Country Report Saudi Arabia May 2011

Outlook for 2011-15: Policy trends

The government will remain a major force in the economy, and the long-term drive to encourage a greater role for the private sector will be tempered by the urgent political need to provide employment for the country's mass of young unemployed. The state will maintain a monopoly over crude oil production, although private firms will have some involvement in gas exploration and joint-venture refineries. With the government announcing new spending measures worth a combined US$129bn in early 2011, and oil export revenue continuing to provide the bulk of fiscal income, Saudi Arabia may seek a higher (informal) target oil price with fellow OPEC members. However, substantial savings built up in recent years will allow the government to play a significant role in financing new industrial and infrastructure projects, with a long-term strategy of reducing the country's dependence on crude oil exports, using more of its energy resources as feedstock for value-added, energy-intensive industries, and creating jobs in manufacturing, tourism and other services. The eventual retirement of Ali al-Naimi as oil minister is unlikely to lead to any significant change in policy. The private sector will continue to benefit from soft loans from five public-sector credit institutions.

In terms of investment priorities, having completed a large-scale expansion of crude oil production capacity to 12m barrels/day (b/d), Saudi Aramco, the state oil company, will focus on maintaining capacity and ramping up output of gas, refined products and petrochemicals. The government is increasing spending on health and education, backing major new rail and infrastructure projects, and planning to invest in food production abroad. In an effort to address the dearth of residential housing, a greater share of expenditure will be directed into the supply of affordable homes; in March the king pledged US$67bn to build 500,000 housing units. The Saudi Arabian General Investment Authority (SAGIA) will seek to make the business environment more conducive to foreign investment, but a number of deterrents will persist, including excessive bureaucracy and an unpredictable and restrictive visa policy. Investment opportunities will result from gradual liberalisation in several sectors, including power generation, ports and transport. SAGIA is also seeking to attract investment into four new "economic cities"; these plans may take some time to implement, or may not fully materialise.

Overall, policy implementation will be mixed, given a lack of co-ordination between ministries and the inefficiency of the overstaffed bureaucracy. "Saudiisation" quotas on the proportion of expatriates that can be hired by firms will be strengthened, and will remain a drawback for businesses.

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