Previous Quarterly Editions
Expropriation Risk: 40 40 38 38 Political Violence Risk: 55 55 56 58 Terrorism Risk: 50 50 48 48 Exchange Transfer and Trade Sanction Risk: 35 36 36 38 Sovereign Default Risk: 36 38 38 38
TREND ▲ OUTLOOK ▲
Rising tensions in the Gulf have led to warnings from Tehran about the risks to Saudi and Western interests from President Trump’s policy of applying maximum pressure on Iran. Both sides want to avoid conflict but the risks of a confrontation breaking out unintentionally remains high. Within Saudi Arabia, Crown Prince Mohammed bin Salman (MBS) is now in an unassailable position as the ruling family rallies behind him in the wake of the Khashoggi affair. The crackdown continues on dissent from any direction, including conservative opposition to his campaign to foster more moderate practices. Despite some disillusion over the fitful delivery of Vision 2030, Saudis below the age of 30 welcome MBS’s policies of opening up society to more forms of entertainment and doing more to boost women’s rights. In August, the government began allowing women over the age of 21 to obtain passports and travel without a male guardian's permission. The move is in part a response to the recent damage to the Saudi image abroad, not least in the US Congress, which has forced President Trump to veto several efforts to curb some arms deals with the kingdom. In return, the White House expects Saudi Arabia to voice support for its new Middle East peace plan. Meanwhile, the government has gained favour with Moscow by opening the country to Russian grain. The IMF has commended Riyadh’s progress on economic reform but urges more effort to enhance growth in the non-oil sector, a key generator of jobs for young Saudis. Youth unemployment is still too high despite Saudisation efforts that saw one million foreign workers return home in 2018. Foreign Direct Investment (FDI) remains disappointingly low whilst the outflow of capital has jumped, partly as a result of extensive overseas investment by the Public Investment Fund (PIF). Saudi leaders understand the reasons for the fall in FDI but still regard the opportunities in the country as too good for investors to resist. However, they need to do more to implement transparent and consistent commercial regulations while limiting state intervention in the economy. Saudi Arabia and the UAE continue to boycott Qatar and support General Haftar in Libya, while remaining concerned about the popular movements against the authoritarian regimes in Algeria and Sudan. Relations with Iraq continue to improve as Saudi Arabia seeks to reduce Iran’s regional influence. The Huthis have recently used drones as they step up targets on southern Saudi Arabia as the war in Yemen continues.
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The stock market has been greatly boosted by its admission into the MSCI Emerging Markets Index in May, following its earlier entry to the FTSE, Russell and S&P Dow Jones indices. In June, the Capital Market Authority removed the 49% limit on corporate ownership of listed companies by foreign strategic investors, although shares purchased must be retained for at least two years. The government has also begun a scheme that will enable expatriates to acquire privileged residency status on payment of a fee. The scheme is aimed at high-grade professionals and businesspeople, with a view to providing them with greater incentives to invest in property and business ventures. The PIF has borrowed ten billion dollars to invest in ways that are intended to encourage diversification in the Saudi economy. It intends to repay the money from the sale of its stake in SABIC. Saudi Aramco’s half-yearly earnings report in August showed profits down 12% year-on-year, and the chairman has been replaced by the head of the PIF. An initial IPO of 1-2% of shares on the local Tadawul exchange is now expected this year, with wealthy Saudis encouraged to buy, prior to a subsequent international offering in 2020.
The US has toughened its position against Iran, reinforcing its naval presence in the region and sending 1,000 troops to Saudi Arabia as part of pressing its demand for Tehran to curb its activities in the wider region. With Iran appearing determined to resist this pressure, the risks of conflict by accident will remain for the rest of 2019. Attacks by the Huthis on Saudi airports in Najran and Abha using Iranian-style drones will continue, with the number of targets likely to expand. In Yemen, the UAE has withdrawn its forces from the north, where they have been replaced by Saudis, but Riyadh will avoid ground fighting in terrain that favours the Huthis. There could be greater Saudi interest in a negotiated end to the conflict in the coming months, but MBS will need a conclusion that justifies its original intervention and does not reward Iran for backing the Huthis.
TREND ► OUTLOOK ▼
There has been only one small, unsuccessful terrorist attack so far in 2019, indicating that security authorities remain capable of dealing with the terrorist threat within the kingdom. The UAE is staying in Yemen to support counter terrorist activities against AQAP, which are now largely conducted by Yemeni forces. Rising tensions with Iran will affect the Saudi Shia but are unlikely to lead to violence so long as Shia leaders calculate that they have more to gain by supporting rather than opposing MBS’s policies, which include some steps towards ending anti-Shia discrimination.
TREND ▲ OUTLOOK ►
The IMF now expects growth to be below 1.8% this year, down from 2.2% in 2018, as a result of lower oil prices, the exodus of foreign workers, and the worrying regional outlook. The Fund wants to see further reforms to the capital markets, the country’s legal framework and business environment, and specific measures to boost small- and medium-sized enterprises. In July, the central bank followed the Fed and cuts its key rate by 25 basis points to 2.75%.
The recent softening of oil prices and a fall in output could lead to a higher than expected fiscal deficit of 5-6% this year, although this would still be an improvement on 2018. The current budget appears to assume that prices will stay in the 75-80-dollar range but they had fallen below 60 dollars by the middle of the year. Foreign exchange reserves, which reached an 18-month high in June, fell back slightly in July but remain above 500 billion dollars.
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