On the domestic politics front, Saudi Arabia faces a number of challenges over the coming year or so, with the economic downturn likely to increase dissatisfaction and inter-communal tensions. The violent clashes between protesting Shi'a Muslims and the security forces earlier in the year highlighted the resentment that continues to brood below the surface of Saudi society. For Saudis to protest in this manner, given the reputation of the security services and jails, suggests that dissatisfaction is running deep, in spite of King Abdullah's attempts to reach out to the nation’s different communities. In another significant development, Prince Nayef looks likely to be appointed crown prince, signalling a potentially more conservative and hawkish direction over the coming years. This may be positive for stability in light of the unrest.

On the foreign policy front, it is noteworthy that Saudi Arabia, following the lead of the US, has reinstated its ambassador to Syria. Despite renewing sanctions against Syria, on June 24, the US announced it would send an ambassador to Damascus for the first time in four years. Saudi Arabia followed Washington’s lead on July 6, reappointing an ambassador to Syria for the first time since 2008.

With respect to macroeconomic considerations, we still see positive growth in Saudi Arabia on the back of very strong finances, good domestic demand dynamics, early indications of a pick-up in sentiment, and the government's bold monetary and fiscal policy stimuli. We see Saudi Arabia managing to grow by 0.5% in 2009, with the rate bouncing back to 2.7% in 2010 and then continuing to recover gradually after that (albeit not returning to plus 4% rates of growth within our ten-year time horizon). Qatar is the only other state in the GCC for which we foresee positive growth in 2009.

Considering the size and prosperity of the country, Saudi Arabia’s defence industry is underdeveloped.

The country relies heavily on arms imports despite previous efforts to create a degree of self-sufficiency in its defence production. The country’s geo-strategic position and pro-Western outlook have allowed it to receive high-technology weapons systems from the major supplier countries, including the US, the UK and France.

The most significant development to affect the country’s defence industry has been the sharp deterioration of personal security for overseas workers. The attacks in Khobar and the impossibility of guaranteeing security (a raid on ExxonMobil’s Yanbu complex was undertaken by employees with security passes) have led to a greater fear among expatriates and pressure to leave the country.

In the last quarter, we introduced an innovative ratings system entitled the City Terrorism Rating (CTR).

The CTR provides an at-a-glance assessment of the risk of a terrorist attack in a given city by weighing a number of significant measures. At present, we assess the CTR for Riyadh at 80.0 – the seventh highest of the 23 rated cities in the Middle East and Northern Africa region. The CTR is based on a detailed Terrorism Rating (TR) for the country taken as a whole, and an assessment of the prevalence and threat of terrorism for the city in question. This latter assessment takes into account the frequency of past attacks, whether the city is a target for terrorist activity, and the likely extent of possible terrorist attacks.

With an al-Qaeda threat already looming over the country, the question of the spill-over of violence from Iraq is a real source of anxiety for the authorities. Al-Qaeda has a stated goal of toppling the House of Saud, which it deems an infidel regime.