Scenario Planning: The Volatile Future of Saudi Arabia’s GDP (2014-2024)

Word Count: 2710

George Gazzard

"The evolutionary race goes to the adaptable, not to the well adapted,

to those who can learn, not to those who know."

Kenneth Boulding 2013

ContentsScenario Planning: Saudi Arabia’s GDP (2014-2024).....................................................................0

Introduction:...................................................................................................................................2Saudi Arabia Environmental Analysis:...........................................................................................2Identifying Driving Forces of Saudi Arabia’s GDP.........................................................................2Defining Critical Uncertainties.......................................................................................................3Describing Major Characteristics...................................................................................................3Develop Logical Pathways............................................................................................................8References..................................................................................................................................10Appendix (A): PESTLE & SWOT Analysis:.................................................................................12Appendix (B): Driving Forces behind Saudi GDP........................................................................16Appendix (C): Definitions.............................................................................................................16Appendix (D): Oil Price/ Saudi GDP relation...............................................................................16Appendix (E): Critical Uncertainties Matrix..................................................................................17Appendix (F): LRAS, Mundell-Flemming and Resource Markets................................................18

1

Introduction:

Recorded as 19th on global GDP rankings (World Bank 2013) with present fiscal and current account surpluses, Saudi Arabia has strong economic prospects. However with the rule of King Abdullah through the presence of an absolute monarchy, Saudis hierarchical feudal system limits democratic progress. Matabadal (2012) reference towards Saudi Arabia as the central bank of oil1 provides you a preliminary idea as to what industry has largest significance towards performance of Saudi GDP. On the basis of its oil price dependence and questionable Eco/political operations, Saudi Arabia is a country with an unpredictable and potentially highly volatile future in relation to GDP.

This paper will undertake a scenario planning exercise exploring possible plausible futures for Saudi Arabia’s GDP. First, the combination of PESTLE and SWOT analysis will outline all internal/external factors affecting Saudi GDP. Having understood the crucial determinants that have driven Saudi into its current (2014) environment, we will select two critical uncertainties which have significance on our focal point in discussion, Saudi Arabia’s GDP in 2024. Constructed on the identified uncertainties, four potential future scenarios for Saudi will be explored, each with a narrative leading to the scenario based on early warning signals from the current economic climate. To close, we will discuss the implications of each scenario and deliberate on a strategic plan.

Saudi Arabia Environmental Analysis:

In order to propose four future scenarios for Saudi Arabia GDP in 2024, we must first recognise the current critical uncertainties facing Saudi GDP. In order to do this, we will examine the significant determinants affecting Saudi GDP, as “Without driving forces, there is no way to begin thinking through a scenario”2 (Schwartz 1991). To assist, a full PESTLE analysis has been compiled, coupled with a SWOT report ‘Appendix A’, which will help establish an in-depth summary of Saudis environment. Considering both internal and external factors affecting Saudi GDP, allows for us to develop ‘water tight’ Logical Pathways in response. From this analysis we will provide a brief summary of key determinants affecting Saudi Arabia’s GDP:

The Scenario Development Process (Brummell 2008)

Identifying Driving Forces of Saudi Arabia’s GDP

Having discussed other driving forces of Saudis GDP in Appendix B, I believe the most significant determinants of Saudi GDP to be World Oil Price, the gross domestic product of Saudi Arabia fluctuates

1 Matabadal, A. (2013). Country Report Saudi Arabia. Available: http://fanack.com/en/countries/saudi-arabia/basic-facts/geography-and-climate/environmental-issues/. Last accessed 21/11/2014.2 Schwartz, P., 1991. ‘The Art of The Long View’. Century Business. London

2

dramatically according to the price of oil (Appendix D – Significant Pearson Correlation) and moreover the subsequent negative effect corruption has on its output. The following paragraphs discuss:

Since 2002, Saudi Arabia’s economy has enjoyed strong nominal GDP growth at 4.9%, coupled with government budget surpluses averaging 6.4% of GDP since the turn of 2000 (World Bank 2014). Europe can only look in awe at a country where debt now amounts to just 7% of GDP, in comparison with 82% just nine years ago3 (Massoud 2012). Indisputably, the catalyst to this rapid increase in growth was due to its abundance and moreover, its exportation of its natural resource, crude oil. Accounting for more than 90% of Saudi Arabia’s exports and subsequently 55% of its GDP, Saudi Arabia’s dependence on the price of oil cannot be overstated (World Bank 2014). Further, possession of c25% of worlds total proven petroleum reserves affords Saudi a leading role in OPEC as ‘Swing Producer’ (See Appendix C for definition) with excess production capacity and the ability to influence global oil prices and thus Saudi GDP. (Federal Reserve Bank (2000) estimated that for each US$ 1 drop in the price of oil, the Saudi economy loses revenue of US$2.5 billion, annually.) The increasing awareness towards the need for a green and sustainable energy source, coupled with the fact that oil is a finite resource, means Saudi Arabia’s economic performance seems at risk of declining in the long term. Simmons (2012)4 argues Saudi oil resources are already 60% depleted.

Further, Saudis ease of doing business index (22/185)(World Bank 2014)5 would lead you to believe that even without the existence of oil production, this low regulated economy would still witness significant sustainable growth, however it is reasonable to believe that existence of high levels of corruption (Corruption Perceptions Index rank 66/176) will limit the long term sustainability and efficiency with or without the huge levels of oil production, as Chene (2014) states corruption is negatively correlated with economic growth. Elliot (2012) provides us with an insight into the level of Saudi corruption in that 77% of businessmen polled felt they had to `bypass` the law to conduct their operations. Since then "businessmen say it has only gotten worse”6. This means, at Macro level Corruption is acting as an obstacle to Saudi growth through distorting incentives and diverting talent and resources including human resources towards more ‘lucrative’ rent-seeking activities (Oil trade) Chene (2014)7 rather than sustainable new industry areas which it will need for long term growth.

With this sound rationale behind the choice of my uncertainties, I propose them more clearly as the following (With relevant metrics):

Defining Critical Uncertainties

1. Levels of Corruption - (Metric taken from (http://www.transparency.org/research/cpi/overview )) 2. WTI World Oil Price - ($ per Barrel)

Describing Major Characteristics

Having acknowledged current economic indicators from various sources, we can develop and understand how Saudi Arabia’s economy may, inevitably, fall into any 1 of 4 scenario positions. Preparing a Scenario Matrices and discussing implications will therefore act as a tool in order to rehearse the future to avoid any surprises. (Garvin & Levesque, 2006)3 Massoud A. D. (2012). Economic Growth in Saudi Arabia: This is our golden opportunity. Available: http://www.arabianbusiness.com/economic-growth-in-saudi-arabia-this-is-our-golden-opportunity-458223.html. Last accessed 20th Nov 2014.4 Elliot, K. (2012). An End to Saudi Oil. Available: http://alcalde.texasexes.org/2012/10/an-end-to-saudi-oil/. Last accessed 20/11/20145 World Bank. (2014). Ease of doing business index. Available: http://data.worldbank.org/indicator/IC.BUS.EASE.XQ. Last accessed 23/11/2014.6

House, Karen Elliott (2012). On Saudi Arabia : Its People, past, Religion, Fault Lines and Future. Knopf. p. 167.

7 Chene, M. (2014). ANTI-CORRUPTION HELPDESK. THE IMPACT OF CORRUPTION ON GROWTH AND INEQUALITY. 1 (1), 4.

3

Scenario 1: Characterised by High World Oil Price + High levels of Saudi Corruption.

Level of Corruption:173/177 (Corruption Perceptions Index)

Oil Price: $140 per barrel

GDP: $1 trillion dollars

“The Oil-igopoly of the Middle East” Al-Bilad Newspaper: 9th July 2024.

midst the US shale boom, OPEC met in November 2014, in which Loder (2014) outlines there was a strong divide on whether OPEC

should cut output to prop up prices or leave production unchanged to fight for global market share.8 Saudi Arabia, the ‘swing producer’ disbanded OPEC in 2016 and formed a cartel with fellow member, Iran. Their decision, followed investigations into the limited future production capabilities of other OPEC members and cooperation to stockpile oil therefore increasing world oil prices.

A

With this subsequent decrease of OPEC supply and increase of price, Domestic GDP spiked through the roof. A decade of increase in global Oil prices, due to this supply side change saw main export partner US (14.3%), decrease imports from Saudi, due to the high price elasticity9 (contradictive to Cooper 2003 findings)10 of oil within the US and focus on their more economical alternative - shale oil. Saudi Aramco reliance on China for most of its exports increased further. Influxes of skilled labour, from neighbouring gulf countries, seeking work had increased, with limited regulation present to stop these migrants saturating Saudi’s labour pools. (Saudis implementation of lower regulations was to incentivise business setup). This left Saudi Arabia with huge

unemployment figures (12%) and large inequality within a highly affluent nation (Sassen 200111). This world price hike acted as a catalyst for global investments into a more economic substitute.

Early Warning Signals:

Understanding of consumers price elasticity of oil / cross price elasticity

Lack of regulation regarding influx’s of foreign labour

Lack of Political transparency and leadership through leaders of OPEC

Media/publicity - Awareness of international desire to use alternative sustainable energy source

Saudi Arabia’s GDP dependence on oil price OPEC Crude oil supplies deteriorating Further decline in participation of women in

economic sectors

Scenario 2: Characterised by Low World Oil Price + High levels of Saudi Corruption.

Level of Corruption: 112 (Corruption Perception Index)

8 Loder, A. (2014). OPEC price wars evokes ugly memories. Available: http://business.financialpost.com/2014/11/26/fears-of-opec-price-war-evokes-ugly-memories-of-1986-oil-bust-for-u-s-drillers/?__lsa=ab1f-f3d2. Last accessed 27/11/2014.9 Δ ln(Q)Δ ln(P)10 Cooper, J. (2003). Price elasticity of demand for crude oil: estimates for 23 countries. . 1 (1), 3-411 Sassen, S. (2001). A study in international investment and labour flow. The use of foreign workforce. 2 (1), 6.

4

Oil Price: $55

GDP: $745.27 billion dollars

“Here comes the Sun” The Economist: 1st January 2024.

ince the 2014 cut in OPEC prices (unchanged supply levels) which were intended to prop up its exports to the US – (Rising US oil production in

North Dakota and Texas is increasing US independency). The continuous fall of global oil prices ($65 per barrel in 2016) coupled with continuations in Saudi expenditure on new ‘sustainable’ industry areas, has led Saudi Arabia’s budget surplus into a significant deficit.

S

With growing US dominance in supplying more economically viable Fossil Fuels. Saudi Arabia and OPEC have been forced on to the back foot as the low price is affecting OPEC members GDP. United States’ comparative advantage in producing Shale has presented them opportunities to price differentiate against all rivals and provide a more economical alternative to OPEC oil. Saudis amounting low oil export revenues have dissolved their FX-Reserves and any government surpluses they once held. Saudi GDP

has plummeted to a 50 year low of $745.27 Billion (PPP) with Ruler Al Said realizing the need for Industry reform.

Mahdi and Roca (2012) prediction of a successful $109 Billion investment in a solar industry that would drive domestic energy by 202312 had failed. It had fallen short, as the high levels of corruption had led to exit of investment (Chene 2014)13. Further Saudi Arabian youth had lacked the labour skills to fulfil the project.14

Early Warning Signals:

Increased oil production/efficiency capabilities from non-OPEC members + negative price trends

Heavy reliance on oil exports in driving current account and GDP – Lack of substitute

Lack of investment in education and infrastructure/ new industry through periods of current account surpluses

Socio/political environment counterproductive for investment due to corruption

High Investment Exit level Increase in Saudi wage demands relative

to foreigners demand

Scenario 3: Characterised by Low World Oil Price + Low levels of Saudi Corruption.

Level of Corruption: 3 (Corruption Perception Index)

Oil Price: $70 dollars per barrel

GDP: $800 billion dollars

12 Mahdi, W. (2012). Saudi Plan $109 Billion Boost. Available: http://www.bloomberg.com/news/2012-05-10/saudi-arabia-plans-109-billion-boost-for-solar-power.html. Last accessed 27/11/2014.13 Chene, M. (2014). ANTI-CORRUPTION HELPDESK. THE IMPACT OF CORRUPTION ON GROWTH AND INEQUALITY. 1 (1), 4.14 Knickmeyer, E. (2013). Saudi Crack Down on Foreign Workers. Available: http://online.wsj.com/articles/SB10001424127887324883604578396603434399588. Last accessed 27/11/2014.

5

“’Saudisation’ of the domestic labour markets” Tech News World: 24th September 2024.

ith a dissolution of the ‘Al Saud’ rule and thorough reconstruction of Saudi Political systems - due to tension over transparency

of government and business operations15(Albassam 2012). Tal Haim the current Saudi Leader is directing investment towards ‘cleaner’, more sustainable industries.

WLower corruption coupled with low cooperation taxes has seen movements of large FDI and capital flows into new industry areas in Saudi since 2014. The telecommunications and Nuclear power industries have diversified the Saudi economy and are gaining momentum in sparking Saudi GDP.

However, with the gradual dissolution of the comparative advantage they once held in the oil industry, the required skilled labour for new industry areas couldn’t be sourced domestically as the investment in Saudi education system and infrastructure had not been sufficient through early 2000’s oil boom due to questionable government operations. This has meant great leakages into the circular flow of income, as firms had to employ international labour who have the correct skills and training. These (households) are not spending/ injecting their income back into the Saudi circular flow

of income = no multiplier effect. Saudi lacks any self-sustainability.

Further, with no threat to the rule from other political parties, 2024 sees the fifth year of high austerity measures from Saudi Government in counter of the deficit.

Early Warning Signals:

Increase in Saudi labour unemployment levels

New industry areas will attract international labour due to wages and potential of lucrative new markets – therefore the influx of foreign labour needs to be monitored to allow for domestic labour to gain

Decrease in output of crude oil in Saudi Arabia

Scenario 4: Characterised by High World Oil Price + Low levels of Saudi Corruption.

Level of Corruption: 12 (Corruption Perception Index)

Oil Price: $145 per barrel

GDP: $850 billion dollars

“The pegged ER – Contradicting Saudi Arabian Countercyclical Monetary Policy” The Scottish Independent: 5th March 2024

ith a 2014 cut in interest rates by the FED, SAMA (Saudis Monetary Agency) will be forced to match these rates in order to

avoid investors seeking the higher yield on a currency (The Riyal), which is pegged to the dollar.

W With increasing levels of inflation through to 2024, in line with the rising price of Oil (due to an increase in demand without an outward shift in supply), tensions are mounting over the effectiveness of SAMA Monetary and Fiscal policies and the desirability to be pegged against the US $. Especially in regard to Saudi Arabia – Any Keynesian would vouch for

15 Bassam Abdullah Albassam. (2011). Political Reform in Saudi Arabia. Middle East Studies. 3 (6), 2.

6

intervention in increasing interest rates to induce saving and reduce consumption to cool the overheated economy with fast rising inflation rate.

Further, this dollar peg has led to an increasing cost of imports as the US dollar has declined relative to the Yen, Euro and other currencies. The 13% decline of the dollar in relation to other currencies has meant a relative increase in prices for goods Saudis purchased from Japan, Russia and other trade partners. However, with increase in transparency of business operations FDI has increased counteracting the depreciation of the Riyal.

Early Warning Signals:

Deterioration in US current account Depreciation of US $ against other

currencies Inverse relationship in business cycles

between US and Saudi Arabia Limitations of Monetary policy due to

pegged E/R High Saudi Arabian living standards v

Saudi Arabian Income per capita No sustained increase in supply with

increase in demand and growth.

Develop Logical Pathways

The ‘Oil-igopoly’ of the Middle East - implications

Saudi Arabia’s prospering economy means; government should implicate more legislation regarding migration of foreign labour into Saudi labour pools to avoid heightening domestic unemployment (Rudiger 2008)16. Isayev (2000) argues increased legislation infrastructure deems an economy safer for investment and business setup. Abnormal profits from trade surpluses provided by increased oil prices should be redirected into new industry to provide long term alternatives for oil production; this may limit the performance of GDP short term but will provide for sustainable growth in the long term. As the oil industry is not a labour intensive industry the diversification into new industries may lower unemployment levels, only if the domestic labour pool can meet the required skill levels. Fiscal taxation measures should be in place to deduct percentages of foreign revenue to subsidise Saudi Arabian education. The combination of these two supply side policies will compliment any future PPF growth whilst also limit inflation with any demand increase (Please see appendix G for diagram).

Here comes the sun - implications

Scenario 2 presents a much deeper issue, unlike prior seasonal trends with negative growth; this scenario presents a long term structural change for Saudi Arabia to overcome. Sufficient government expenditure + investment would stimulate AD and increase future productivity and skill level of domestic labor which may have helped fulfill the solar panel project in 2024. For now, with the current price of oil decreasing government will need to stimulate economy through fiscal expansion please see Appendix G for expansionary fiscal policy under a fixed exchange rate. However, increase in output through fiscal

16 Rudiger, K. (2008). Towards a Global Labour Market. Globalisaiton and the Knowledge Economy. 1 (1), 4.

7

policies may be ineffective, with the outward shift of AD, leading to increases in income and money demand will lead to a subsequent increase in interest rates. This will shift the AD curve back to the left – this is known as the crowding out effect.

‘Saudisation’ of the domestic labour markets - implications

The Saudi government should stimulate AD through, Government spending (G), in infrastructure which will lead to a subsequent increase in the Consumption component (C) due to increase in employment levels in line with new industry areas created – Keynesian school would expect to see a significant multiplier effect on stimulating growth in the domestic economy.

AD=C+I+G(X-M)

However, effectiveness of the government’s expenditure will be limited due to the fact it would only provide extra revenue to new foreign labour. Therefore, increase in (C) would not reverberate in the Saudi economy to the same magnitude, due to perceived leakages through foreign labours revenue that is spent abroad.

Further, a decrease in the price of oil in the short run may lead to small nation’s oil sites becoming un-economic to mine and with insignificant capital to subsidise and prop up production in the short run; this decrease will drive them out the market. Meaning, long run OPEC and other large oil producers can benefit from increased revenue. If the Cross price elasticity for the demand of global crude oil compared with US shale oil is <1 than the Saudis worry of price effecting demand for crude oil can be eased.

The pegged ER- Implications

Given the predominant character of fiscal policy in influencing monetary developments in Saudi Arabia and the relative ease of open market operations within, the efficiency of monetary policy in controlling the stock of money and thus AD via open market operations is limited going forward. Supply side policies coupled with expansionary fiscal policy could provide sustainability. The Mundell-Flemming model, Appendix G, demonstrates the lack of economic power monetary policy has in a fixed exchange rate economy given that there is perfect capital mobility. This proves expansionary monetary policy to be ineffective for SAMO in increasing Saudi output. If Saudi does not want to disband the pegged ER for fear of economic security should they consider pegging their ER to a basket average of European countries?

8

References

1. Albassam, B. (2011). Political Reform in Saudi Arabia. Middle East Studies. 3 (6), 2.

2. Chene, M. (2014). ANTI-CORRUPTION HELPDESK. THE IMPACT OF CORRUPTION ON GROWTH AND INEQUALITY. 1 (1), 4.

3. Chene, M. (2014). ANTI-CORRUPTION HELPDESK. THE IMPACT OF CORRUPTION ON GROWTH AND INEQUALITY. 1 (2), 4.

4. Elliot, K. (2012). An End to Saudi Oil. Available: http://alcalde.texasexes.org/2012/10/an-end-to-saudi-oil/. Last accessed 20/11/2014

5. Knickmeyer, E. (2013). Saudi Crack Down on Foreign Workers. Available: http://online.wsj.com/articles/SB10001424127887324883604578396603434399588. Last accessed 27/11/2014.

6. Loder, A. (2014). OPEC price wars evoke ugly memories. Available: http://business.financialpost.com/2014/11/26/fears-of-opec-price-war-evokes-ugly-memories-of-1986-oil-bust-for-u-s-drillers/?__lsa=ab1f-f3d2. Last accessed 27/11/2014.

7. Matabadal, A. (2013). Country Report Saudi Arabia. Available: http://fanack.com/en/countries/saudi-arabia/basic-facts/geography-and-climate/environmental-issues/. Last accessed 21/11/2014.

8. Monitor Group. (2008). Introduction to Scenario Planning. Available: http://www.mwcog.org/uploads/committee-documents/aV5eWFtX20080731094534.pdf. Last accessed 25/11/2014

9. Massoud A. D. (2012). Economic Growth in Saudi Arabia: This is our golden opportunity. Available: http://www.arabianbusiness.com/economic-growth-in-saudi-arabia-this-is-our-golden-opportunity-458223.html. Last accessed 20th Nov 2014.

9

10. Mahdi, W. (2012). Saudi Plan $109 Billion Boost. Available: http://www.bloomberg.com/news/2012-05-10/saudi-arabia-plans-109-billion-boost-for-solar-power.html. Last accessed 27/11/2014.

11. Rudiger, K. (2008). Towards a Global Labour Market. Globalisaiton and the Knowledge Economy. 1 (1), 4.

12. Schwartz, P., (1991). ‘The Art of The Long View’. Century Business. London13. Sassen, S. (2001). A study in international investment and labour flow. The use of foreign

workforce. 2 (1), 6.

14. Saudi Arabian General Investment Authority. (2010). Easy place to do business. Available: https://www.sagia.gov.sa/en/Why-Saudi-Arabia/Key-Benefits--/Easy-Place-To-Do-Business/. Last accessed 25/11/2014.

15. World Bank. (2014). Ease of doing business index. Available: http://data.worldbank.org/indicator/IC.BUS.EASE.XQ. Last accessed 23/11/2014.

16. World Bank. (2014). Ease of doing business index. Available: http://data.worldbank.org/indicator/IC.BUS.EASE.XQ. Last accessed 23/11/2014.

17. House, Karen Elliott (2012). On Saudi Arabia: Its People, past, Religion, Fault Lines and Future. Knopf. p. 167.

18. Woertz, E. (2014). Trouble in oil paradise. Available: http://www.energypost.eu/trouble-oil-paradise-domestic-challenges-saudi-energy-market-global-implications/. Last accessed 2014

10

Appendix (A): PESTLE & SWOT Analysis:

Saudi Arabia (Strength)Political

Government recruiting scientific and technical academics in all targeted strategic areas of technology to maximise quality and output long run

‘Saudizing’ economy – replacing foreign workers with Saudi Nationals in a bid to increase employment and expand new sustainable sectors

Islamic law has been the pillar for Saudi Arabia Government regimes – invisible control

‘Central Bank of Oil’ – Saudis abundance of petroleum gives it large production and status as ‘Swing Producer’ with in the OPEC cartel. – This provides Saudi Arabia with significant international political/economical/social clout.

Volatile environmental policy initiatives

The professional political class divided with little experience of life outside their system

Economical Operates a countercyclical

fiscal policy to stabilise path of growth (Expansionary and Contractionary – depending on business cycle) – meaning a less volatile business cycle

Central Bank exercises strict currency control policy keeping inflation checked at 1-5% over last ten years

Saudi Arabias continuously high oil export revenues have resulted in years of subsequent external surpluses and large amounts of FX- Reserves

Saudi Arabia is the world’s most dominant oil producer + exporter (90% of Government Revenue from Oil ex.)

Oil export drives 55% of GDP: GDP at 2013 906.8 billion (PPP)

Saudi Arabia’s position as ‘swing producer’ within OPEC establishes its control over Global oil prices/supply17

16.4 Bn ($) worth of FDI measured by the ‘World Investment Report’ in 2011

SA unemployment at 5.60% (Trading Economics)

SA inflation 2.60% (CPI)

Social Saudi Arabia is an exclusively

Islamic (Muslim) Kingdom – with Islam governing most aspects of life.

Low values of fairness, compassion and social accountability

Adherence to the Islamic values + maintenance of social stability, in the context of rapid economic change has remained a goal for SA Development plans

The (MAS) Masculinity index (Hofstede Dimension of 52) demonstrates women have less social involvement

Appointment of Price Muqrin Bin Abdulaziz Alo-Saud – This appointment has eased concerns over political stability in the immediate future

Ease of doing business index Rank 22/185

Technological Government spending on

Research + development in telecommunications, insurance and power distribution to lesson dependence on Oil sector

NSTIP sets out the need for innovation and technology development being integral to Saudi Arabia’s long term vision.

Aiming towards a knowledge based economy – developing countries resource capacities, supporting innovation activities and research

Investment in 16 nuclear power reactors over next 20 years ($80 billion)

Plans to invest $109 billion into solar panels

Legal

Largest free economic market – Part of the GCC meaning trade agreements with ‘Greater Arab Free Trade Area’ and ‘European Free Trade Association’

SASO law on imported goods Saudi Arabia the 13th most

economically competitive country – IFC 2010

Environmental ARAMCO (Saudi Arabian oil

firm) advancing research in a clean oil and gas solution

SABIC (Saudi Arabian petrochemical. Manufacturers localizing petrochemical. Technology in communities across country

Article 32 – Has lead to significant laws being established in order to meet environmental demands - General Environmental Law, Presidency of Meteorolgy and Environment, Kyoto Potocol (2005)

Pestle Analysis: Saudi Arabia (Weaknesses)

17 http://www.wallstreetdaily.com/2014/11/07/u-s-saudi-arabia-oil/11

Political Hierarchical feudal political

system limits democratic progress – Great promise of reforms towards more democracy since 2003 E.g broadening of electorate and provincial elections have never been employed.

Absolute monarchy through King Abdullah

Existence of other Political parties are banned – Monopoly of power for monarchs – This means there is essentially no democracy. With no political competition – public opinion is irrelevant as governance has no threat to other parties catering for public desires – weaknesses of privatisation

Data transparency is below average for a high income economy – leading acting as a deterrent of FDI

Economical Saudi Arabia operates a Fixed

Exchange rate regime – Riyal pegged to the US$ - 1$ = 3.75R - Can lead to difficulties in managing Riyal appreciation

Saudi Arabia’s freedom score is 62.2 (77th in 2014 global ranking) Trade and investment freedom have been outweighed by overwhelming corruption levels, decline in property rights and regulatory efficiency or lack of it.

Saudi Arabia has huge GDP ppp output however; its GDP per capita is relatively lower than other five smaller countries within Gulf. (Bahrain, Kuwait, Oman, Qatar) – This suggests high levels of unemployment and also larger inequality within Saudi Arabia

Narrow Saudi Economy is overly dependent on the hydrocarbon industry

Social SA adherence to Islam has

been a major deterrent to the current social problems within.

Press Freedom Index – Rank 163/179 which is very poor. Government control over press means inhabitants are not aware of the real current state of affairs (World Bank)

Technological Legal Corruption remains significant

within Saudi Arabia (46 on the CI at 2013)

Slow and non-transparent judiciary which is not independent and must coordinate its decisions with the executive branch

Environmental Huge Carbon Emissions (16.6

metric tonnes per capita 2008) Lack of perennial rivers and

other water bodies. This has meant that the government has had to invest in extensive seawater desalination facilities

Air pollution and waste management is a problem which has plagued SA

Pestle Analysis: Saudi Arabia (Future Opportunities)

12

Political Strong political and economic

relationship with the US – allied in opposition of communism, in support of stable oil prices

Economical Investment and FDI into

petrochemicals, automobile assembly, biotechnology

Large Asset Base and strong FX reserves

Removed some legal and bureaucratic barriers to private investment in order to qualify for membership in the World Trade Organisation

Increase in the tourism sector Openness to Trade. Saudi

Arabia’s economy is exceptionally open to trade, with the lowest average weighted tariff rate in the entire MENA region. In an effort to further boost trade, the Government reduced port handling fees by 50% in early 2008.

SA to launch six ‘economic cities’ in order to diversify economy and provide more jobs

Social The need for a large scale

recycling system Saudi population is one of the

fastest growing in the world 46% of government budget for

2014 fiscal year allocated to education and training, health and social development and infrastructure

Large research and development endowments at King Abdullah University for Science and Technology (KAUST) and King Abdul Aziz City of Science and Technology (KACST).

Technological Huge planned investment in

the Telecommunications sector to divert reliance on oil sector

Creation of 6 Nuclear power plants as a substitute energy source for Oil sector

Legal Lesson corruption – more

transparent operations which would lead to higher FDI/ investment as external investors would have a clearer understanding of environment

Environmental Solar Panels – 6 Bn $

investment proposal for solar panels. The planned expenditure would lead to Saudi Arabia holding the largest resource of solar panels.

Pestle Analysis: Saudi Arabia (Future Threats)

Political Absolute monarchy hinders the

benefits of having a democracy where inhabitant’s demands

Economical Huge dependence on Oil Sector Government expenditure Oil Resource is a finite resource

Socia l Low productivity of Saudi Labor

is also a problem – lack of technologically educated,

13

have to be heard – hierarchical power will always prevail.

Data transparency is below average for a high income economy – leading acting as a deterrent of FDI

– If production slows it will have a subsequent negative impact on Saudi Arabia GDP

Immergence of Renewable or other energy sources will lesson global dependence on oil

R&D into use of electrical machinery

Environmental and Financial threat to any petroleum spills.

Unbeatable Fiscal Environment. With extremely low taxes and excellent incentives, Saudi Arabia is ranked 5th in the world for “fiscal freedom.” Earnings from Saudi-based operations are highly secure due to the Kingdom’s very stable currency. The Saudi Riyal is pegged to the dollar without restrictions on foreign exchange or repatriation of profits.

competent and motivated workers

Saudi workers not prepared to take wage cuts that foreign workers are accepting

Technological Significant lack of high skilled

labour to innovate. – The government has looked to focus spending on Education as well as academic institutions to educate the youth.

Lega l Corruption within Saudi Arabia

– leading to subsequent effects on investment level, development in new industries and huge equality

Environmental Depletion of underground

water resources married with the fact Saudi Arabia currently has the third-highest per capita fresh-water consumption in the world.

18

Appendix (B): Driving Forces behind Saudi GDP

From use of PESTLE coupled with SWOT analysis we can outline the key instruments in determining Saudi Arabian GDP figures. Saudi Arabia’s economy is exceptionally open to trade. It holds the lowest average weighted tariff rate within the MENA region. In 2008, the government reduced port handling fees by 50% in an effort the further boost trade. The increasingly deregulated and competitive economic environment is assisting an explosion of business formation as the private sector takes and increasingly prominent role in the economy. Secondly Saudis has an unbeatable fiscal environment - with exceptionally low taxes and attractive incentives, Saudi Arabia is ranked 5th globally, for fiscal freedom.  Earnings from Saudi-based operations are highly secure due to the Saudis very stable currency - The Saudi Riyal is pegged to the

18 Matabadal, A. (2013). Country Report Saudi Arabia. Available: http://fanack.com/en/countries/saudi-arabia/basic-facts/geography-and-climate/environmental-issues/. Last accessed 21/11/2014.

14

dollar without restrictions on foreign exchange or repatriation of profits.19 SAGIA (2010). These facets accumulated could arguably be why Saudis ease of doing business index scored (22/185) (World Bank 2014)20.

Appendix (C): Definitions

1. The Swing producer: control global deposits of any commodity and possess large spare production capacity over other producers. A swing producer is able to decrease or increase the commodity supply at minimal additional internal cost therefore they can influence prices and balance the markets - raising production in times of high demand and then taking oil off the market when demand declines to keep prices stable. Saudi Arabia has this luxury within OPEC

Appendix (D): Oil Price/ Saudi GDP relation

There is a very strong Correlation between Saudi Arabia GDP US$ and WTI World Annual Average Oil price as seen by the Pearson Correlation of 0.969 highlighting Saudis GDP dependence on world oil price. Price and GDP taken from 1990 – 2013.

Correlations

GDP Oil

GDP Pearson Correlation 1 .969**

Sig. (2-tailed) .000

N 24 24

Oil Pearson Correlation .969** 1

Sig. (2-tailed) .000

N 24 24

**. Correlation is significant at the 0.01 level (2-tailed).

19 Saudi Arabian General Investment Authority. (2010). Easy place to do business. Available: https://www.sagia.gov.sa/en/Why-Saudi-Arabia/Key-Benefits--/Easy-Place-To-Do-Business/. Last accessed 25/11/2014.20 World Bank. (2014). Ease of doing business index. Available: http://data.worldbank.org/indicator/IC.BUS.EASE.XQ. Last accessed 23/11/2014.

15

Appendix (E): Critical Uncertainties Matrix

High

Scenario 4:Early Warning Signals:Deterioration in US $ against other currencyDeterioration of US current accountInverse US + Saudi business cycleNo outward shift in supply in line with demand

Strategic options:Disband pegged ER with USLink ER with basket of average EU currenciesIncreased use of open market operations to control Current account and inflation

Low

Scenario 1:Early Warning Signals:Lack of regulation/legislation over labour movementLack of political transparencyDesire for alternative clean energyOPEC supplies diminishing

Strategic options:Implicate more legislation regarding foreign labourAbnormal profits from oil price redirected to new industrySupply Side policies to limit inflation + long term prospects increase

High

Scenario 3:Early Warning Signals:Increase in Saudi labour unemploymentInflux of foreign labour with new industryDecrease in production capabilities in oil

Strategic options:Allow for a short term decrease in oil priceStimulate economy through investment in new industryTaxation on foreign labours revenue

Scenario 2:Early Warning Signals:Increased oil production/efficiency of competitorsLack of investment in education/ trainingSocio/political environment deterrent for investmentHigh Investment Exit Level

Strategic options:Government spending in EducationFiscal expansionary policy

Low

Appendix (F): LRAS, Mundell-Flemming and Resource Markets

16

Scenario 1 Implications

Increase in Long Run Supply

Scenario 2 Implications

Use of Expansionary Fiscal Policy

Scenario 3 Implications

A non-renewable natural resource market

.

17

1. In theory increases in Aggregate Demand leads to a shift in AD from (AD1-AD2)

2. This increases output/quantity from (Q1-Q2) however, also leads to an increase in the price level from (P-P1)

3. In order to facilitate a growth in output without a significant rise in the price level (inflation) Saudi Arabia will need to shift LRAS out to LRAS2

4. This can be done through supply side policies such as: Start-up of new businesses, more competition, mobility of labour and investment in training

5. Therefore with the shift in AD1-AD2 and a matched shift in Aggregate supply from LRAS1-LRAS2, Saudi Arabia will witness increased output Q-Q2 with only a small level of inflation (P-P2)

1. In theory, Increases in Government spending shifts the IS curve to IS1

2. This shifts (i – i2) (10%-12%) and increases output from (Y-Y2) (1000-1200)

3. Increase in interest rates will affect the capital account due to influx of ‘hot money’ seeking higher return on investment

4. This will have a Positive effect on the balance of payment account, appreciating the value of Riyal (However long term may cause a current account deficit)

5. The central bank, SAMA, will then sell local currency increasing the MS to avoid short term volatility which shifts the LM curve to the right with new equilibrium at point C.

6. This gives us a new output level at Y2 with a decreased interest rate at ‘i’

7. Therefore with open markets operations the use of fiscal policy can be effective in a fixed exchange rate economy like Saudi Arabia in increasing output

The value of marginal product of a non-renewable natural resource, VMP, and the marginal cost of extraction, MC, determine the market fundamentals price, point B. Demand and supply, which determine the equilibrium price, point A, are influenced by the expected future price. Speculation can bring a gap between the market fundamentals price and the equilibrium price

Scenario 4 Implications

Monetary ineffectiveness

18

The value of marginal product of a non-renewable natural resource, VMP, and the marginal cost of extraction, MC, determine the market fundamentals price, point B. Demand and supply, which determine the equilibrium price, point A, are influenced by the expected future price. Speculation can bring a gap between the market fundamentals price and the equilibrium price

1. LM + IS are simultaneously in equilibrium at point E

2. Theoretically, Government purchasing of bonds will increase the money supply leading to a downward shift in the LM curve (LM – LM1)

3. This leads to an increase in output from (Y-Y1) and a decrease in interest rates from (i-i1) = new equilibrium point E1

4. However, as the interest rate declines speculators will try to sell Saudi currency back to the central bank, resulting in capital outflow

5. Therefore, the change in current account is less than 0. The increase in output will also lead to more income in domestic economy – this will increase imports.

6. The combination of current account deficit + current account surplus will cause the Balance of Payments to equal less than 0

7. This will lead to depreciation of local currency – therefore under FXR policy the central bank sterilized intervention means they will buy back local currency in order to keep Exchange Rate at ‘i’ – Anything less/more than this will cause capital inflow/outflow which will adversely affect exchange rate between US + Saudi

8. The government then buy local currency decreasing MS which shifts LM up, increasing interest rates back to ‘i’

9. This leads to an increase in capital inflow until LM1 shifts back to LM with output reducing from (Y1-Y) and equilibrium returning to ‘E’