CONTINUED HIGH OIL prices are setting the Saudi Arabian budget on course for a second year of surplus, structural reforms are starting to come into effect and the private sector is beginning to grow at a level needed to create jobs and reduce dependence on oil.
The most important question now facing the country's economic planners is whether they can sustain the momentum of change and ensure that the best-qualified figures are in place to control the transformation to an open, private-sector-driven economy.
Their task is hampered by the unstable international background. Despite tough and overt security in the kingdom and a robust campaign against terrorism, there have still been attacks on government buildings and compounds housing nationals and expatriates.
And relations between Saudi Arabia and the US – central to both countries' foreign policies for the past 25 years – continue to come under strain as the conflict in Iraq shows no sign of ending.
Policymakers are also under pressure to make the non-oil economy grow sufficiently fast to generate jobs for Saudi nationals. Some 60% of Saudis are younger than 20 and with annual growth of 3% the population will become even more youthful.
The country's leading business figures are working with the government to find ways to modernize the labour laws – the present system discourages even totally Saudi-owned companies from hiring Saudis as they are much harder to dismiss and have to be paid higher salaries than non-Saudis. Companies are also starting to introduce vocational programmes to instil the skills demanded by the market, though it will be years before their full benefits are felt.
Despite these pressures there is a clear mood of optimism in Riyadh and Jeddah as bankers, business executives and economists conclude that the kingdom will be robust enough to compete when it joins the World Trade Organization – a move expected to take place later this year.
"The Saudi market is very strong," says Nemeh Sabbagh, chief executive of Arab National Bank. "Oil prices remain high, there are good levels of liquidity and money continues to be invested in property and the stock exchange. Corporate earnings have been excellent, businesses continue to thrive and banks are delivering good results."
The foundations for this have been provided by the strong performance of the economy, which is set to deliver a second consecutive budget surplus for the first time in a generation. The continued high oil price has kept revenues much higher than projected. Last year the kingdom earned a record $85 billion from oil and this year's total should be similar. Equally important, though, will be the private sector, which is expected to generate 4.5% growth this year after a dip in 2003.
According to Brad Bourland, chief economist at Samba Financial Group, current economic conditions "are strong and likely to remain so throughout the year – strong oil revenues, good private sector growth, low inflation, low interest rates, twin surpluses in the government budget and current account and a buoyant stock market."
Modernization is crucial
To take full advantage of these opportunities, modernization needs to be maintained. As Bourland points out, these excellent numbers alleviate but do not resolve structural imbalances.
He says: "These include low levels of job creation, inadequate foreign and domestic investment in fixed assets and the continued fiscal stresses of high debt and high levels of current expenditures, mainly on salaries for government workers, in the budget."
Some business executives express concern that repeated budget surpluses might dull the sense of urgency surrounding structural change. But local bankers insist that the reformers do seem to have maintained the initiative. The recent appointment of Amr Dabbagh, a leading Saudi businessman and chairman of the Jeddah Marketing Board, as the new governor of the Saudi Arabian General Investment Authority (Sagia) is seen as an indication that the government is still committed to opening up to international companies.
International bankers have also been impressed with the way the government has revived its plans to attract foreign investment to the natural gas sector – the first time that Saudi Arabia has allowed non-national involvement in its hydrocarbons industry for 30 years.
The projects were in danger of collapse when it proved impossible to reach a final deal with consortia headed by US companies. Earlier this year, new – though rather more modest deals – were signed with Russian, Chinese and European institutions.
Equally important have been the final approval for the laws to create an independently regulated capital market and a formally structured insurance sector – though many Saudi business and financial leaders are expressing frustration at the delays in appointing a chairman for the Capital Markets Authority.
There is also evidence that ministers are determined to continue with structural changes including privatization, where the desire to press ahead is strong following the successful flotation of Saudi Telecommunications and its dynamic subsequent performance.
Bankers say that Saudi Arabia is also starting to reap the benefits of a cabinet reshuffle last year that created a more reform-minded and dynamic ministerial team.
Evidence of their commitment to reform was demonstrated at the Jeddah Economic Forum (a meeting of leading global and national politicians and business executives, headed by former US president Bill Clinton), when several Saudi government figures reinforced the message that the momentum of change had to be sustained.
According to Hasim Yamani, minister of commerce and industry, there has to be much speedier implementation of policies. "I feel that on many issues we take an unreasonably long time to implement our decisions," he said.
There is also a greater desire to see competition in vital infrastructure sectors. Khalid Al-Ghosaibi, the minister of planning and economy, said that this would "lead to more private-sector players in the airline, telecoms, electricity, water and waste-water sectors, to name but a few". He also said that private business should play a more active role in education and health and called for a "redoubling of efforts to narrow the gap between policy approval and its implementation on the ground".
The progress that has been made is starting to receive international recognition. Last year Standard & Poor's gave Saudi Arabia's long-term local currency rating an A+ grade in its first official assessment of the sovereign risk. Bankers note that Saudi Arabia's decision to go for a rating was itself evidence of a more open approach.