GCC Insights: Saudi Arabia scores big on the economic front

Saudi Arabia's economy has registered notable success in the last few months including signing a long-awaited gas deal and getting closer to WTO entry.

These had happened notwithstanding the terrorist bombing on compounds housing expatriates in Riyadh in May and pressure from the US on the kingdom to crackdown on extremists.

First, a breakthrough has occurred in the proposed gas project. A consortium led by Royal Dutch/Shell plans to invest as much as $2 billion for the gas exploration and production for an area of 209,000 square kilometres in the Rub Al Khali (Empty Quarter) in the south of the kingdom. The Shell consortium includes the French giant TotalFinaElf and the national oil giant Saudi Aramco.

Gas initiative

Also, the government plans to issue tenders for another three projects in early 2004. The original gas initiative collapsed in July on the grounds of being exceptionally complicated. The integrated programme involved exploration and processing of gas plus power stations, water desalination plants and petrochemical schemes.

Total investments were projected between $25-$30 billion, but the international oil companies and the government failed to resolve differences over pricing and the acreage available for exploration.

Second, the stock market has benefited from efforts to develop a capital market. In June, the Supreme Economic Council approved the capital markets law (CML) in order to set up a fully regulated market. The development has helped the counter trading of stocks.

Market capitalisation of the 68 trading firms amounted to $150.6 billion by September, which is substantially higher than the $88.5 billion in January. CML's goals include attracting corporate and individual Investors for raising finance.

Also, it could stem the outflow of funds from the kingdom. Annually, expatriates remit some 70 billion riyals ($18.7 billion) to their home countries. The amount is uniquely sizeable, as it represents just above 10 per cent of Saudi Arabia's GDP.

The authorities are tempted to see more of this fund remaining and circulating in the domestic economy.

Third, Saudi Arabia is poised for WTO entry as early as 2004. In late August, the EU, a powerful block within the WTO, has supported Saudi Arabia's entry bid.

In the agreement with the EU, the kingdom has agreed to decrease tariffs and open its market to services such as telecommunications and financial services. But the kingdom still needs the US endorsement for possible accession to the WTO.

Finally, the kingdom is due to post an exceptional budget surplus in 2003. Original projected figures called for revenue of 170 billion Saudi riyals ($45.3 billion) and expenditure of 209 billion riyals ($55.7 billion), leaving behind a budget deficit of 39 billion riyals ($10.4 billion).

However, the budget is now expected to post a surplus of 41 billion riyals ($10.9 billion) on improved revenue of 234 billion riyals.

The turnaround is attributed to higher oil production and firm prices. Estimated production for the first half of 2003 is put at 9 million barrels, some 1.6 million barrels above 2002 average. Also, oil price is likely to hover around $25 a barrel, considerably above the budgeted figure of $17.50 a barrel.

Outstanding debt

Oil is uniquely significant to the Saudi economy, as it accounts for about 70 per cent of treasury income.

The authorities could use partial of the surplus to help reduce the extraordinary outstanding debt of nearly $180 billion, which represents a hefty 96 per cent of the GDP.

The writer is assistant professor, College of Business Administration, University of Bahrain