Previous Quarterly Editions
Expropriation Risk: 38 38 40 40 Political Violence Risk: 56 58 56 56 Terrorism Risk: 48 48 46 48 Exchange Transfer and Trade Sanction Risk: 36 38 38 40 Sovereign Default Risk: 38 38 39 42
TREND ▲ OUTLOOK ▲
The failure of Riyadh and Moscow to reach an agreement in March 2020 on the level of production cuts produced an immediate and dramatic fall in global oil prices. Saudi leader Muhammad bin Salman (MBS) responded by ordering Aramco to ramp up production just as global demand was being hit by the COVID-19 virus. In addition, Saudi Arabia has also settled its long-term problem with Kuwait over competing claims to their Neutral Zone, and this is adding an extra 500,000 barrels a day to its production capacity. Other recent plans to boost output include developing a major gas field and even starting to exploit shale oil. It is now clear that MBS sees that his country’s future lies in controlling the oil market, rather than its traditional role of the swing producer who helps to stabilise prices. Although he was confident that Russia would eventually want to compromise on production levels, this push for greater production underestimated the importance of shale oil to the US. As a result, he faced unexpectedly strong pressure from the Trump Administration for OPEC and OPEC+ to reach a production agreement that would stabilise the market. The subsequent deal reached in April 2020, which will see an overall production by signatories that is roughly equivalent of 10% of global oil demand in 2019, will also help limit the danger posed by low prices to a Saudi budget for 2020 that was based on an oil price of 60 USD a barrel. He will also have been aware of the domestic costs of COVID-19. Riyadh has won praise for its efforts to control the spread of the virus through school closures, travel restrictions and lockdowns within the kingdom, and its readiness to deploy a stimulus package of 3.2 billion USD in the first instance was followed by two further packages of 2.4 and 4 billion USD in April 2020. However, the impact on the politically and financially important Hajj pilgrimage in July 2020, when 2.5 million pilgrims were expected, is already evident. Although MBS appears secure in his position, several senior Saudi princes, including a former Crown prince, were arrested or interrogated during March 2020 in what was probably a warning to members of the ruling family against any effort to block the succession of MBS to King Salman. In a separate move, some three hundred senior government officials and military officers have been arrested on corruption charges in a process that has been notably more transparent than the moves against a group of successful businessmen in 2017. Relations with Tehran remain tense but there has been no repeat of last year’s aerial attack on the kingdom’s refining complex at Abqaiq. This is mostly because it is now protected by the presence of US troops and missile defences but may also reflect Tehran’s conclusion that Riyadh now appreciates the Iranian capacity to inflict serious damage on the kingdom’s energy infrastructure. The Huthis have made important military gains in Yemen, further embarrassing Saudi support for what has become the losing side. MBS may have been hoping that chairing the G20 virtual summit at the end of March 2020 would repair his international image after the Khashoggi affair, but Turkey sabotaged that by indicting 20 Saudis for Khashoggi’s murder, with the group including senior figures close to MBS who had been acquitted in an earlier Saudi trial. Turkey, allied with Qatar, has sent troops to Libya to support the internationally recognised government whilst Saudi Arabia, Egypt and the UAE continue to back General Haftar.
TREND ► OUTLOOK ▲
The government channelled most of the revenue from the sale of 1.5% of Aramco at the end of 2019 for 25.6 billion USD into the Public Investment Fund (PIF) to invest in achieving the objectives of MBS’s Vision 2030. This should go some way towards compensating for the reluctance of local business to invest domestically and the need to support the economy during the virus crisis will reinforce this local focus. A limited government reshuffle in February 2020 saw the return of former oil minister Khalid al-Falih to head a new investment ministry that has been upgraded from its earlier status as a commission. Although foreign direct investment (FDI) inflows were up in 2019, they are still well behind government targets and below the sums seen in earlier years. This year will undoubtedly see FDI fall back again as a consequence of the global impact of COVID-19.
Riyadh now wants to end the war in Yemen but needs to do so in a way that does not cause MBS to lose face. The war has become even more of a financial and reputational burden now that Saudi forces have replaced UAE troops on the ground, and the kingdom is having to pay security forces previously supported by the UAE. Neither of the Yemeni protagonists have implemented their commitments under the Riyadh Agreement whilst their joint enemy, the Huthis, have been expanding their area of control and have renewed attacks on Saudi Arabia, including firing missiles towards Riyadh.
The December 2019 shooting of three US sailors at a military base in Florida by a radicalised Saudi military student underscored the ability of Al Qaida and ISIS to find support in the kingdom. Other recent terrorist attacks involved Saudi Shia who still see themselves as second class citizens despite recent moves to reduce discrimination.
Economic growth in 2019 benefited from an unexpectedly strong final quarter but was still only 0.4%. The IMF was predicting slightly more than 2% for 2020 at the start of the year, and the government hoped for 2.6%, but the impact of the virus will push these figures substantially downward. The central bank has announced financing packages designed to sustain small-to-medium enterprises and provide liquidity support for the banking sector. In return, it expects banks to restructure loans for their commercial customers.
Earlier government forecasts indicated a deficit of 6% this year but this may now rise beyond 9% to cover the costs of fighting COVID-19 in the context of lower oil prices. The deficit will be financed by combining spending cuts, although these will be difficult unless the Yemen conflict can be concluded quickly, with the use of reserves and more borrowing that takes advantage of low interest rates. Government borrowing was previously expected to reach about 26% of GDP by the end of 2020 but King Salman has agreed that the ceiling on debt can be raised to 50%.
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