Saudi Arabia Country Forecast

( ) Indicates change in rating.        *  Indicates forecast of a new regime.

Generational Transition Looms

The senior members of the royal family have avoided taking any overt steps to begin grooming princes from the third generation of the Al Saud dynasty to eventually rule the kingdom, a move that once initiated could trigger a destabilizing power struggle among the dozens of grandsons of Abdul Aziz, the country’s founding monarch, who for whatever reason perceive themselves to have a legitimate claim on the throne.  However, the inevitable generational transfer moved one step closer to reality on February 1, when Sheikh Muqrin was named to the post of second deputy prime minister, effectively placing him second in the line of succession to the throne behind Crown Prince Salman.
Muqrin is the youngest of the sons of Ibn Saud seen as being a suitable candidate to one day take the throne, which means that the next change at the top of the royal hierarchy—which, given the advanced age of both King Abdullah and Crown Prince Salman, could come at any time—will probably bring the official addition of one of the grandsons of Abdul Aziz to the line of succession.  Fully cognizant of the potential for that step, once taken, to sow instability within the political structure, the senior princes will be especially keen to ensure that the Saudi population is content.
In the immediate near term, high levels of social spending will be a key component of the government’s strategy for achieving that goal.  However, officials have acknowledged that the recent pace of public-spending growth cannot be sustained without creating the risk of fiscal deficits, and have suggested that the growth of expenditures will be held to single digits beginning in 2014.

Job Creation a Top Priority

Recognizing that state spending alone cannot be relied upon to protect against socioeconomic discontent, Saudi officials are shifting their focus to rapid job creation.  The centerpiece of that strategy is the Nitaqat system, which establishes a maximum number of foreign employees that a firm may hire.  The rules are very unpopular with private employers, many of whom contend that they cannot afford the higher wage costs associated with hiring from the domestic labor pool, and complain that Saudi workers are unwilling to accept some jobs, especially those involving menial tasks or manual labor.
However, given the impressive results claimed by Saudi officials—the official figures indicate that the employment of Saudis increased as much as nine-fold in 2012—it is unlikely that the criticism will prompt any revision of the policy, and private businesses will have to adapt accordingly.
Assuming the government’s political strategy succeeds in preventing an outbreak of destabilizing domestic unrest, the economic outlook is fairly bright.  Although anxiety over turmoil elsewhere in the Gulf region may have some dampening effect on private sector spending and investment, reduced oil output will help to sustain high global prices, ensuring sufficient financial resources to prevent a sharp deceleration of growth.
While the government has made strides toward improving the climate for investment, further steps will be necessary to address impediments arising from a bloated bureaucracy and corruption.  Officials will not move aggressively to trim the public-sector workforce as long as the private sector is incapable of absorbing displaced workers.
Abdullah has pledged to stamp out corruption in government, but any serious effort on that front would necessarily entail a concerted campaign to clean up the Ministry of Defense.  If initiated in the near term, such a move would inevitably be seen as an attempt to influence the succession process, and might very well trigger a power struggle between the sons of the monarch and the sons of Sheikh Nayef, the late crown prince who headed the Ministry of Defense for many years.
The government has spent its oil windfall wisely, focusing on investments in infrastructure and human resources development that will provide a firm foundation for steady growth of the non-oil sector later in the forecast period.  Sluggish growth of output will dampen the rate of oil-sector expansion throughout the period to 2018, but the overall rate of real GDP growth will average 4.2% annually over the five-year forecast period.

Economic Forecasts for the Three Alternative Regimes

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