BMI's Executive Summary

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From Q108 we will be calculating the Commercial Banking Business Environment Rating (CBBER) for each of the countries surveyed by BMI. This will permit a more systematic and comprehensive comparison of the conditions within the banking industries of the various countries than was possible in the past. For each country, it will also facilitate a comparison of the conditions within the banking sector and conditions prevailing in other sectors.

Saudi Arabia's overall CBBER is 67.8. The equivalent figures for the USA and the eurozone are 84.8 and 81.4, respectively. Saudi Arabia's CBBER is higher than that of any other country in the Middle East and Africa except for South Africa. It is also higher than that of any of the majority of countries in Central and Eastern Europe that are surveyed by BMI.

Within the CBBER, the most important aspect is the (banking) market element of the limits of potential returns. This element accounts for 42% of the overall CBBER. Saudi Arabia's rating for this element – 56.3 – is lower than the overall CBBER and lower than the country element of the limits of potential returns – 63.6. this indicates that despite the size of its banking sector relative to those of other countries in the regions, Saudi Arabia's banking sector nonetheless remains under-developed in relation to the potential offered by the general wealth of the country.

Nevertheless, the CBBER highlights clearly what are the factors that are holding back Saudi Arabia's banking sector. The primary constraint is the volatility of the economy over the long-term.It should be noted that, as in the case South Africa, this in part the result of external risks and challenges. Regarding Saudi Arabian economic conditions more generally, the non-oil sector looks set to outpace hydrocarbon sector growth, although inflation remains a key risk to the country's growth prospects. The oil and gas sector, which accounted for 28.2% of GDP in 2006, continues to be the mainstay of the Saudi Arabian economy, accounting for 90% of export revenues and over 70% of budgetary revenues. However, the non-oil economy has now overtaken hydrocarbons sector growth and should remain above it over the forecast period, to 2012. We see non-oil private sector growth averaging around 5% over the forecast period, with non-oil government sector expansion coming in just under 5%. According to the latest figures, non-oil government sector growth reached 6.1%, with private sector growth coming in at 6.3%.

Indeed, Saudi Arabia is the largest construction market in the Middle East. With surplus liquidity from in the inflow of petrodollars being ploughed into real estate, this is likely to remain the case. Moreover, the