Abstract
The three months to the end of December brought several themes to the fore.
One is the slight decrease in
domestic terrorist activity in the face of
the continued, systematic bolstering of security services by the
Riyadh
government. Notwithstanding this, Saudi Arabia remains unstable, with
significant activity by
anti-regime militants and the continuation of
threats of violence, especially against foreigners.
Saudi Arabia’s
defence industry is small and underdeveloped – surprising when one
considers the size
and wealth of the country. The ongoing targeting of
overseas employees by anti-regime militants could
damage the defence
industry, discouraging skilled employees from staying in the country. However,
at
the present time, multinationals maintain strong representation within
the Kingdom.
Another key theme was the doubts raised over the current
stand-off between the West and Iran over
Tehran’s nuclear programme,
which continues to concern Saudi Arabia, although the international
attention paid to the issue will be reassuring. Riyadh has been diplomatically
active, supporting the
Annapolis Middle East peace initiative trying to
mediate in the Lebanese political crisis, seeking a similar
balancing role
in Washington’s stand-off with Tehran over the latter’s nuclear
programme, and
continuing to exert a moderating influence within the
Organisation of the Petroleum Exporting Countries
(OPEC).
The outcome
of the instability within Saudi Arabia has been the burgeoning of a lucrative
market in
industrial and commercial security equipment. However, with the
domestic military-industrial base still
weak, the majority of equipment is
sourced from outside the country. Saudi Arabia has traditionally relied
heavily on foreign sources of arms, and looks set to continue to do so in the
medium term. The US has a
large Foreign Military Sales (FMS) programme in
Saudi Arabia, which affords the government the ability
to purchase
military items without bureaucratic delays. Recent surges in oil prices have
allowed for new
procurements, and the recent announcement of US
preparations to provide Saudi Arabia with US$20bn of
arms over the next
decade should see that the Kingdom’s defence imports remain high.
For the time being, we continue to expect that the Saudi government will
increase defence spending by
5% annually, in real terms, over the coming
years. Absolute increases will depend in part on how the
country’s
economy fares in the face of the Global Financial Crisis. Thus far, the
economy has avoided
recession, but our oil price forecast for 2009 at
US$75.00/bbl implies a significant but not disastrous
downturn for the
Saudi economy.
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