Outlook for 2011-15

• The rule of the Al Saud family will remain secure in 2011-15, although the complex issue of succession will become increasingly prominent.
• Some resentment of Al Saud rule will continue, but this is unlikely to translate into organised movements. There is some risk of a conservative backlash against socially liberalising reforms.
• The government's political effectiveness will be constrained by the need to build consensus among elites and by the vast and inefficient bureaucracy.
• Saudi Arabia's key strategic partner will remain the US, and the two countries' interests will remain broadly aligned in terms of curtailing the influence of Iran, particularly in Iraq and Lebanon, and preventing state collapse in Yemen.
• The government plans US$373bn of investment over the next five years, which will help to support average real GDP growth of 4.2% a year in 2011-15.
• We have raised our forecast for the fiscal surplus, to an average of 4.9% of GDP in 2011-15, owing to an upward revision to our oil price expectations.
• The riyal is forecast to remain pegged to the US dollar in 2011-15 at its current level. A single Gulf currency is in preparation and may be in place in 2014-15.
• We forecast that the current-account surplus will narrow from 15.6% of GDP in 2010 to 7.2% of GDP in 2015, assuming slow growth in world oil demand.

Monthly review

• Saudi Arabia's response to the spate of social unrest in North Africa and elsewhere has fluctuated significantly. Having initially welcomed the revolution in Tunisia, it has since firmly sided with the status quo.
• Local officials have faced renewed public criticism as a result of another round of flooding following heavy rain in the Red Sea port city of Jeddah.
• Saudi Arabia has announced that its effort, in co-ordination with Syria, to mediate an agreement in Lebanon will end for the time being, after it failed to prevent the collapse of the national unity government.
• Hopes that the Saudi stock exchange (Tadawul) is considering opening the Saudi bourse to direct investment from abroad have been dampened by the head of the Capital Market Authority.
• Saudi Aramco has reportedly issued two contracts to expand and build a refinery in Yanbu and Jizan, respectively.
• With a contract to develop the large offshore Wasit gasfield expected soon, the need to resolve internal differences over allocations and pricing of natural gas is becoming ever more urgent.

The rule of the Al Saud family is expected to remain secure in 2011-15, with opposition movements fragmented and suppressed. The power of the king, Abdullah bin Abdel-Aziz al-Saud, will be checked by the need to maintain consensus among senior princes with strong power bases of their own, and to accommodate the conservative clerical establishment. Limited institutional capacity and a large and inefficient bureaucracy will also constrain policymaking and implementation. The king's personal standing is bolstered by his reputation for piety, but there is believed to be significant resentment of Al Saud rule, owing to perceptions of corruption, vast inequalities in the distribution of wealth, high youth unemployment, the often arbitrary application of the law and the government's strong ties with the US. Nevertheless, the potential for an outbreak of unrest on the scale witnessed in Tunisia and Egypt is relatively low, given the government's huge oil-related wealth (which should allow it to maintain extensive price subsidies and continue to hand out pay rises for public-sector workers), and the government's claimed religious credentials-domestically, the king uses the title of Custodian of the Two Holy Mosques. However, inspired by the protesters in North Africa and emulating their tactics of using social networking websites, smaller groups may mobilise to protest against specific issues, such as youth unemployment or the authorities' failure to prevent the recent floods in Jeddah, while refraining from directly challenging the position of the Al Saud.

Uncertainty persists about the political succession, which will be an increasingly pressing issue over the forecast period, since both the king and the crown prince, Sultan bin Abdel-Aziz al-Saud, are in their late 80s. Prince Sultan has had a long-standing illness thought to be cancer and he is unlikely to survive King Abdullah. By law, the heir to the throne must be a male descendant of the country's founder, Abdel-Aziz al-Saud. Traditionally, the crown prince is appointed by the king, but King Abdullah has established a formal council of the direct descendants of Abdel-Aziz to help to determine the succession. This is intended to ensure that future kings have broad legitimacy within the family, but its mandate does not begin until after King Abdullah's reign. The interior minister, Prince Nayef bin Abdel-Aziz al-Saud, is widely seen as the most likely successor since the king appointed him as second deputy prime minister in 2009. He has a strong internal power base and is regarded as a conservative; principally concerned with stability, he is unlikely to promote reform. He has won some support in the West by tackling domestic militant Islamist violence. Prince Salman bin Abdel-Aziz al-Saud, the governor of Riyadh, the capital, is another contender, and a less well-known prince could emerge as a consensus candidate. There will be increasing focus on the eventual transfer of power to the next generation, with the sons of Prince Sultan, Prince Nayef and Prince Salman being among the possible contenders.

An ongoing threat of attacks by Saudi militant groups loosely aligned with al-Qaida remains. Attacks on government and Western targets will be attempted, possibly from Yemen, although Saudi Arabia's border defences and military capability will be strengthened by arms purchases. The government will continue to address the issue by arresting suspected militants-it claims 149 have been arrested in the past eight months-and sometimes by attempting to co-opt them by putting them through rehabilitation programmes. If Yemeni government efforts to tackle al-Qaida in the Arabian Peninsula-an offshoot of al-Qaida that has become established in Yemen-fail, there is an increasing likelihood of direct Saudi intervention in the country.

The king has taken steps towards implementing some socially liberalising reforms, and this will continue to risk provoking a backlash from within the clerical establishment and from conservatives. Job shortages, rising unemployment and the withdrawal of subsidies, particularly on electricity, could also lead to discontent among Saudi nationals, which may create unrest in the medium term. There is also a risk that the marginalised Shia minority could become restive. They face tight restrictions on religious practices and economic discrimination.

Saudi Arabia's underlying tensions

In light of the mass protests that have affected Tunisia, Egypt and elsewhere, attention has shifted to other countries in the region potentially susceptible to a similar outbreak of wide-ranging social unrest. The Economist Intelligence Unit do not expect to see a repeat of the ongoing events in Egypt (or, indeed of Tunisia) in the near term, reflecting a host of differences between Saudi Arabia and its North African peers.

First, one of the main differences is the role of the clergy, which subscribes to a fundamentalist strain of Islam, and which has a long-standing pact with the Al Saud ruling family, predating the establishment of the Kingdom of Saudi Arabia in 1932. As such, any movement that went so far as to seek to end Al Saud rule would not only be up against the country's founding family and the well-equipped security forces, but would also potentially find itself arrayed against the clerics (in a country that contains the holy cities of Mecca and Medina).

Second, the Saudi government is far better placed to deal with the immediate economic grievances that have helped to drive the protests elsewhere-namely, rising living costs and, in particular, increased foodstuffs prices. With healthy fiscal revenue (especially in light of the present high oil prices) and a huge stock of official reserves, the Saudi leadership is well-placed to maintain wide-ranging subsidies on electricity and food, as well as potentially offering a plethora of jobs in the public sector (although this would reverse the ongoing policy to encourage Saudi youths to join the private sector).

Despite this, however, in the longer term, some of the factors that have contributed to the protests elsewhere in the region could well play a role in fomenting unrest in Saudi Arabia. In particular, finding sufficient, well-paid jobs for Saudi Arabia's legion of graduates is a major challenge, and one that is unlikely to dissipate soon given the fact that some 38% of the population is under the age of 14. According to official statistics, over 10% of the population are unemployed, with a 2009 report from the Central Department of Statistics indicating that over 40% of those in the 20-24 year old age group are jobless. In an indication that public unhappiness at the unemployment problem is beginning to spill on to the streets, some 200 unemployed teachers demonstrated outside the Ministry of Education in January (such protests are a rare occurrence in the kingdom). In addition, the ruling family could find itself especially exposed to public anger because of the paucity of alternative available political scapegoats, reflecting the absence of democratic institutions in the country (Saudi Arabia came a lowly 160th out of 167 countries in the Economist Intelligence Unit's 2010 democracy index).

Meanwhile, in an echo of the situation in Tunisia, Egypt and Yemen, succession concerns are afflicting the ruling family, with King Abdullah bin Abdel-Aziz al-Saud convalescing in Morocco after two operations on a herniated disc, and the crown prince, Sultan bin Abdel-Aziz al-Saud, thought to be suffering from cancer. The next in line to the throne, the interior minister and deputy prime minister, Prince Nayef bin Abdel-Aziz al-Saud, is in his late 70s, and there is a risk that his generally conservative views (in contrast to King Abdullah's more liberalising tendencies) may trigger a backlash from the kingdom's youthful and segregated population (which, revealingly, has embraced social networking sites with enthusiasm). Overall, therefore, although at present the situation in Saudi Arabia is probably not conducive to the outward explosion of public anger witnessed in Egypt and Tunisia, the ingredients are certainly there.

It is important to note that, although the instability in Tunisia and Egypt has had major implications for the region, thus far the wider world has not been particularly directly affected. This would certainly not be the case should mass demonstrations against the ruling regime spread across Saudi Arabia. Such an outcome would no doubt have a dramatic effect on the international oil price (even if oil output was not curtailed), which would in turn attract the close attention of the US (the world's largest oil importer) and China (which has surpassed the US as a market for Saudi oil). Nonetheless, in light of the fact that the Suez Canal has kept running and oil and gas operations in Egypt have been little affected, we would not expect protesters in Saudi Arabia to target the oil sector. In addition, even if they did, most of the oil installations are well protected (owing to the terrorist threat) or are located deep in the desert (or increasingly offshore). The composition of the workforce of the state oil firm, Saudi Aramco, which is majority Saudi, should also protect it to an extent from the ire of discontented unemployed locals. Indeed, given the Saudi population's reliance on the country's oil wealth (either via subsidised living or public-sector jobs), it is possible that maintaining oil output could be one issue on which the rulers, the protesters and the US and China could all agree on.

There is unlikely to be any democratic reform or move to an elected parliament before 2015, and political parties are expected to remain illegal. The king appoints the Council of Ministers and the Consultative Council, which has advisory powers. There are no parliamentary elections. The authorities have put on hold plans to introduce more elected representatives following the municipal elections in 2005. They have postponed the next set of municipal elections, originally scheduled for 2009, until at least 2011 to carry out further "studies". It is possible that, with the proliferation of demonstrations across the region, the government may view this as a propitious time to proceed with the municipal elections, in order to allow a veneer of inclusivity. Women cannot vote, but calls for their enfranchisement will grow.

Saudi Arabia will pursue a fitfully active foreign policy. Although it will at times seek to counter rising Iranian influence, such as occurred in Lebanon (although it has for the time being abandoned its diplomacy in the country), and will retain a close eye on the instability afflicting Yemen, it will generally defer to the US on wider regional security issues. However, mindful of its own Shia minority and the likely destabilising impact of a US or Israeli strike against Iran, Saudi Arabia is unlikely to support any military action overtly. Elsewhere, alarmed by the spread of social disorder in Tunisia, Egypt and elsewhere, Saudi Arabia may dispense increasing economic largesse to those countries, such as Jordan, that it considers to be both allies and vulnerable to interference from outsiders (namely Iran or militant groups connected to it).

Saudi Arabia's hostility to the Shia-dominated government in Iraq is likely to moderate following the inclusion of Ayad Allawi's Iraqi National Movement, the main electoral vehicle of the Sunni Arab minority, in the coalition government. Saudi Arabia is likely to become increasingly involved in Yemen, where an offshoot of al-Qaida has gained a foothold and the possibility of state failure looms. Saudi Arabia will lead efforts to provide economic and military aid, and there is a possibility of military intervention before the end of the forecast period. The US will remain Saudi Arabia's most important strategic partner and the two countries' interests will remain broadly aligned in terms of preventing state collapse in Yemen and containing Iran.

Relations with fellow Gulf Co-operation Council (GCC) members will be bolstered by economic co-operation. However, relations with the UAE are likely to remain frosty because of an ongoing border dispute and the damage caused by the UAE's withdrawal from the planned GCC single currency. The kingdom will continue to try to maintain cohesion among the Arab states and to present a united Arab front in the face of security risks.

The government will remain a major force in the economy, although there is a long-term effort to encourage a greater role for the private sector. The state will continue to monopolise crude oil production, although private firms will have some involvement in gas exploration and joint-venture refineries. Oil export revenue will continue to provide the bulk of government income, and fiscal policy will thus be constrained by oil market developments. Nonetheless, substantial savings built up in recent years will enable 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 (for example, the government has announced that Saudi Arabia is planning to produce as much as 70% of its military hardware and spare parts in-house, instead of ordering from abroad). The eventual retirement of Ali al-Naimi as oil minister is unlikely to lead to any significant change in oil and gas policy. The private sector will continue to benefit from soft loans from five public-sector credit institutions.

Public investment worth US$373bn is planned in 2010-14. Having completed a large-scale expansion of crude oil production capacity to 12m barrels/day, Saudi Aramco, the state oil company, will focus on maintaining capacity and ramping up output of gas, refined products and petrochemicals. The government is also increasing spending on health and education, backing major new rail and infrastructure projects, and planning to invest in food production abroad. 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", although the plans may take some time to implement, or may not fully materialise.

Some of the state-owned enterprises will be part-privatised, but the restructuring of large companies, such as Saudi Arabian Airlines and the loss-making Saudi Electricity Company, will take time. Privatisation will often be carried out through initial public offerings on the local stock exchange, which are open only to Saudi citizens, in order to redistribute wealth while allowing the state to remain the largest shareholder. Government institutions will retain shares in some of the banks, given concerns about the health of the global financial sector. The state will continue to guarantee bank deposits and (implicitly) borrowing by parastatals.

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

Fiscal performance will remain closely tied to the fortunes of the oil sector, and no serious efforts to increase the tax base are expected. A generally pro-cyclical approach to fiscal policy will exacerbate the impact of the volatility of international oil prices. The government is planning to continue its fiscal expansion, including a marked increase in capital spending. Several factors will make it difficult to cut expenditure in 2011-15, including rapid population growth, the increase in global foodstuffs prices this year (which will push up spending on subsidies-especially in light of the protests elsewhere in the region), a growing wage bill as the bulk of new labour market entrants continue to be absorbed into the public sector, rising pension and other welfare costs, and commitments to education and healthcare. Nonetheless, the pace of spending growth is likely to be slower than it was during the 2003-08 oil boom. In December the Ministry of Finance announced that the budget recorded an estimated surplus of 6.6% of GDP in 2010-broadly similar to our own figure. With oil prices rising this year, we expect it to widen to 9.4% of GDP in 2011 (above our previous forecast, owing to an upward revision to our oil price projection). In 2012-15 increased spare capacity is likely to lead to steadily lower average international oil prices. Saudi oil production will increase, but much of the additional output will be consumed domestically. As a result, the budget surplus is forecast to fall from 6% of GDP in 2012 to 3% of GDP in 2015.

The currency's peg to the US dollar, which is likely to be maintained throughout the forecast period, means that the main policy rate of the Saudi Arabian Monetary Agency (SAMA, the central bank) must roughly track movements in US interest rates, although this can sometimes lead to economic distortions when the two countries' growth paths are misaligned. The Federal Reserve (the US central bank) is expected to maintain rates at a low level throughout 2011 and is only likely to begin monetary tightening in the second half of 2012, with dollar three-month commercial paper reaching 5.1% by 2015. SAMA will follow these broad trends but may begin to tighten monetary policy ahead of the US owing to concerns about rising inflation and money supply growth. A small premium is likely to be maintained given Saudi concerns about inflation.

Credit to the private sector stagnated for much of 2009 owing to banks' concerns about corporate risk and as companies adjusted to new lending requirements. However, it picked up in 2010 and is likely to continue expanding. The bulk of current lending may be going to larger companies, and the government may privately lean on banks to increase their lending to smaller businesses in the domestic private sector.

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Saudi Arabia's economy is forecast to grow by an average of 4.2% a year in 2011-15, a slowdown from the annual average of 4.9% during the 2003-08 oil boom, but a recovery from the low of 0.2% in 2009, when growth was constrained by oil production cuts. A number of major projects are expected to come on stream in 2012-15, including refineries and petrochemical plants, as well as two new offshore gasfields. The services sector has also shown signs of strong growth.

Oil output policy will remain a key determinant of economic growth, and relatively weak world demand for OPEC oil will constrain growth over the forecast period. Government spending will help to boost growth in the early part of the forecast period. Growth in the non-oil private sector is projected to pick up in 2011-15, averaging 4.8%, as it recovers from a tightening of bank lending (following the default of two major Saudi conglomerates) and as foreign direct investment (FDI) rises. Government spending, subsidised credit and public-sector contracts will support growth in this sector.

In terms of demand components, private consumption is forecast to expand robustly, underpinned by strong population growth and by expansionary fiscal and monetary policies. However, it will be lower than during 2006-09 owing to tighter credit conditions and persistent high unemployment. The public sector will continue to absorb a large proportion of job market entrants. Government consumption will slow as the private sector recovers.

The government will also drive strong increases in investment. Private investment growth will be stimulated by projects planned or under way. Foreigners will be an important source of investment, and inward FDI has remained relatively strong despite the weak global climate. Oil export growth will remain modest over the forecast period, but overall exports will be boosted by continued expansion of the petrochemical sector and other heavy industries, such as fertiliser and aluminium. Import volume growth will be stimulated by rising demand from ongoing infrastructure projects, particularly early in the forecast period, and a reliance on imports to meet many consumer needs. As ever, oil price movements pose significant risks, as does the spectre of more corporate defaults.

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We estimate that inflation averaged 5.4% in 2010. Rises in international food and non-oil commodity prices are likely to drive inflation in 2011, but these prices are expected to decline in 2012 and 2013, leading to a slight decline in Saudi inflation. Housing shortages will support rental price inflation throughout the forecast period. The link between interest rates and inflation is weak (as consumer debt levels are relatively low and are capped by the government), and inflation is contained largely through subsidies. The government plans to remove some utilities subsidies, but the timing is uncertain. There is a risk of a renewed inflationary spike, as in 2008, given the weakness of the policy tools available to contain inflationary pressures. A weakening dollar, and thus Saudi riyal, will add to the risk of imported inflation. These factors suggest that inflation will be higher in 2011-15 (when we expect it to average 5.3%) than it was in 2005-09 (when it averaged 4.4%).

Saudi Arabia, Bahrain, Kuwait and Qatar remain committed to plans for a Gulf monetary union despite the withdrawal of Oman and the UAE. A joint monetary council has been established with the governor of SAMA as its chairman and this is likely to evolve into a central bank by the end of 2012. However, the countries still need to agree on various technical issues and meet the convergence criteria, and a single GCC currency is unlikely until later in the forecast period. The peg may therefore be adjusted in 2014-15 to prepare for a single currency. A single currency would probably also initially be pegged to the dollar, although a currency basket might be introduced later.

The current account is forecast to remain in surplus in 2011-15. Oil revenue will remain the primary factor determining current-account trends, and changes in oil prices and production will continue to be the main risks. International oil prices are expected to average US$80/barrel in 2011-15 (slightly above our previous forecast). Revenue from oil exports will remain below its 2008 peak, but with lower world commodity prices also helping to keep down the cost of imports, the trade balance is expected to remain comfortably in surplus. This should be sufficient to offset persistent deficits on the services and current transfers accounts. Income from investments abroad has been sustained through the global economic slowdown, and we expect the income account to return widening surpluses over the forecast period. Rising domestic fuel consumption, weak global demand for oil and declining international oil prices will lead to a slow decline in export earnings from 2011 and a contraction in the current-account surplus. The current-account surplus is forecast to average 11.7% of GDP in 2011-15, although it will narrow to 7.2% of GDP in 2015.

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Saudi Arabia's response to the pressure for political change witnessed in different parts of the Arab world has fluctuated significantly. It initially hoped that the uprising in the North African state of Tunisia could be isolated, and it tried to present itself as assisting the process of change. However, when events in Tunisia began to influence developments in Egypt, and, more modestly, in some countries neighbouring Saudi Arabia, the Saudi government took a more hostile stance, alleging foreign manipulation of popular discontent.

In mid-January the outgoing Tunisian leader, Zine el-Abedine Ben Ali, was granted permission by the Saudi authorities to reside in the kingdom. The Saudi foreign minister, Prince Saud al-Faisal bin Abdel-Aziz al-Saud, presented the decision as being in line with the tradition of providing refuge for those who seek it, and as helping to end the crisis in the North African state. This theme was taken up in the Saudi press, which noted that refuge has previously been given to the former Pakistani prime minister and present day opposition figure, Nawaz Sharif, and in the 1970s to Idi Amin when he fled Uganda. Saudi Arabia would seem to view this hospitality as a means to secure influence over the exile's home country and/or possibly as a means to influence events if such figures resume a political role in the future.

Saudi Arabia had had good relations with Mr Ben Ali and his regime, and in that sense was a natural choice as place of refuge. However, Prince Saud al-Faisal thought it politic to balance the so-called asylum decision by stating that Saudi Arabia was "with the Tunisian people". The Saudi foreign minister also made clear that the decision to grant Mr Ben Ali "refuge" was subject to clear rules about refraining from political statements about events in his home country and that there should be no transfer of wealth to Saudi Arabia. However, the Saudi leadership may face embarrassment over the fact that the new Tunisian government has since issued a warrant for the arrest of Mr Ben Ali and his immediate family via Interpol, and is seeking to freeze their assets. Meanwhile, shortly after a wave of self-immolations across the Arab world that had began in Tunisia, and which had helped spark the revolt, an official Saudi fatwa (religious ruling) was released asserting that such acts were un-Islamic. It was later alleged by Saudi Shia activists, without verification, that two self-immolations had taken place in Saudi Arabia's Eastern Province.

However, by late January, as demonstrations engulfed Egypt, the semi-officially approved Saudi embrace of popular aspirations in other Arab countries began to shift significantly. The day after the Egyptian president, Hosni Mubarak, had responded to nationwide and sometimes violent challenges to his authority by making a live broadcast in which he promised political changes, King Abdullah bin Abdel-Aziz al-Saud (who is presently convalescing in Morocco) issued a strong statement in support of the Egyptian leader, adding that "some infiltrators into the brotherly Egyptian people are attempting to destabilise that country's security and stability in the name of freedom of expression". It is unlikely that the Saudi leadership will feel directly threatened by the potential for a similar popular uprising. However, the Saudi leader's language, which is in line with the traditional response of Arab leaders to any hint of popular upheaval, suggests that the kingdom's leadership is firmly siding with the status quo.

At the time of the Tunisian leader's departure from office, Arab leaders met at the Egyptian town of Sharm el-Sheikh at a pre-planned Arab League economic summit and agreed to the formation of a US$2bn fund, to be used to aid the poorest countries by specifically targeting assistance to small businesses. Saudi Arabia and Kuwait pledged US$500m apiece toward the fund. Such large aid monies have been promised before, but events appear to have concentrated minds on the part of Saudi Arabia and some of its fellow energy-rich Arab leaders on the need to address popular discontent over economic problems.

Events closer to home suggest that, for Saudi Arabia, a firm attachment to the status quo in fellow Arab states and perhaps a generous handout may be its approach going forward. Although press reports have filtered out of demonstrations in Oman in late January over the previous cutting of food subsidies and over joblessness, Saudi Arabia will be keeping an especially close eye on neighbouring Bahrain. Bahrain has long been prone to popular instability in response to a sense of political injustice and economic discontent on the part of a Shia majority living under a Sunni hereditary leadership. Should the situation deteriorate rapidly in Bahrain, the Saudi leadership will be hugely concerned at the potential knock-on impact on its own small Shia population largely located in Eastern Province (and, potentially, the prospect of Bahrain falling under Iranian influence). At the time of going to production, events have thus far been muted in Bahrain. However, Saudi Arabia, which deployed its National Guard in the neighbouring country at a time of upheaval in 1995, will be considering possible future options, in addition to its normal pattern of bolstering the ruling Al Khalifa family financially. Elsewhere, Saudi Arabia will also be closely monitoring recent anti-government protests in Yemen, although its commitment to the presidency of Ali Abdullah Saleh is probably negotiable and, in any case, instability in Yemen is hardly a new phenomenon. Inside Saudi Arabia, regional events may encourage a more aggressive approach to tackling structural weaknesses such as the large number of foreign nationals performing jobs that Saudis, both men and women, are in effect being subsidised not to do.

Saudi Arabian officials have been facing renewed public criticism as a result of another round of flooding following heavy rain in the Red Sea port city of Jeddah. By end-January 2011, the total of dead was officially given as "at least ten", although the numbers may be higher than that. In the previous bout of flooding, which occurred in November 2009, it was officially acknowledged that local officials had been partly responsible for a death toll that officially ran to 123 (and Saudi media reports suggested may well have been higher), owing to illegal and corrupt decisions to allow inappropriate building in flood-prone valleys and for not ensuring adequate drainage. Over a year ago the Mecca governor, Prince Khalid al-Faisal bin Abdel-Aziz al-Saud, instigated an inquiry after many officials had been arrested and some sacked at the initiative of King Abdullah. At the end of January 2011 a further inquiry was announced by the second deputy prime minister and interior minister, Prince Nayef bin Abdel-Aziz al-Saud, and again it was announced that "negligent officials" would be punished.

The rainfall in late January that caused the flooding was assessed as greater than in November 2009, yet the much small number of official fatalities suggested that some infrastructural progress had been made in the intervening period. There has not been the same reported concern about sewerage mixing with flood waters either; nor, so far at least, has Saudi anger on various social media reached the same proportions this time around. However, just as in 2009, Saudis have been prepared to talk to the print media about their anger over aspects of the affair, and to some extent this has been reported. Nonetheless, there remain tight restrictions on how far locals can express their grievances-according to reports, Saudi security forces arrested some 30-50 demonstrators in Jeddah on January 28th, who were apparently protesting against the disruption caused by the heavy rains.

Saudi mediation reaches dead-end in Lebanon

In mid-January Saudi Arabia announced that its effort, in co-ordination with Syria, to mediate an agreement in Lebanon would end for the time being. The Saudi foreign minister, Prince Saud al-Faisal, quoted King Abdullah bin Abdel-Aziz al-Saud as saying that he had "lifted his hands from the issue", and a Saudi-owned satellite station, al-Arabiya, said that the decision had been made because the situation was "too dangerous". The recent crisis in Lebanon came about over differences between the country's political parties over whether to co-operate with the UN-backed Special Tribunal for Lebanon (STL), charged with investigating those responsible for the killing of the former prime minister, Rafiq Hariri. The Lebanese Shia party and guerrilla group, Hizbullah, which had demanded that the government should withdraw its co-operation, had already left the coalition, and days later the Lebanese government led by Saad Hariri, Rafiq's son, collapsed.

Ever since the Saudi-Syrian rapprochement, which began in the summer of 2010, there has been a joint effort to mitigate the domestic Lebanese fallout from the tribunal's expected fingering of Hizbullah, a Syrian and Iranian ally, for the assassination. Although details regarding the two sides' initiative have been lacking, and some have also questioned their commitment to this effort, the Saudi-Syrian rapprochement has been largely based on a desire to reduce the fallout from the STL, and, at the least, to delay the publishing of its findings. Hizbullah's leader, Hassan Nasrallah, argued, as did the Syrian and Lebanese pro-Syrian press, that King Abdullah could not pursue his efforts after Saad Hariri, the Lebanese prime minister, had visited Washington and was apparently told to adhere to the STL and to back its findings.

Whatever the case, Saudi Arabia "took away its hand" as the STL was nearing completion of its indictments, and therefore previous efforts to delay it had patently proven fruitless. It also coincided with the withdrawal of Hizbullah from the Hariri government, which suggested that time was more or less up on Saudi Arabia's diplomatic engagement in relation to the STL. It can be argued that Saudi efforts had always been limited by the health problems of the king and Prince Saud al-Faisal. However, the foreign minister was anxious to clarify a few days after his initial comments that this did not mean that Saudi Arabia was ending its mediation efforts in Lebanon generally. In reality, Saudi Arabia will be anxious to avoid Lebanon falling entirely within Iran's sphere of influence, although its ability to act as a "neutral" arbiter seem limited-Prince Saud al-Faisal referred to ongoing Saudi efforts in support of the Lebanese "majority", in effect code for the alliance of (non-Shia) forces represented by the outgoing Hariri government. Diplomatic efforts are now largely in the hands of Qatar, which is continuing mediation together with Turkey.

Reports that the Saudi stock exchange (Tadawul) is considering opening to direct investment from abroad raised hopes that the market may be able to reverse a steady slide in trading value over the past five years. Retail investors have become increasingly risk averse, in the wake of the boom and bust of the previous decade, and local institutional investors have failed to fill the gap. According to the Reuters news agency, the management of 29 representatives of banks and brokerages operating in the kingdom's capital market were invited to a meeting at the Capital Market Authority (CMA) in December, at which the question of handling foreign investor accounts was discussed. The agency quoted bankers as saying that they were confident that the market would be opened up to direct investment from abroad in the first half of 2011. Abdelrahman al-Tuwaijri, the head of the CMA, dismissed the Reuters report as speculation, and said that there were no plans to change the current regulations. However, it is clear that Saudi policymakers are at least considering the issue.

There are currently 146 companies listed on the Tadawul with a total market capitalisation of about US$360bn. The Tadawul All Share Index (TASI) peaked in early 2006 at just over 20,000 before tumbling by more than half in a matter of months. It staged a recovery in 2007 and the first half of 2008, but then crashed again in response to the global financial crisis (and the sharp fall in oil prices after it hit a peak of US$147/barrel in June that year). Saudi investors have been chastened by these experiences, and the value of trading has fallen steadily since it peaked at SR5.3trn (US$1.4trn) in 2006. According to the latest Tadawul annual report the value of shares traded in 2010 was only SR759bn. The TASI has risen in each of the past two years (up by 27.5% in 2009 and 8.2% last year), but is still well below its level in 2004, when the boom was starting to build.

However, arguably the timing of such a move is not especially propitious. Confidence may be knocked by the recent uncertainties that have afflicted the regional political scene. The Tadawul started the year in the middle of a bull market, with Banque Saudi Fransi's highly regarded business confidence index for the first quarter, published in December, showing that fully 75% of respondents thought that the outlook for equity markets would be positive over the next two quarters. However, market sentiment was subsequently knocked by a below-expectations set of results from Saudi Basic Industries Corporation (SABIC)-the largest company on the bourse by market capitalisation-and then by the unrest that has affected Tunisia, Egypt and elsewhere. The accompanying uncertainty that surrounded the events in North Africa drove a 6.4% decline in the index on January 29th alone (although it recovered much of these losses the following week).

Saudi Arabia has again scored relatively poorly in the Index of Economic Freedom published by the Heritage Foundation (a conservative US think tank), ranking 54th, and second-last in the Gulf Co-operation Council. This contrasts with its typically strong showings in the World Bank's Doing Business rankings (where it placed a creditable eleventh in 2010). However, Saudi Arabia has made some improvements on the index, with its score improving two points since 2010, and the report cited strong gains in freedom from corruption, property rights, business freedom and better control of government spending.

Arguably the biggest shortcoming in Saudi Arabia's business environment is that of investment freedom, particularly as all foreign investors need to be licensed by the Saudi Arabian General Investment Authority (SAGIA). Furthermore, outside investment is completely prohibited in a series of manufacturing and service sectors. Given that one of SAGIA's stated aims is to encourage external investment in the kingdom, and the government is pinning its hopes on greater participation from the private sector to aid economic growth, it is likely that foreign investment regulation will be reviewed during this year.

As well as deficiencies in its foreign investment climate, the Saudi authorities may be forced to address the large quantities of illicit money leaving the kingdom. Research by a US-based non-profit organisation, Global Financial Integrity (GFI), showed that the country had lost US$320bn over the last ten years, some of it owing to trade mispricing, but the bulk as a result of "the proceeds of bribery, theft, kickbacks, and other forms of tax evasion". Saudi Arabia was the worst performer in the Gulf, and behind only China, Russia and Mexico in the GFI's emerging-market rankings.

Having earlier received bids from some six firms to provide the front-end engineering and design (FEED) package and project-management consultancy services for the 400,000-barrel/day (b/d) Jizan refinery (January 2010, Economic performance), Saudi Aramco, the state oil company, has selected KBR of the US for the four-year contract. The overall project will cost some US$7bn. The Jizan refinery was initially planned to become the first privately owned oil refinery in Saudi Arabia. However, owing to a lack of interest from international oil companies, Aramco took over the project in February 2010.

In another major advance in the country's refinery plans, a FEED contract to expand the Yanbu refinery has been agreed between Saudi Aramco, the Lubricating Oil Refining Company (Luberef-a 70-30 joint venture between Aramco and ExxonMobil of the US) and Jacobs of the US. Among other things, the expansion will allow the refinery to produce high-quality type-three oil, used by luxury cars. The total cost of the project will be around US$1bn. Aramco has also intensified talks with Sinopec of China with an offer to fill in the void created after Houston-based ConocoPhillips withdrew from the 400,000-b/d Yanbu export-refinery project, citing commercial reasons (May 2010, Economic performance). Sinopec is one of the three Asian companies with whom Aramco has held negotiations in the recent past. The two others are Reliance Industries and Hindustan Petroleum Corporation Limited, both of India. The estimated US$10bn project, which is intended to refine heavy crude, has been on the drawing board for over five years.

The need to resolve internal differences over allocations and pricing of natural gas is becoming ever more urgent. Contracts are expected in late February/early March to develop the large Wasit offshore gasfield and Shaybah natural gas liquids projects (December 2010, Economic policy), and, although Aramco insists that it will need incremental volumes for reinjection and use as feedstock for seven new power plants (which together will have total capacity of about 1,000 mw), the Saudi private sector is also increasingly seeking ethane-rich gas for setting up new petrochemical projects. As a result, pressure is likely to mount on the Ministry of Petroleum and Mineral Resources to decide on the allocations.

At present, given the plethora of major petrochemical projects planned, the private sector may get its wish. Top of the list is the major joint venture between Aramco and Dow Chemical of the US-now officially dubbed the Ras Tanura integrated project (RTIP)-for which prequalifications have already been invited for the offsite and utilities package, with a similar invitation due to be issued by late March for the hydrogen plant. The promise of new ethane and methane has also kindled the hopes of PetroRabigh-a joint venture between Aramco and the Sumitomo Corporation of Japan-to move ahead with the second phase of its expansion. Finally, both SABIC and the Bahrain-based Kanoo Group are awaiting final word from the ministry on fresh gas allocations before issuing separate FEED tenders for their methyl methacrylate (MMA) and acrylic acid butol acrylates projects, respectively.

On the gas pricing issue, there is pressure from within the government and Aramco in favour of raising the current price from US$0.75/mBtu. Some have argued for a doubling of the feedstock price of ethane and methane, arguing that production costs will rise significantly given that new supplies will be sourced from offshore, sour gas reserves. Whatever the case, raising the gas price would at least meet the demands of Aramco's upstream arm, but it would potentially affect the economics of some of these large petrochemical projects.

Away from the domestic issue of gas supplies, the International Energy Agency (IEA) has said that Saudi Arabia has been stealthily boosting crude oil output in the past few months to cool an international price rally, with oil prices now at US$100/barrel. According to Reuters, Saudi Arabia has been making more crude available to the market in the past six months. This assessment was based on export data from independent tanker trackers. The IEA did not put any figure on the volume of additional crude being pumped, however.

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Land area

2.15m sq km

Population

24.2m (2007, Saudi Arabian Monetary Agency)

Key provinces

Population in '000 (2004 census, Ministry of Economy and Planning

Riyadh (capital): 4,730

Mecca: 5,449

Eastern: 3,009

Asir: 1,637

Medina: 1,379

Jizan: 1,083

Qassim: 980

Climate

Hot and dry, milder in the winter months

Hottest month: July, 26-42°C (average daily minimum and maximum); coldest month: January, 8-12°C; driest months: July, September, October, 0 mm average rainfall; wettest month: April, 25 mm average rainfall

Language

Arabic

Measures

Metric system

Currency

The Saudi riyal (SR) = 20 qirsh = 100 hallalas. The riyal is pegged to the US dollar at a rate of SR3.745:US$1

Time

3 hours ahead of GMT

Fiscal year

Calendar year

Public holidays

All Muslim holidays are observed in accordance with the Islamic or hijri calendar, based on the lunar year, which is about 11 days shorter than the Gregorian year. The weekend is Thursday-Friday

The month of Ramadan (August 1st-30th 2011) is not a public holiday but significantly reduces the working day. Eid al-Fitr (marking the end of Ramadan-August 30th 2011) and Eid al-Adha (Feast of the Sacrifice-November 6th 2011, the tenth day of the haj, or pilgrimage) are public holidays. The country's national day is September 23rd and is sometimes a public holiday. Travelling in the kingdom is particularly affected during the haj period, which lasts for about a month, Eid al-Adha and the school summer holidays, which last until mid-September

Official name

Kingdom of Saudi Arabia

Legal system

Based on sharia (Islamic law) and the Basic Law (1992); no written constitution

National legislature

There is no elected legislature. A Majlis al-Shura (Consultative Council) was appointed in August 1993 and held its inaugural session in December that year

Head of state

The king, Abdullah bin Abdel-Aziz al-Saud, acceded to the throne in August 2005 on the death of King Fahd bin Abdel-Aziz al-Saud, who had ruled since 1982. Prince Sultan bin Abdel-Aziz al-Saud became crown prince

National government

Council of Ministers, headed by the king, who holds the post of prime minister. The Council of Ministers exercises both legislative and executive powers

Main political parties

Political parties are not permitted

Council of Ministers

Prime minister: King Abdullah bin Abdel-Aziz al-Saud

First deputy prime minister & defence & aviation minister: Crown Prince Sultan bin Abdel-Aziz al-Saud

Second deputy prime minister & interior minister: Nayef bin Abdel-Aziz al-Saud

Key ministers

Agriculture: Fahd bin Abdel-Rahman Balghnaim

Civil service: Mohammed bin Ali al-Fayez

Commerce & industry: Abdullah Zainal Alireza

Culture & information: Abdel-Aziz al-Khoja

Economy & planning: Khaled bin Mohammed al-Gosaibi

Education: Faisal bin Mohammed al-Saud

Finance: Ibrahim Abdel-Aziz al-Assaf

Foreign affairs: Saud al-Faisal bin Abdel-Aziz al-Saud

Health: Abdullah Rabia

Higher education: Khaled bin Mohammed al-Anqari

Islamic affairs: Saleh bin Abdel-Aziz al-Sheikh

Justice: Mohammed al-Eissa

Labour: Adel Fakieh

Municipal & rural affairs: Mitab bin Abdel-Aziz al-Saud

Petroleum & mineral resources: Ali bin Ibrahim al-Naimi

Pilgrimage: Fouad bin Abdel-Salam bin Mohammed Farsi

Social affairs: Abdel-Mohsen bin Abdel-Aziz al-Akkas

Telecoms & information technology: Mohammed bin Jamal al-Mulla

Transport: Jabara bin Eid al-Seraisry

Water & electricity: Abdullah al-Hussayen

Key officials

Chairman of the Consultative Council: Abdullah bin Mohammed al-Sheikh

Director of General Intelligence: Muqrin bin Abdel-Aziz al-Saud

Head of National Security Council: Bandar bin Sultan bin Abdel-Aziz al-Saud

President of the Board of Grievances: Ibrahim al-Hokail

President of the Supreme Judicial Council: Saleh bin Abdullah bin Humaid

Central bank governor

Mohammed al-Jasser