Saudi Arabia's Economic Boom & Challenges Of Local/Regional Geo-Politics.

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BEIRUT - King Abdullah ibn Abdul-Aziz of Saudi Arabia is said to be more worried by the challenges of local and regional politics being faced by Riyadh than impressed by the note of the Saudi Arabian General Investment Authority (Sagia) that the kingdom has projects worth $624 bn in the pipeline to 2020 - i.e., "a boom of unprecedented proportions" if one is to measure today's money according to WTI crude oil's current price leaps between $96/b and above. The highest WTI price was reached in late 1979, when it was worth $109/b - in today's money adjusted for inflation and the value of the US dollar.

While prices of crude oil have risen four-fold since 2002, the costs of materials and projects have increased even more sharply in the past five years (see omt13SaudiProspSep24-07). The cost of building a complex refinery in Saudi Arabia has more than doubled since 2006 (see down14SaudiRefOct1-07). So the current economic boom in Saudi Arabia and the rest of the oil exporting world must be measured in that context (see omt19Venz&GlobalProspNov5-07).

The challenges of regional politics which Saudi Arabia and its five partners in the Gulf Co-operation Council (GCC) face are led by Iran's nuclear and geo-political ambitions, which the US calls the most serious in the world. Iran's Shi'ite theocracy leads an axis of anti-US forces, including an 'Alawite/Ba'thist regime in Damascus hostile to Riyadh, with Tehran now controlled by supremacists whom moderate critics call "as dangerous as Hitler's Nazis" and who seem to want confrontation with the US (see news18-IranLarijaniQuitsOct29-07).

Saudi Foreign Minister Prince Saud al-Faisal on Nov. 1 said Riyadh was calling on Iran to respond to a 2006 GCC proposal for a joint uranium enrichment venture outside the Middle East, the first regional attempt to defuse Tehran's nuclear crisis. He said this would satisfy Tehran's right to nuclear technology while providing assurances that Iran's programme would not produce nuclear weapons.

OPEC's mid-November summit conference in Riyadh will be an occasion for King Abdullah to urge Iranian President Mahmoud Ahmadi-Nejad, who is a front for the supremacists, to consider the GCC proposal for the sake of peace in the region. Riyadh and Tehran have one common concern which is to avert a Sunni-Shi'ite war in this potentially explosive part of the Muslim world.

The most explosive zones in the cold war between a US-led alliance and the Iran-led axis are Iraq, the Gulf with Iran occasionally reviving claims to Bahrain and occupying three strategic UAE isles, Lebanon and Fatah-Vs-Hamas. The US is acting to defuse a serious tension between Turkey and Iraq's Kurdistan (see ood-4IraqKurd-PartitionOct29-07 and sbme5-IraqSunnisNov5-07).

Locally, the Saudi government is at war with Neo-Salafi militants of al-Qaeda whom it calls terrorists. King Abdullah on Oct. 29 told the BBC the challenge of terrorism was a long-term problem which may not be resolved in 20-30 years. He said the Saudi authorities earlier in that week had arrested a number of Neo-Salafi suspects and that the process will be ongoing for a long time.

A construction momentum in Saudi Arabia features multi-billion-dollar projects to meet pressing social needs and upgrade infrastructure. The boom is less visible than in the smaller GCC neighbours, such as Dubai and Qatar, but the needs and the numbers are massive - thousands of kilometres of new roads and railways; billions of dollars of water, sewerage and power plants; and 4m housing units over the next decade, with investment of $320 bn needed in housing through to 2020.

Economists put the value of projects announced so far at more than $300 bn, with the construction sector growing at about 7% and expected to sustain similar or higher growth through to at least 2010.

The FT on Oct. 29 quoted John Sfakianakis, chief economist at the Saudi Arabian British Bank (SABB) as saying: "If you look at the sheer numbers in Saudi Arabia the amount of project work that is required...it is much more than what is happening in the rest of the [GCC] region".

King Abdullah on Oct. 29 began a tour of Europe with a state visit to the UK. Through the week, he and his 400-man delegation - including a posse of businessmen - have showcased the boom and the opportunities it offers. A swathe of public and private investment is providing opportunities for foreign and local investors, including a flagship project to build six new "economic cities".

In 2006, Sagia granted licences to foreign companies for projects with a value of $65 bn. Sagia officials say in 2007 it is expected to reach $75 bn. The hope is that the boom will have a multiplier effect on non-oil private-sector growth, develop infrastructure which is in need of repair following periods of little or no growth in the 1980s and 1990s and provide a platform for a more diversified economy.

Despite its image as a vastly rich country boasting 25% of the world's known oil reserves, however, Saudi Arabia faces huge challenges as it seeks to improve services, reduce its dependence on oil, broaden the economy beyond the main centres, improve the skills of Saudi workers and tackle unemployment, which is about 12%.

The kingdom has the GCC's largest population, with 24m people (including some 6.5m expatriate workers). But its GDP per capita is lower than the other five GCC states, with the exception of Oman, according to McKinsey. McKinsey says historically, Saudi Arabia has invested in infrastructure at a rate of about 17% of GDP but now it is about 30-35%.

One of the key differences between this boom and that of the 1970s is the participation of the Saudi private sector, from cement companies ramping up production to small and large building contractors. Still, companies have been slow to realise the boom's potential. Gassan al-Kibsi at McKinsey says: "The capacity for them to deliver against what's going on in a competitive way is low. There are maybe only three or four who have the institutional skills and who can service the cycles in the construction industry. That's why any large project that's not with one of those few Saudi companies is looking for construction partners from outside".

The kingdom faces hurdles as it implements its plans, including skilled labour shortages, rising costs and supply bottlenecks. In August Saudi inflation reached 4.4%, a seven-year high, partly because of rising rents. These could affect the pace of economic growth and cause some projects to be scaled back. But Sa'id al-Shaikh, chief economist at National Commercial Bank (NCB), says: "We keep track of a number of projects and it has been rising and with oil prices remaining high...we will probably see a continuation for this kind of phenomenon until 2015".