III. ECONOMIC TRENDS AND OUTLOOK

Summary

The strong, post-Gulf War growth of the Saudi economy ended in 1993.  GDP grew
by one percent in nominal terms, the slowest rise since the mid-1980s
recession.  Only the private sector continued its impressive post-war boom
last year, while the output of the oil sector fell for the first time since
1988.  Per capita income fell to $6,975.

Saudi Arabia recorded twin budget and current account deficits again in 1993,
in part because of negative developments in world oil markets.  The Embassy
estimates the budget deficit for 1993 to be in the $10 to $15 billion range,
little changed from the 1992 shortfall.  Financing that deficit added to the
country's growing debt burden, pushing the government's total debt to about
$80 billion at the end of the year.  In addition, the Embassy estimates the
Kingdom recorded a current account deficit of about $17.5 billion.  A larger
proportion of the current account shortfall may have been financed by a
reduction in the foreign assets of the government as the amount of capital
inflow from the banks and other private sector entities fell for the year.

The Saudi economy will likely record negative growth during 1994.  Most local
observers expect total output to decline between three and six percent in
nominal terms, the first decline in output since 1986.  Both the oil and
government sectors of the economy will shrink in 1994, and growth in the
private sector will be slower than seen since the post-Gulf War boom.

Saudi Arabia took a strong step toward controlling spending with King Fahd's
announcement of a planned 19 percent cut in the budgets of government
ministries.  Lower oil prices and revenues mean, however, that the Saudi
Government is expected to record another fiscal deficit for 1994 roughly equal
to the shortfalls of the past few years, although the deficit could be
lessened if recent oil price increases are sustained the second half of the
year.  Little improvement in Saudi Arabia's current account deficit in 1994 is
expected.  The tightening of liquidity in the banks, coupled with the
government's large need for capital, will add pressure to the already rising
domestic interest rates and may crowd out some private sector borrowers.

The private sector will be the only segment of the economy to
grow this year, but the rate will be slower than seen since the
post-Gulf War boom.  Per capita income almost certainly will fall below the
1990 average of $6,620.


The State of the Economy

Saudi economic growth slowed considerably in 1993.  GDP grew by one percent in
nominal terms to $122.2 billion, down significantly from the five percent
increase for 1992 and the slowest rise since the mid-1980s recession.  Taking
inflation into account, real growth was near zero for 1993.  Only the non-oil
private sector continued its impressive post-war boom last year, rising 5.1
percent in nominal terms and becoming the largest component of the economy.
The private sector has grown at an average annual rate of five percent for the
1987-1993 period.  Output of the oil sector fell by an estimated three percent
in 1993 because of a small reduction in volume and roughly 10 percent decline
in average prices.  It was the first decline in the oil sector and oil prices
since 1988.  Lastly, the growth rate in the government sector of the economy
slowed to an estimated 1.1 percent.  Per capita income fell by 2.4 percent to
$6,975, based on data from the 1992 census and a conservative population
growth rate of 3.5 percent.

The Saudi economy will be in a recession during 1994 caused by a decline in
oil prices and government efforts to control deficit spending.  Estimates
vary, but most local observers expect total output to decline between three
and six percent in nominal terms for the year, which would be the first
decline in output since 1986.  The continuing weakness in the world oil market
will reduce the oil sector's contribution to Saudi GDP in 1994. Similarly, the
government sector contribution will also fall as it reduces spending to adjust
to lower oil revenues.


Fiscal Policy and Public Debt

Saudi Arabia recorded its eleventh consecutive government budget deficit in
1993 because of the weakened oil market and continued high levels of
government spending.  The Saudi Government has not published official data on
its fiscal accounts for 1993, but the Embassy estimates the shortfall to be in
the $10 to $15 billion range, over 30 percent greater than the deficit
budgeted and roughly 10 percent of GDP.  The government budget deficit for
1992 was $10.5 billion, according to provisional data from the International
Monetary Fund.  Total budget revenue last year fell to about $40.0 billion,
with oil income making up 75
percent of these revenues.  Saudi Arabia planned to spend $52.5 billion in
1993, and most observers estimate that outlays were within five percent of
that target.


Saudi Arabia's budget deficits are structural in nature.  Petroleum continues
to be the critical source of revenue--averaging 75 percent of all income over
the last five years--with customs duties and investment receipts comprising
much of the remaining government revenue.

The income and profits of Saudis are not taxed, except for a voluntary 2.5
percent annual religious donation.  The government grants tax holidays to many
foreign investments and therefore receives limited fiscal benefit from the
growing private sector.  At the same time, the government continues to spend
on a broad social support program, which includes free or heavily subsidized
basic utilities, social services, and agricultural products.  Spending on
these services-on both a recurrent and capital basis--is growing because of
the rapid population growth.

Year-end 1993 data from the commercial banks suggest that only a small
amount--about $12 billion--of the roughly $80 billion total debt is banks'
holdings of government development bonds and Treasury bills.  Most of the
remaining government debt is "soft financing" provided by Saudi Arabia's
autonomous government institutions--the General Organization for Social
Insurance, the Pension Fund, and the Saudi Fund for Development--or direct
loans made by the local banks.  The Saudi Government's foreign debt at the end
of 1993 was limited to only $4.5 billion, from a loan signed in May 1991.

The Saudi Government has embarked on a major austerity program for 1994 but
nonetheless will record another budget deficit this year.  The government
plans to reduce spending to $42.7 billion, 19 percent less than planned for
1993, a level that is less in real terms than actual spending in 1989.
Despite these planned cuts, which are being observed throughout the economy,
most local observers expect the fiscal deficit for 1994 to be roughly equal to
the shortfalls of the past few years, barring a major and sustained
improvement in world oil prices during the second half of the year.  Financing
the 1994 deficit could push total debt above $90 billion by the end of the
year, an amount equal to over 75 percent of GDP.

The Saudi Government is beginning to address its fiscal problem.  King Fahd
has openly endorsed privatization, a major step toward budgetary reform with
long-term fiscal benefits, on two occasions in 1994.  Most local analysts
believe it will take time to evaluate the state's assets and decide on the
mechanism to conduct the sales, postponing the start up of privatization to
the next two-to-three years.  Recent statements by government ministers imply
that other fiscal reform measures, especially raising utility prices, are not
likely to be implemented soon.


Balance of Payments and External Accounts

Saudi Arabia realized a small improvement in its current account position in
1993 but nevertheless saw its eleventh consecutive shortfall.  The Kingdom's
current account fell over 15 percent to $17.5 billion.  The Embassy estimates
that Saudi exports fell 10 percent to $42.0 billion--over 90 percent from
petroleum--while imports declined 15 percent to $25.7 billion.

The resulting $16.3 billion merchandise trade surplus is slightly less that
the surplus recorded in 1992.  Net service payments abroad remained high,
however, and more that offset the balance of trade surplus.

A larger proportion of the 1993 current account deficit may have been financed
by a reduction of the foreign assets of the government.  Unlike the past two
years, the net foreign assets of the commercial banking system were
essentially unchanged in 1993; the banks repatriated $4.6 billion in 1992 but
that amount fell to only $37 million in 1993.  In addition, most domestic
observers of the Saudi economy noted a decline last year in the amount of
private capital repatriation, which totalled an estimated $14 billion in 1992.
With less capital inflow from the banks and other private sector entities, it
is likely that the official bodies--the Saudi Arabian Monetary Agency (SAMA)
and the autonomous government institutions--had to liquidate more of their
foreign assets than they did in the past few years.

The amount and liquidity of SAMA's foreign assets remain a question mark.
SAMA managed almost $54 billion at the end of 1992.  According to Article 6 of
the Kingdom's currency law that requires all Riyals be covered fully by gold
or foreign exchange convertible to gold, roughly $20 billion of SAMA's
overseas portfolio is set aside in the issue department as backing for the
currency.  Questions remain as to how much of SAMA's remaining foreign assets
are available for use to finance future current account deficits as some of
them are reportedly held against letters of credit or commercial bank deposits
or include claims against developing countries.

There will be only a small improvement in Saudi Arabia's external payments
deficit in 1994.  Most observers forecast a reduction in total trade, with a
likely decline in the merchandise trade balance.  The deficit on net services
payments is also likely to decline, primarily because of a reduction in
private transfers and freight costs.


Domestic Financial Sector

Saudi Arabia's 12 commercial banks continued to be highly profitable in 1993.
Total profits rose 12.7 percent to $1.2 billion for the 11 banks that have
reported results for the year.  These banks used roughly half of their 1993
profits to increase their capital and reserves, which increased their
aggregate capital-to-asset ratio to 10.3 percent.  Most of the Saudi banks are
well capitalized:  nine of the 12 banks have capital-to-asset ratios above the
eight percent recommended by the Bank for International Settlements.

The consolidated balance sheet of the commercial banking system grew by 10.4
percent to $81 billion at the end of 1993, although most of the increase
occurred in the first quarter of the year.  According to statistics published
by SAMA, claims on the private sector rose 18 percent to $27.4 billion and
accounted for most of the increase in bank assets.  Meanwhile, total deposits
rose by only three percent, the lowest growth since the Gulf War, to $48.9
billion, most of which came from higher foreign currency deposits.  The
credit-to-total deposit ratio of the consolidated banking system rose from 49
percent for the end of 1992 to 56 percent for the end of 1993, which indicates
a reduction in liquidity in the banking system.

Meanwhile, the two-year long post-Gulf War bull market for Saudi shares came
to an end in 1993.  According to official statistics, the all-company share
index closed 1993 down 5.1 percent from the start of the year, the first year
over year fall since 1990.  The index (1985=100) opened 1993 at 188.87 points,
reached its high for the year at 200.54 points in April, and ended 1993 at
179.33 points.  Most individual sector indices recorded greater percentage
declines for 1993:  The agricultural index fell 28.3 percent, the industrial
index fell 14.2 percent, the services index fell 9.7 percent, the cement index
fell 7.9 percent, and the bank index fell 1.5 percent.  Only the electricity
sector index recorded a gain, rising 3.7 percent for the year.

Local financial markets have been weak in the first part of 1994.  The
domestic banks will continue to be profitable, but a continuing slowdown in
deposit creation, partly caused by the recession, and strong demand for credit
is drawing down the liquidity of the banking system.  The continuing
tightening of liquidity, coupled with the government's large need for capital,
will add pressure to what are already rising domestic interest rates and may
crowd out some private sector borrowers.  Meanwhile, the local shares market
has continued to fall throughout most of the first half of 1994, with the
closing value
of the all-company index in early June down over 18 percent from the level
seen at the end of 1993.


Inflation and Monetary Policy

Inflation remained low in Saudi Arabia in 1993.  The consumer price index
(CPI) rose 1.1 percent last year, a reversal from the 0.1 percent price drop
seen in 1992.  According to partial year data, slight increases in food,
housing, and transportation and communication costs were the major cause of
the increase in the CPI.  Saudi Arabia's money supply fell slightly in 1993,
the first annual decline since 1988.  M1 was $33.3 billion at the end of last
year, with both currency in circulation and demand deposits ending 1993 less
than at the start of the year.  Meanwhile, M2--adding time and saving
deposits--fell 0.8 percent to $46.1 billion.

The government's primary method of controlling money supply is the sale of and
repurchase agreements for two- to five-year development bonds and four- to
52-week Treasury bills.

Riyal interest rates in the Saudi banking system closely follow US Dollar
interest rates, traditionally with a small premium charged on the riyal.  For
1993, the premium for riyal interest rates over the same-term dollar rates was
higher than normal because of speculative pressure on the Saudi currency in
the latter part of the year.


Principal Growth Sectors

Manufacturing
Manufacturing grew considerably during and after the Gulf War, as many firms
took advantage of subsidies and soft loans from the government.  The aim of
the current Saudi Five-year Plan is to continue to help create a diversified
economy, one not so highly dependent on oil.  According to a report from the
Saudi Government, the incentives have led to the creation of over 2,400
manufacturing firms, mostly light manufacturing such as metal fabrication,
woodworking, food processing, and plastics.  Under Saudi offset guidelines,
several joint venture companies have been established with foreign technology
partners in more sophisticated areas, particularly related to defense and
aviation.  These include computer software, avionics, aircraft repair,
aircraft engine repair, radios for military use, and other electronic
componentry.  Joint stock companies have been particularly active in
developing the downstream petrochemical

base of the Kingdom, and consequently a great deal of the petrochemical needs
are now met domestically.

Mining
The current metal mining activity, at the Mahd Ad Dahab and the Sukay Barat
gold mines, creates demand for US$ 40 million a year of imported mining
equipment.  Main suppliers are Caterpillar, Euclid, Wabco, PXH Loaders,
Ingersoll-Rand, Atlas-Copco, FMC, Hitachi, Komatsu and Tamrack.

The Saudi Ministry of Petroleum and Mineral Resources is spearheading the
initiative to develop new mines to produce iron, phosphates, bauxites and
precious metals.  Once these major projects are underway in the next two to
three years, importation of mining equipment should exceed US$ 200 million a
year.  The Ministry plans to start negotiating contracts with American and
other Western mining companies during Summer 1994.

Travel and Tourism
American destinations are preferred by Saudi travellers, thanks to the fixed
exchange rate between the dollar and the riyal, and their educational and
business ties with the U.S.
In 1992, over 100,000 travellers flew to the U.S. on Saudia Airlines, and
another 100,000 Saudis flew to the U.S. on European carriers.

Saudi Arabia's 800 travel agents book about 30% of all travel to the U.S.,
half of which involves tour packages.  The majority of Saudis still prefers to
rely on individual travel arrangements.

Lengthy stays are typical: 47% stay 15 to 30 days, and 37% from 30 to 90 days.
Average daily expenditures are also above average:  the typical family group
is estimated to spend US$ 10,000 in addition to airfare.

The 1993 air transportation agreement between the U.S. and Saudi Arabia allows
American carriers to operate eight passenger and six cargo flights between the
two countries.

Food and Agriculture Sector
Saudi agriculture has shown rapid growth in production over the last several
years, while food processing has only recently begun significant expansion.
The growth in agricultural output has been led until recently by wheat , but
also with notable increases in livestock, vegetables and fruits.  Much of the
expansion has relied on imported technology and production inputs.  Wheat
production is now declining, but output continues upward for most other crops
and livestock.  Thus, the prospective demand for inputs is mixed, with a weak
near term outlook for large machinery and irrigation equipment, but likely
growth in demand for inputs related to the livestock or fruit and vegetable
segments.  Imports of most food and bulk agricultural products, other than a
few items such as wheat, eggs, and dates, are continuing at a strong pace.
Food processing has started significant growth, but remains modest.
Investment in food processing, handling, and storage equipment is continuing.


Trade and Investment Barriers

Some industries are 100 percent state owned, such as oil and gas companies
and, therefore, are closed to the private sector.  All mineral rights belong
to the government, but may be granted to a private company as a concession.
Only Saudi nationals are permitted to engage in trading activities.  All
industrial enterprises are open to non-Saudis, and they can also trade in the
products they manufacture.  Current regulations do not require a foreign
investor to obtain a Saudi partner.  However, an FCIC (Foreign Capital
Investment Committee) license will be extremely difficult to obtain without at
least 25 to 50 percent Saudi ownership.  In the oil and banking industries,
foreign participation cannot exceed 40 percent.  Non-Saudis are not permitted
to register as commercial agents.  A minimum 25 percent Saudi participation is
required to qualify for certain investment incentives.

The Companies Regulations Law provides for the formation of wholly
foreign-owned branch office registrations; however, it is difficult to obtain
an FCIC license for such branch offices.  Foreign entities are not permitted
to own real estate, and Saudi companies with partial foreign ownership are
only permitted to own real estate if it is stated in the FCIC license.
Finally, the Ministry of Defense and Aviation (MODA) has required foreign
defense contractors to participate in the economic offset program.  This
program requires the company to invest in industrial projects involving the
transfer of modern technologies.  In order to qualify under this program, MODA
will ask the competing companies to commit themselves to offset a certain
percentage of the value of the import content of their contract by investing
in high-technology joint ventures with Saudi investors.  Investments must be
approved by the Offset Committee.

The Saudi Arabian Monetary Agency (SAMA), the Saudi central bank, regulates
and controls the Saudi banking sector.  Financing is available to Saudi and
non-Saudi businessmen and entities.  Offshore banking and trust operations do
not exist in Saudi Arabia and there is no legislation that permits the
establishment of these operations.  The securities market is still not highly
developed.  Banks are the sole entities that may act as stockbrokers for
publicly traded shares or for joint stock companies.

Insurance companies, except for certain forms of mutual insurance
organizations, are not permitted under Saudi law.  The only insurance company
registered in Saudi Arabia is the National Company for Cooperative Insurance,
which is government owned and operates in accordance with Islamic rules and
regulations.  Branches of foreign insurance companies currently operating in
the Kingdom are doing so outside the strict letter of the law, although there
does not seem to be any formal objection to their presence.  Many contracts
signed locally include provisions requiring insurance.


Major Local & Third Country Competitors in Specific Sectors

Japan is particularly competitive in the process control industries,
desalination, the petrochemical sectors, automobiles and trucks, and consumer
electronics.  Great Britain is particularly competitive in the defense sector,
engineering services, processed foods, and pharmaceuticals.  France is
particularly competitive in consumer luxury goods, defense, foodstuffs, and
home furnishings.  Germany is competitive in industrial process controls,
turnkey industrial projects, motor vehicles, chemicals, pharmaceuticals, and
machine tools.

Local competition is strong in such areas as operations and maintenance,
cement, metal fabrication, basic engineering and construction, some furniture,
some foodstuffs, and, of course, petrochemicals.


Infrastructure Situation Re: Goods/Service Distribution

Saudi Arabia possesses a good network of infrastructure to facilitate the
distribution of goods and services.  The business centers of Riyadh, Jeddah,
and Dammam/Al Khobar/Dhahran each have an international airport served by a
variety of international airlines with passenger and cargo capabilities.  Air
travel is preferred for inter-Kingdom passenger travel with public service
restricted to the sole national airline, Saudia.  Most inter-Kingdom freight
is hauled by truck over a good highway system linking the major business
centers.  One rail line carries passengers and freight between Dammam and
Riyadh.  Jeddah and Dammam are the main international seaports for moving
containerized and bulk cargo.  Other ports are specially configured for more
specialized uses, e.g. Ras Tanura for oil shipping, and Jubail and Yanbu for
serving the petrochemical sector and heavy industry.

Modern communication facilities are available including telephone, fax, telex,
and courier services.  U.S. database log-on is available through a Ministry of
Post, Telephone and Telegraph trunk line service, Al-Waseet.  Use of private
satellite communication transponders is not allowed.  Facsimile machines are
heavily utilized in the conduct of business.  There is currently no cellular
phone system (due in 1996) and radiophones are restricted.  There is a
shortage of telephone lines which makes it very difficult to obtain lines for
a new business or residence.  The government is embarking on a large-scale
telecommunications upgrade program but the shortage is expected to worsen
through 1995.


Major Infrastructure Projects Underway

A number of major infrastructure projects are underway in the areas of power
generation, water desalination, airport improvement, communications, and
public transport.  These include:

Telecommunication: The Saudi PTT expansion (TEP 6) contract for switching
lines, estimated at $4 billion, has been awarded to  AT&T via a letter of
intent.  Contract negotiations are underway, and the U.S. firm is expected to
complete 1.5 million telephone lines, 200,000 cellular units, and a fiberoptic
network across the Kingdom.

Power: The Saudi Consolidated Electric Company in the Eastern Region intends
to build a 2400 MW generation facility in Gazlan. The Saudi Consolidated
Electric Company in the South envisages a 1000 MW generation facility for
Asir/Jizan, phase two, another 1000 MW power station in Shuqaiq, and a 100 MW
generation facility in Tihama.  The Saudi Consolidated Electric Company in the
Western region also plans a 1000-2500 MW thermal power plant in Shuaiba.  The
Saudi Consolidated Electric Company in the Central region is still negotiating
a $1.2 billion, 2400 MW power station for Riyadh.

Desalination:  The Saline Water Conversion Company is implementing the third
phase of a $462 million reverse osmosis/power plant in Al-Khobar on the East
Coast of Saudi
Arabia.  The Royal Commission for Jubail and Yanbu is building a 2.5 million
gallons per day desalination plant for a contract valued at $170 million.