which comprises of 100,000 miles of roads. SA has 3 international
airports and 24 domestic airports. The national Saudi Airline which started in 1945 now
comprises of more than 150 aircraft and carries more than 15 million passengers. SA has 21
large and modern ports which facilitate in the development. Saudi ports move some two million
twenty-foot equivalent units (TEUs) annually.
MONETARY POLICY

Saudi Arabia’s monetary policy framework is firmly wedded to its fixed exchange rate policy.
Saudi Arabia uses the exchange rate as a nominal anchor for stabilizing exchange rate
expectations and keeping inflation low. This maintains public confidence in the policy
framework and encourages capital inflows for domestic investment. The rationale for pegging
the Riyal to the Dollar is the pattern of Saudi Arabia’s external receipts and payments, which are
predominantly in US Dollars.

Saudi Arabia derives most of its revenue from oil exports, which vary widely and cannot be
adjusted by changes in the exchange rate as they depend critically upon world energy demand.
Therefore, the Government stabilizes the economy by operating a counter-cyclical fiscal policy
in which expenditures are kept steady when receipts are volatile. Hence, the stability of the Riyal
against the Dollar is relevant in the context of overall economic policy. The operational target of
the Saudi Arabian Monetary Authority (SAMA) is to manage system liquidity through the repo
window, and its intermediate target is stability of the Riyal against the Dollar, which is the
anchor and intervention currency.

Monetary policy rules and instruments

Monetary policy comprises policy targets (eg medium-term price stability or exchange rate
stability); strategy (what interest rate level is required to achieve the target); the operational
framework, which determines how to reach the required interest rate level by using the available
instruments (eg key interest rates such as repo, supply of reserves); and the monetary policy
transmission mechanism, which is the process through which monetary policy decisions affect
the economy in general and the policy target in particular. Inflation targeting rules, the exchange
rate, monetary aggregates and the level of bank reserves are often used as part of the strategy
process because they limit the discretion of the central bank, strengthen its credibility and anchor
private sector expectations. Changes in rules are more important than any single change in policy
instruments. Interest in monetary rules has increased over the past decade as many central banks
sought to organize their policy deliberations around specific targets.
In contrast, a feedback rule (such as Taylor’s rule) does not give complete guidance on
deviations between actual and target values of objective variables because of interpretation
problems on relevant targets (ie the desired inflation, output, and equilibrium funds rates). In
Saudi Arabia, the exchange rate is targeted for conducting monetary policy. Although reserve
requirements have been a powerful instrument of monetary policy in the past, SAMA has made
no changes to reserve requirements since 1980.

With the advent of Central Bank Bills in 1984, SAMA moved to using repo rates for managing
day-to-day system liquidity and signaling the desired overnight rate to the market. Government
Development Bonds inaugurated the government debt market in 1988, and the Central Bank
Bills were replaced by Treasury Bills in 1992. Currently, the repo and reverse repo rates are the
most effective indirect instruments used by SAMA for conducting monetary policy. Recent
budget surpluses have allowed the payback of longer-dated Government debt, but SAMA makes
sure that enough Treasury Bills remain in issue to allow repo operations to continue unhampered.
In times of severe speculation against the Riyal through the forward market, SAMA augments its
repo rate policy with intervention in the forward market to contain wild gyrations in foreign
exchange swap points and interest rates.

Economy and Trade

Saudi Arabia was established in 1932 by King Abd-al-Aziz. Since his death in 1953, he has been
succeeded by various sons. Covering much of the Arabian Peninsula, Saudi Arabia has
transformed itself from an underdeveloped desert kingdom into the world’s dominant oil
producer, and owner of the world’s largest hydrocarbon reserves. Proven reserves are estimated
to be 263 billion barrels, about a quarter of world oil reserves. Despite efforts to diversify the
economy, oil accounts for around one-third of GDP, more than 90% of the country’s export
earnings and nearly 75% of government revenues. Saudi Arabia continues to pursue rapid
industrial expansion, focusing on the petrochemical sector.

The Saudi Basic Industries Corporation (SABIC), a parastatal petrochemical company, is one of
the world’s leading petrochemical producers. Other industries, including construction, transport,
finance, and communications, are also being developed. The government is seeking to encourage
privatization, liberalize foreign trade, and reform the investment regime. Saudi Arabia is a
member of the Gulf Cooperation Council (GCC), which also includes the United Arab Emirates,
Kuwait, Oman, Bahrain, and Qatar.
FISCAL POLICY

Fiscal policy is an important government tool for managing the economy, having the ability to
affect the GDP. Changes in the level and composition of government spending, taxation or other
instruments of fiscal policy have impact on aggregate demand, the pattern of resource allocation,
and the distribution of income. Regarding the circumstances of the current financial and
economic crises, the revival of the fiscal policy as a macroeconomic policy faces high
expectations as to what it can accomplish.

The Kingdom posted an all time high budget surplus of $157.33 billion (33.8% of GDP) in 2008
compared to a budget surplus of US$47.07 billion (12.5% of GDP) in 2007, emanating from a
sharp increase in oil revenues on the back of sustained high oil prices and increased oil
production levels. The Kingdom recorded deficits of 15.4% of GDP and 10.1% of GDP in 2009
and 2010, respectively.
Economic Risk: Low

• Saudi Arabia is the world’s largest exporter of petroleum and a powerful member of OPEC. Oil
export revenues account for almost half of GDP and 90% of export earnings. Diversification
efforts have been launched but at this time their success has been limited.
• Falling oil prices, production reductions and a slowing global economy have made 2009 and
2010 a challenging year economically for Saudi Arabia as growth is expected to slow sharply.

Political Risk: Moderate

• Saudi Arabia is one of the six nations that make up the Gulf Cooperation Council (GCC). The
GCC’s objectives include private sector cooperation, formulating consistent regulatory
environments and at some point establishing a common currency.
• The falling oil prices and the reduction in oil production to fall in line with OPEC production
cuts along with expansionary fiscal policy have moved the government budget into deficit for
2009 and 2010.

Financial System Risk: Low

• Saudi Arabia’s insurance industry is regulated by the Saudi Arabian Monetary Authority
(SAMA) under the Cooperative Insurance Companies Control Law of 2003.
• The government has relatively tight control over most of the economy and privatization efforts
have been limited.
EFFECT OF RECESSION

The world’s largest oil exporter is navigating the global economic crisis better than most
countries because of its large foreign reserves, totaling more than $500 billion, which are mainly
in conservative, low-risk investments, such as U.S. bonds. Saudi Arabia, unlike some countries
does contend with the slowdown from a strong position given that it comes from a background of
many years of high oil prices which in turn have left the Kingdom’s public finances in good
shape after years of chronic deficit.
The impact of the recession in Saudi Arabia is felt more by the private sector than the
public/governmental sector which will feel the brunt of the conservative banking practices which
have been put into place as well as shrinking credit markets. A sharp reduction in oil output will
ally with collapsing crude prices to plunge Saudi Arabia's economy into a recession this year
after nearly seven years of rapid growth, according to a study by a key bank in the Kingdom.

In the overall economy, the main drag on GDP growth is lower oil production (hydrocarbons
contribute around a third of GDP in real terms) and a 14% reduction in Saudi output as the
authorities attempt to support global prices. But there was a recovery in the Kingdom's economy
after the global crisis began to wind down in 2010, pushing up oil prices and allowing Saudi
Arabia to increase its crude output from one of its lowest levels in many years.

In 2010, global financial deleveraging had eased significantly and with US consumers beginning
to regain some confidence, oil price posted a 9% gain. With Saudi crude production edging up,
public investment holding firm and private investment posting recovery, nominal GDP climbed
up by around 11%. Real GDP growth also posted a respectable 4.2% increase. The lower oil
prices and output turned a massive surplus in the Kingdom's budget into a deficit of around
15.4% and 10.1% of the GDP in 2009 and 2010 respectively, after swelling to a record 33.8% in
2008. The current account also showed a deficit of 9.7% after recording a mammoth surplus of
32.3%. Clearly, 2009 was a year of weak economic activity, with stagnation in the private
output. However, the non-oil sector is expected to maintain modest growth, thanks to the
ramping up of public sector investment: the authorities are committed to spending US$ 400
billion on infrastructure over the next five years, and have ample financial resources to support
these plans.

In the overall economy, the main drag on GDP growth is lower oil production (hydrocarbons
contribute around a third of GDP in real terms) and a 14 per cent reduction in the output of Saudi
Arabia as the authorities attempt to support global prices. The Kingdom's economy started
recovering after the global crisis began to wind down in 2010, pushing up oil prices and allowing
Saudi Arabia to increase its crude output from one of its lower levels in many years.
EFFECT OF INFLATION

Source: International Monetary Fund

The Kingdom has a proven track record of very low inflation rates over a long period of time
until 2005. The consumer price index grew by a 9.9% in 2008 compared to a 4.4% rise in 2007.
A high rate of inflation in 2008 was mainly attributed a 17.5% rise in house rents and a 14.1%
increase in food prices. Rising domestic demand pressures and bottlenecks in the labor market
contributed to the price upward pressures as costs of labor and other materials increased.

Higher government, consumer and investment spending, especially in the construction sector
plus the persistent depreciation of the US Dollar, demand/supply imbalances and imported
inflation associated with the regional boom exerted upward pressure on prices. The real-estate
sector suffered the most. In March 2009, the rate of annual inflation was 6%, mainly due to a
17.8% increase in rents and a 2.8% rise in food prices, whereas by November, 2010 it slowed
down to 5.8% in view of the prudent management of the fiscal and monetary policies of the
Kingdom amid global financial crisis.
CONCLUSION

Saudi Arabia being the world’s top oil exporter is expected to see economic growth of 4.3% in
2011. The 2011 budget clearly shows that the Kingdom is dedicated to continue spending to
develop the economy and attract private investors. It is expected to post a positive fiscal balance
of 4.1% of GDP in 2011 compared to 2.7% in 2010 this will largely be due to the recovery of oil
prices since December 2008. The private sector and banks are becoming less risk averse due to
which, a private sector of more than 8% is expected.

Saudi Arabia’s economic recovery was at a gradual but steady pace this year and it accelerated
following a stagnant and difficult year, inflation was manageable and private sector expansion
set a track for credit expansion at Saudi Banks. Bank lending was more to the private sector due
to the collapse of two conglomerates of SA and it is anticipated that the lending will recover.

Strength of emerging market currencies against the Saudi Riyal could put upward pressure on
inflation as these markets are the major source of imports, currently the main pressure point is
the inflexibility of the Chinese Yuan. Hence, even if inflation remains high it will mainly be due
to rent and imported price pressure and will therefore, not be affected by interest rates.

The whole scenario revolves around the level of oil prices, if global growth is indeed robust i.e.
very positive and firm oil prices. It is expected that inflation will rise in 2011 in all the Gulf
Countries except Saudi Arabia. Saudi Arabia should still see their highest inflation at 5% in 2011
due to rapid population growth, higher housing cost and rise in global food prices but that is
below the peak seen in most Gulf Countries during 2008.

The government has allocated $154 billion in its national budget for the next fiscal year 2011. It
is allocating 46% of the funds on education and training, health and social development and
infrastructure. Real GDP growth is expected to be 3.5% in 2011.

A revival in global petrochemical demand and public spending on infrastructure is more likely to
support non-oil sectors. Declining productivity is posing a challenge to create jobs. Saudi Arabia
is currently enjoying a massive boom in its personal computer industry since the deregulation of
2002. Hence, it can be said that Saudi-OIL-Arabia will continue to flourish at a growing rate in
the coming future.
BIBLIOGRAPHY

“Economy of Saudi Arabia”

<http://en.wikipedia.org/wiki/Economy_of_Saudi_Arabia>

“Saudi Arabia Economy – Overview”

<http://www.indexmundi.com/saudi_arabia/>.

“Arabia records strongest economic growth in decades; burgeoning money and credit
growth gave fuelled the asset markets”, June 2006.findarticles.com. 1 May 2008

<http://findarticles.com/p/articles/mi_m2742/is_368/ai_n24988675>

Saudi Arabia: Baseline Forecast 2010-12

<http://www.samba.com/GblDocs/Saudi_Arabia_Baseline_Forecast_Eng.pdf/>

“OPEC Basket Price”

< http://www.dinarspeculator.com/>
<http://www.ordons.com/reports-a-analisis/>

“Saudi Arabia: The Sharp Rise in Inflation”

<http://www.marketresearchanalyst.com/2008/04/06/saudiarabia-the-sharp-rise-in-inflation>

“Saudi Arabia Inflation Rate

<http://www.tradingeconomics.com/Economics/Inflation-CPI/>

Literature Review:

<http://www.suite101.com/content/the-bleak-future-of-saudi-arabian-oil-production/>