Previous Quarterly Editions
Expropriation Risk: 46 46 46 52 ▲ Political Violence Risk: 51 51 51 51 ► Terrorism Risk: 45 40 40 38 ▼ Exchange Transfer and Trade Sanction Risk: 35 35 35 35 ► Sovereign Default Risk: 37 37 37 27 ▼
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Government's commitment on climate policy Weakest 1 2 3 4 5 Strongest
Saudi Arabia has pledged to achieve net-zero emissions by 2060, committing to investments of over USD10 billion to a series of green initiatives as a first step and to reduce to 50% its use of fossil fuels to generate electricity by 2030. This will be a formidable challenge to a country that depends so much on its hydrocarbons, not least for its desalination plants. The kingdom is the fourth largest consumer, using 3.5 million barrels per day of oil and gas liquids in 2020, which is more than Japan or Germany.
The pledges are consistent with Vision 2030. Originally launched by Crown Prince Muhammad bin Salman (MBS) in 2015, this initiative aims to diversify the economy by reducing its oil and investing in sectors that will create jobs for the growing, and young, population. However, until recently it was seen as seeking to delay international efforts to reduce emissions and paying lip service to the need for action to reduce the impact of climate change. At the COP26 international climate meetings in November 2021, Saudi Arabia sought to demonstrate it has changed course, announcing a series of initiatives to cut emissions, capture carbon, and develop a circular economy. The country has one great incentive: climate change will have a severe impact on its people from
increasing aridity, high summer temperatures and rising sea levels.
Riyadh has given little detail on how it will achieve its goals. It has said the transition will be managed so that it preserves the “kingdom’s leading role in enhancing the security and stability of global energy markets, in light of the maturity and availability of the necessary technologies to manage and lower emissions”. The problem is that the government needs income from oil and hydrocarbon exports to finance investment in cutting emissions, while persuading its people they must pay much more for their power consumption and for their currently free and high-quality government services.
The government has introduced value-added tax but there are no plans yet for taxing incomes. In practice, the government will continue to produce oil at current levels for the next five to ten years, and, given its low production costs, it will remain better placed than other large producers to maintain its market share. Riyadh has spoken of its current strategy of allocating money from privatisation and part of oil income to invest in new sectors, saying this provides a basis for directing investment into green sectors.
The kingdom has great potential for producing solar energy and is already investing in aiming to produce 4 million tonnes of hydrogen by 2030. Saudi Arabia’s geology is particularly suitable for carbon storage. The government plans to plant 450 million trees by 2030 and says it will be a key contributor to the plan to plant 50 billion trees in the Middle East. The 2060 net-zero target does not specify the extent to which the government would rely on forestry and land use.
The nature of the Saudi governing system is that its leadership can take a long-term approach and drive policies forward, though in the shorter term it will need to enhance the government’s still weak but improving administrative and technical capacity.
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There will be a substantial fiscal surplus in 2022, the first since 2013. Gross domestic product (GDP) growth could exceed 7%, after it grew 6.8% in the fourth quarter of 2021, as the COVID-19 economic shock receded. The Russia-Ukraine crisis will increase demand for and the price of Saudi oil, and international pressure may force the country into increasing production in the short term and abandoning the OPEC-related limits on output.
Growth in the non-oil sector should also increase from its current level of 5.5%, a key factor in achieving the job creation goals of the regime. The Russia-Ukraine crisis casts a shadow over world economic growth, but the risk of expropriation in Saudi Arabia is very low.
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War in Yemen will continue but will be in stalemate. The Houthis will maintain the frequency and range of missile and drone attacks against Saudi cities and economic targets. Most are brought down by Saudi defences, but Riyadh has been seeking to replenish its stock of interceptor missiles for its US-made Patriots. The risk of strikes causing serious casualties, especially in the south of the kingdom, remains. Saudi Arabia is playing a more prominent role in the war in Yemen in preventing the Houthis seizing the strategically important Maib and its oil, gas and electricity facilities. However, those parts of Yemen notionally loyal to President Abdrabbuh Mansur Hadi are fragmenting to a degree that will complicate the rebuilding of a stable Yemeni state, or states.
Iranian support for the Houthis has been increasing, consistent with its aim of weakening its Saudi regional rival. Nevertheless, Saudi Arabia has renewed its low-profile discussions with Iran as negotiations over the renewal of a version of the Joint Comprehensive Plan of Action (JPCOA), otherwise known as the 2015 Iran nuclear deal, draw closer to a conclusion. Saudi Arabia is deeply worried about the role of Iran in Lebanon, Syria, and Iraq.
Saudi Arabia has deposited further sums of USD3 million in the Egyptian and Pakistani central banks, to ensure Cairo’s support for its regional policies and Pakistan’s in coping with the fallout from the Taliban takeover in Afghanistan since August 2021. There are reports China is providing new missile systems and drones to Saudi Arabia. This will draw opposition from Washington, which has been irritated by the lack of Saudi moves to boost oil output. It took some U.S. pressure to persuade Saudi Arabia to support the Western position at the United Nations over the Russia-Ukraine crisis; Riyadh appeared to be hedging its bets amid concern over the future of U.S. commitment to its allies in the region.
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Al-Qaida in the Arabian Peninsula (AQAP) and Islamic State (IS) no longer pose serious threats within Saudi Arabia or from Yemen. However, Riyadh is concerned IS clearly has a strong presence in Afghanistan. Tensions in the Shia areas of Saudi Arabia remain in the background but there is no sign of any serious organised terrorist group.
MBS has sponsored a campaign to play down the role of Wahhabism in the foundation of the Saudi state. This is part of a wider campaign to foster a more liberal interpretation of Islam. Some will resent this move, but they are unlikely to resort to violence. Most young Saudis support MBS in this policy.
Risk is low. The 2022 budget is based on an average oil price of USD70-75 per barrel and a budget forecast was for a surplus of about 3.4% of GDP. With oil prices likely to remain very high in the short term, Saudi Arabia should have ample funds for its proposed expenditure and be able build up foreign exchange reserves which were USD455 billion at the end of 2021.
Public debt is likely to decline further than the forecast 25.9% of GDP in 2022 and 25.4% in 2024, down from 29.2% in 2021. The government has said it will focus in 2022 on refinancing around USD11.5 billion of debt.
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The risk level is low. In its first rating, the Public Investment Fund (PIF) was assigned an A1 long-term issuer rating, an A1 baseline credit assessment and a "stable" outlook on all ratings by Moody's Investors Service. The PIF is a central plank of Vision 2030 and will play a key role in climate action plans. The government has said that 4% of Saudi Aramco’s shares would be transferred to the PIF, which acts as the country’s sovereign wealth fund; it plans to raise assets under its management to USD1.07 trillion.
