MIDDLE EAST ECONOMIC TRENDS AND FORECASTS,  Lauren Rossman, June 30, 1997

Saudi Arabia continues to ride the wave of unexpectedly high oil prices, but deep structural problems remain and will likely drag the Saudi economy down in the next few years. It appears likely that Crown Prince Abdullah will succeed to the throne when King Fahd dies, or sooner if the king chooses to step down voluntarily. This change could mean a significant shift in Saudi economic policy, which currently seems in danger of stagnating.

Progress on sensitive reforms is especially slow. This reflects in part the fact that technocrats, who are more tentative about their authority than the princes, tend to be in charge of these ministries. Without active direction or approval from the king, they are unlikely to implement policy, and as a re-result, plans for further privatizing state enterprises, increasing foreign access to the country's equity markets, and reducing government subsidies will likely remain on the drawing board. Moreover, the recent rise in oil prices is reducing the urgency to proceed with reform programs.

The 1997 budget announced no new initiatives and if King Fahd is in full control this time next year, a similarly cautious but unambiguous approach- to fiscal policy is anticipated. However, contrary to some reports, analysts have recently noted that the government is moving to open up to the private sector. Liberalization of the economy is also likely to be brought closer by Saudi Arabia's attempts to join the World Trade Organization.

In 1996, the first sustained rise in oil prices came since their sharp drop in 1986. The price of Saudi Arabia's benchmark crude, Arab Light, increased to an average of $20/b, up from $16.73/b in 1995. The rise in oil prices is the major factor helping to ease the imbalances in Saudi Arabia's internal and external accounts. The petroleum sector continues to account for approximately 35 percent of GDP and 90 percent of exports, and there remains a consensus that, in the words of one expert, the government remains too dependent on fickle oil prices.

But the expected oil price decline is likely to curb both government and private spending. Real import growth is forecast to slow as a result of a lag from the surge m oil prices. Thus in 1998, a combination of cautious fiscal policy and lower oil prices is expected to lead to only modest real GDP growth of 1.5 percent, down from 5 percent in 1996.