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OUTLOOK AND DIRECTIONat a CAGR of 5.0% in 2002-2007. GDP growth in 2008 accelerated to 4.2% from the previousyear’s 3.5%, despite a sharp slowdown in the second half of the year.KSA’s impressive economicprofile is supported by threemain factors• Regulatory andinstitutional reforms• Large petrodollar reserves• Strong demographicprofileThe progress of regulatory and institutional reforms has complemented the established robustmacroeconomic health of KSA. Saudi Arabian Monetary Agency (SAMA), the Kingdom’s centralbank, has been highly successful in ensuring price stability, while fiscal policy has built oncautious assumptions about the oil price. For years, the Saudi Government has used its largelyoil-driven surpluses to pay down the country’s external and public sector debt burden, whichwas accumulated during the period of low oil prices of 1980s and 90s. Domestic Governmentdebt in 2008 declined to 13.5% of GDP, compared with a peak of 119% in 1999.Although Saudi Arabia was a key beneficiary of the global imbalances that accumulated duringthe recent boom, it was relatively successful in preventing the mounting surpluses from derailingits macroeconomic stability. The greatest source of concern was the takeoff in inflation in 2006-2008, partly because the dollar peg limited SAMA’s autonomy in countering the price pressures.Otherwise, with some 90% of budget revenues coming from oil, the petrodollar windfall largelytranslated into large fiscal surpluses, which peaked at SR590bn, or 33.7% of GDP in 2008,compared with a surplus of 12.5% of GDP in 2007. The reserves amassed by SAMA and otherentities have placed the Saudi economy well, preparing it to weather even severe economicturbulence in the near future. SAMA’s net foreign assets reached SR1,702bn at the end of Nov08 from SR1,171bn in 2007.An important driver of the attractiveness of the Saudi economy is its sheer size and regionalimportance. For instance, with a market-cap of USD246.5bn as on 31 Dec 08, Tadawulaccounts for more than 45% of GCC’s aggregate market capitalization. From theperspective of investors, the Kingdom boasts the largest market in the region – a youngpopulation of just under 30 million – and some of the largest corporate houses. Major newinfrastructure projects with increased private-sector participation are under way, particularly inpower, water, housing, transport, roads, and railways.Oil price a short-term concernOil prices went on a rollercoasterride, touching the peakof USD147 per barrel and thendropping to USD40 per barrelduring 2008Until recently, the rally in oil prices seemed almost unstoppable with especially emerging marketdemand – typically less price sensitive due to price controls and subsidies – looking extremelyrobust. Nonetheless, since an all-time high of USD147 per barrel of oil in July 08, the oil marketdynamic had experienced a complete reversal. Heightened levels of uncertainty about theextent and duration of the global crisis have weighed on market sentiment. As a result, oil pricestemporarily dipped below the USD40 mark. However, recent months have been characterizedby a relative stabilization and even a recovery of the oil price.Slow replacement andchallenging topographies foroil extraction point towards apossible rebound in oil pricesEven if we see a relatively severe and drawn-out global economic crisis, we believe that the oilmarket downturn will be limited in duration. A number of structural factors are pointing to rapidlytightening markets. In the current environment, insufficient investments are being made into oilproduction globally to replace the production lost from mature fields, which are currentlydeclining at the rate of 5% or more a year. The International Energy Agency (IEA) recentlyfound that even with stable demand for oil up to 2030, production capacity would have to beincreased by 45mn barrels per day. Problematically, much of the new production is in areas thatare remote and in challenging geographic or climatic conditions. Moreover, the reserves are forthe most part controlled by national oil companies who may be swayed by their controllingGovernments’ desire to affect the price outlook.JUNE 2009SAUDI ARABIA FACTBOOK7