Previous Quarterly Editions
Expropriation Risk: 38 40 40 40 Political Violence Risk: 58 56 56 56 Terrorism Risk: 48 46 48 45 Exchange Transfer and Trade Sanction Risk: 38 38 40 38 Sovereign Default Risk: 38 39 42 44
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Following tensions with Washington over Riyadh’s impulsive decision to ramp up oil production in March 2020 (just as global demand was being effected by COVID-19), Saudi Arabia agreed with OPEC and OPEC+ partners to cut output by the equivalent of 10% of last year’s global oil demand. In June 2020, Saudi Arabia announced a further reduction of one million barrels per day in its output. Helped by moves to end lockdown restrictions in oil importing countries, these moves have lifted oil prices from the extraordinary lows seen in April 2020. But they are levelling out at around 40-45 USDper barrel, which is well below the price of 60 US dollars on which the Saudi budget is based. Saudi Arabia’s initial response to COVID-19 was proactive and well received but the virus has persisted, requiring more localised lockdowns, curfews, and restrictions on movement. By mid-July 2020, the government had reported 250,000 cases and 2,500 deaths. In an unprecedented move, Riyadh effectively cancelled the politically and financially important Hajj pilgrimage for this year, having earned 20 billion USD from religious tourism in 2018. The government deployed a stimulus package worth 9.4 billion USD in March and April 2020. To help pay for this, VAT was increased from 5% to 15% and the cost of living allowances that are an important element in state salaries was suspended. Crown Prince Muhammad bin Salman (MBS) has faced some grumbling over these measures and will have to delay aspects of his 2030 Vision and largeschemes such as NEOM, the new megacity planned for the Red Sea coast. However, his position remains unassailable as he continues to isolate potential rivals while broadening his support within the ruling family. Rising unemployment has mostly affected foreign nationals, with more than one million expected to leave in 2020. Young Saudis support his drive for modernisation though he will need to keep a careful eye on the impact on tribal areas, some of which feel marginalised by his policies. Relations with Teheran remain tense but there has been no repeat of 2019’s aerial attack on the kingdom’s refining complex at Abqaiq. The US is withdrawing some of the Patriot missile defences sent in response to that attack, to be replaced by Riyadh’s own Patriot systems. However, the attack succeeded in reminding Riyadh that Tehran has the capacity to inflict serious damage on the kingdom’s energy infrastructure. The situation in Yemen is not going well, with the Huthis now in firm control of most of northern Yemen whilst Saudi Arabia’s Yemeni allies have been fighting each other in the south. Saudi Arabia is increasingly concerned about Turkish activism in the wider region, particularly its role in pushing General Haftar out of Western Libya. Saudi Arabia and the UAE have backed Haftar and will support Egyptian moves to deter Haftar’s opponents from taking the fight into the key oil producing region. MBS is planning to use the G20 summit in late 2020 to repair any lingering reputational damage from the Khashoggi affair and deflect attention from regional issues by concentrating on coordination of the global response to COVID-19.
TREND ► OUTLOOK ▲
The central bank’s foreign reserves fell by some 50 billion USD during the first four months of 2020, in part because funds were transferred to the Public Investment Fund (PIF) to support its investment plans. Further transfers in May and June 2020 were likely because the PIF has been taking advantage of market conditions to buy foreign assets. For example, PIF holds 80% of the bid for UK Premier League football club Newcastle United, as part of a much larger strategy to enhance the country’s soft power and modernise its international image, although the foray into UK football has also highlighted Riyadh’s unwelcome tolerance of pirated sports broadcasting. However, PIF will increasingly be required to invest more in Saudi internal projects as these are not attracting sufficient private sector investment or FDI in the current circumstances. In turn, this makes it important for Riyadh to balance PIF demands against its need to continue boosting local liquidity by shifting foreign assets home to support the banking system.
Riyadh has been talking to the Huthis about ending the war in Yemen but is still having to cope with Huthi missile and drone attacks in areas close to the border, as well as occasional attacks on Riyadh itself. The Huthis claimed that a drone and missile attack on the capital in June 2020 was its largest so far, but the Saudi government says that no damage was caused. Saudi Arabia’s problems are exacerbated by the further weakening of the Internationally Recognised Government in Yemen, which has been fighting the Southern Transition Council. Saudi attempts to mediate have been ignored. The problem remains that there is no way out of the war that would enable MBS to save face and the UN has had no success in negotiating a ceasefire to respond to COVID-19, which is ravaging Yemen. Riyadh is also closely monitoring the potential for a serious escalation in Libya that could involve Egyptian forces.
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The central bank has been trying to sustain small-to-medium enterprises through the current crisis and provide liquidity support for the banking sector. In return, it expects banks to restructure loans for their commercial customers. The bank remains committed to maintaining the official exchange rate of 3.75 riyals to the dollar (USD) and should do so with little difficulty.
TREND ▲ OUTLOOK ▲
Initial assumptions that the budget deficit can be limited to single figures now seems very optimistic given that the government was already expecting a deficit of 6% in 2020 before COVID-19 struck. Latest forecasts of around 13% seem closer to the mark. The deficit will be financed by combining spending cuts with the drawing down of reserves and by additional 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%. Foreign reserves, which were above 700 billion USD as recently as 2015, are now around 450 billion USD.
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