Saudi Arabia country profile

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1 Saudi Arabia country profile Saudi Arabia is the largest country in the Arabian Peninsula and the second largest country by size in the Middle East and North Africa (MENA) region, after Algeria. The country is strategically located between the two busiest sea routes: the red sea and the Persian Gulf and it shares boundaries with nine different nations. Riyadh is the capital city, and the country houses Islam s two holiest shrines, Mecca and Medina. The country has a total population of 21.7m, which makes it the seventh largest country in the MENA region by population. Saudi Arabia falls under the wealthier sub-group of nations in the MENA region, collectively known as the Gulf Co-operation Council (GCC) nations. Saudi Arabia, United Arab Emirates, Qatar, Oman, Kuwait and Bahrain are part of this economic group. These countries are net exporters of oil and have immensely benefited from their huge oil wealth. Saudi Arabia is the biggest among them in terms of both GDP and oil reserves. Together, these six nations control 29% and 23% of the world s oil and natural gas reserves, respectively. Geographical profile of Saudi Arabia The landscape of Saudi Arabia is dominated by the Arabian Desert, which includes the world s largest contiguous sand desert known as the Rub al Khali or the Empty Quarter. Agricultural activities are rare, and the bulk of the food requirements are imported. The country is split into 13 administrative areas, which are further divided into

2 118 governorates. The biggest area of all is the Eastern Province, which contains the bulk of the country s oil reserves. Despite the vast area, Saudi Arabia s population is concentrated in the cities. Makkah is the most populated administrative area, where about 26% of Saudi s population resides. Saudi Arabia has the second largest oil reserve in the world Oil is the life blood of the Saudi Arabian economy. The oil sector contributes to about 20% of the country s GDP and 85% of its exports. Saudi Arabia is, in fact, the world s largest producer of crude oil and has the second largest oil reserve in the world after Venezuela. The country also controls 3% of the world s natural gas production and has about 4% of the world s gas reserves under its soil. Top 10 countries by oil production (2013) Top 10 countries by gas production (2013) Saudi Arabia follows a fixed-peg currency system The Saudi riyal (SAR) is the official currency of Saudi Arabia. Each riyal is divided into 20 qirsh or 100 halalas. The denomination based on qirsh, which came into existence from 1960, is slowly deteriorating, and all new coins are minted in halalas. The Saudi Arabian Monetary Agency (SAMA) is the monetary authority in the country. Currently, SAMA issues bank notes in SAR 1, SAR 5, SAR 10, SAR 50, SAR 100 and SAR 500 denominations. In June 1986, Saudi government pegged the riyal to the IMF s special drawing rights. The currency was unofficially managed at a USD FX cross rate of SAR 3.75 for USD 1.

3 Political structure The Saudi Arabian government is set up as an absolute monarchy. The King is the head of the government and is bound to the Sharia and the Quran. The King s official title is the Custodian of the Two Holy Mosques. Members of the royal family hold significant positions in the government and key public-sector companies. The modern state of Saudi Arabia was founded in 1932 by the first King Abdul Aziz Al Saud, and the country was named after the Al Saud family. Since then, only his descendants have been selected to rule the country. Saudi Arabia does not have any political parties or national elections. Only recently, in 2005, the Saudi government allowed the first-ever national-level municipal elections to be conducted. Even today, women are restricted from voting in these elections. Since the creation of Saudi Arabia, the kingdom has had seven kings in its history. King Abdul Aziz, who founded the kingdom, ruled for 22 years, while King Fahd was the longest-ruling monarch of Saudi Arabia. The current monarch, King Salman, ascended to the throne on 23 January 2015, following the death of his brother, the late King Abdullah. Crown princes are chosen by the monarch in power, so that the succession in power is streamlined. One of the first decisions that King Salman made was to name his nephew Mohammad bin Nayef as the crown prince and his son, Mohammad bin Salman, as the deputy crown prince. Membership in key economic groups Saudi Arabia is a prominent regional power and takes an active role in the politics of the MENA region. The country is part of many economic and political groups like the GCC, the Organization of the Petroleum Exporting Countries (OPEC) and the Organization of Islamic Cooperation (OIC). Saudi Arabia is also the only Arab state to be part of the Group of Twenty (G-20) nations. Gulf Cooperation Council (GCC) The Cooperation Council for the Arab States of the Gulf or the GCC is a political and economic union of the richest oil-producing nations within the Arabian Peninsula. The union was formed on 25 May 1981 with Saudi Arabia, the United Arab Emirates, Qatar, Kuwait, Oman and Bahrain as the member nations. The membership has not been extended since then. The political systems of all six states are based on monarchies. The group

4 strives for regional free trade, equality of all GCC citizens in the job market and creating a monetary union. A Gulf rail project was launched to connect the six countries through a 1,940 km network at an estimated cost of USD 15-19bn. The member countries rotate the leadership position among themselves. Currently, Bahrain holds the leadership role in the group. Organisation of the Petroleum Exporting Countries (OPEC) OPEC was established in September 1960 as a permanent international organization of oil-producing countries. The goal of the organization is to regulate the petroleum policies of member countries and provide stability to the global oil market. As the world s largest producer of crude oil, Saudi Arabia is the most influential member in the group. While OPEC sets production targets for all member countries, Saudi Arabia s production level is used to regulate the oil price. Its power was evident when Saudi Arabia refused to lower oil production when oil prices plummeted in the second half of This stance was considered a deterrent to the increased production levels of shale oil in non-opec countries, which is viable only at higher oil prices. Currently, OPEC has 12 member states six from MENA, four from Africa and two from Latin America. As of 2013, these 12 nations hold 72% of the world s proven oil reserves and contribute 42% of total oil production.

5 Saudi Arabia Economic summary Economic growth and structure Saudi Arabia s economy started booming at the start of this century. By 2014, the nominal GDP of the country quadrupled to USD754bn from just USD188bn in The nominal GDP of the economy posted a CAGR of 10% over the past 14 years. However, the sharp decline in oil prices is projected to have an impact this year. Deutsche Bank economists estimate the 2015 nominal GDP of Saudi at USD652m, down by 14% YoY. Looking from a constant currency perspective, we can observe that the economy has slowed down in recent years. Following a boom in 2011, when oil prices ranged from USD90-130/bbl, the economy is growing at a declining rate. The GDP growth rates for 2015 and 2016 are estimated to be 2.8% and 1.8%, respectively. Saudi Arabia real GDP growth (%) Saudi Arabia can easily get itself placed among the top-10 emerging economies. Based on the estimated nominal GDP for 2015, Saudi s economy is bigger than Taiwan s, Poland s and Thailand s. It is about 10% bigger than the combined economies of UAE and Qatar. 2015E nominal GDP of emerging market countries (USD bn)

6 Saudi economy has become diversified over the years In 2003, about 31% of Saudi Arabia s real GDP was contributed by the oil sector. However, 10 years down the line, the economic activity in the country is more diversified. In 2013, which is the latest year disclosed by the Saudi Arabian Monetary Agency, the oil sector was responsible for only about 20% of Saudi s real GDP. The GDP shares of the trade and transport & communications sectors grew about 5% each in this 10-year period. With lower oil revenues projected for 2015 and one-off fiscal packages owing to the royal succession, the fiscal deficit for this year is expected to be about 18% of Saudi s GDP. The deficit is projected to decline next year and over the medium term due to expected spending restraint and improved oil prices. Saudi Arabia has enough room for adjusting to lower oil prices Saudi Arabia can finance its fiscal deficit by drawing upon the government s substantial assets. Indeed, this is already happening. The SAMA reserve as of April 2015 is already down by USD46bn compared to the level at the end of Such high reserve is the reason behind a solid sovereign credit rating, which is higher compared to many EM peers. Also, there is scope to increase government borrowings if necessary given the very low level of debt, which is less than 2% of GDP. Tim Callen, chief of the IMF mission to Saudi Arabia, has already confirmed that the Saudi Arabian government is planning to resume government bond issue this year to ease the drawing pressure from the reserves. We estimate that Saudi Arabia will register a sizable deficit this year of USD 89,3 billion (14% of GDP). To finance this deficit, the government could rely on its vast foreign reserves, amounting to USD 732 billion (equivalent to 97% of GDP) at the end of They could also issue local currency bonds to finance part of the deficit. At end domestic public debt to GDP stood at 1,6% of GDP; this low level of debt gives the government ample room to raise debt without jeopardizing its debt sustainability measures. We estimate total foreign reserves of the GCC block at USD 2,3 trillion, including official reserves plus Sovereign Wealth Fund foreign assets. The UAE and KSA account for 33,3% and 33,1% of the total. In the case of Saudi Arabia, we estimate that the current level of reserves would be used up in eight years based on an annual fiscal deficit equivalent in size to the deficit that we are estimating for this year. On the other hand we estimate that the UAE s reserves would be depleted in 172 years based on an annual deficit of USD 16 billion.