Previous Quarterly Editions
Expropriation Risk: 46 46 46 46 Political Violence Risk: 49 49 49 51 Terrorism Risk: 48 48 45 40 Exchange Transfer and Trade Sanction Risk: 35 35 35 35 Sovereign Default Risk: 37 37 37 37
TREND ►
Relations between Saudi Arabia and the United States have cooled with the change of administration in Washington to Joe Biden, which happened in January 2020. He has authorised the publication of a CIA report suggesting that Crown Prince Muhammad bin Salman (MBS) may have authorised the assassination of journalist Jamal Khashoggi in 2018, and Biden imposed sanctions on those Saudis directly involved. Henceforth, Biden will judge Saudi Arabia on its future actions and will work directly with his opposite number King Salman, not MBS.
The United States has withdrawn its support for the Saudi offensive in Yemen and is pushing for an agreement to end that war. The Biden administration is also seeking to improve relations with Iran and return to the Joint Comprehensive Plan of Action (JPCOA), otherwise known as the 2015 Iran nuclear deal. However, Biden’s administration will help Saudi Arabia to defend itself from Houthi missile and drone attacks, which have been increasing in frequency and range and in targeting Saudi cities and oil facilities, although so far most have been destroyed by Saudi defences and little damage has been inflicted.
Riyadh knows that it and Washington share a range of common interests covering trade, energy and counterterrorism but understands it will need to rely less on US security guarantees in the future. Saudi Arabia has produced a revised proposal to end the war in Yemen, but the military balance has swung in favour of the Houthis, who are not yet ready to help Riyadh find the face-saving deal it seeks. Iran and Saudi Arabia have been holding secret talks in Iraq in an attempt to reduce tensions with Tehran.
Domestically, MBS’s position remains strong as he continues to isolate potential rivals while broadening his support within the ruling family. There is some discontent over the impact of value-added tax (which was increased from 5% to 15%) but MBS remains popular among younger Saudis who support his moves to modernise and moderate religious and social practices. They welcome his focus on creating jobs through investment and the Saudisation of the labour force: almost one million foreigners left the kingdom in 2020. New moves are being made to codify and thus standardise the administration of justice.
Meanwhile, Saudi Arabia has coped well with COVID 19: 394,169 cases and 6,711 deaths were recorded by early April 2021. The government aims to vaccinate 70% of its population by the end of 2021. For the second year running, however, the Hajj pilgrimage (which generated USD20bn in revenue in 2018) is being reduced in scale.
Oil prices have recovered from the extraordinary lows of mid-2020 and were over USD60 per barrel in early April 2021, thanks to Saudi-inspired action in OPEC and economic recovery in Asia. Saudi Aramco (the country’s gas and oil company) saw its profits fall to USD49bn in 2020 from USD88.2bn in 2019 but paid dividends of USD75bn, mostly to the Public Investment Fund (PIF). This is building up its international portfolio and investing domestically as part of the MBS long-term plan to reduce Saudi dependency on hydrocarbons, diversify the economy and create jobs.
The central bank’s foreign reserves fell to USD440bn in February 2021 but have since started to rise and should remain above USD450bn during the rest of 2020, thanks to higher oil revenues and bond sales. Saudi Arabia is working on creating a consolidated balance sheet of its assets and liabilities, which will include the investments and debts of the PIF. This will clarify the respective roles of the central bank and the PIF, whose assets have risen to USD400bn from USD150bn in 2015. The central bank has said that it will retain its core responsibilities, including maintaining sufficient reserves to protect the riyal-dollar peg and financial stability, as well as regulating and supporting the financial sector.
TREND ▲
The growing frequency of missile and drone attacks indicate that these are now being manufactured in Yemen using Iranian designs and technical assistance. The quality is slowly improving. None have so far inflicted serious damage, but the risks of a possible strike against a Saudi city or an oil facility are rising.
In an effort to end the war, Saudi Arabia and the Houthis have been holding indirect negotiations in Muscat with US support- a new US envoy has also been in touch with the Houthis. The Houthis have rejected these advances, seemingly confident that they can achieve more on the battlefield before entering serious negotiations. The forces supporting Yemeni President Abd Rabbu Mansur Hadi have been losing ground and his regime faces a major challenge from the Southern Transition Council (which seeks to restore an independent south Yemen) and other smaller local groups. A new coalition government has been set up following Saudi mediation, but it remains weak and ineffective.
Iranian-backed militias in Iraq have been threatening Saudi Arabia and have launched small-scale drone attacks. In Saudi eyes, the US rapprochement with Iran will only encourage Tehran to support anti-Saudi forces in the region.
TREND ▼
Al-Qaida in the Arabian Peninsula (AQAP) and Islamic State no longer pose a serious threat within Saudi Arabia, though they may still be capable of launching an occasional attack. Saudi security forces have demonstrated a capacity to pre-empt nearly all attacks. AQAP in Yemen has been seriously degraded and is no longer capable of mounting a terrorist campaign in Saudi Arabia. There is still restiveness within Saudi Arabia’s Shia community but the majority do support leaders who argue that it is better to work with the regime rather than against it.
GDP fell by around 4% in 2020 but should return to growth of about 2% in 2021, with the oil and non-oil sectors performing strongly. In the longer term, Saudi Arabia needs GDP growth of over 6% to meet its job creation goals. The country is looking for innovative ways to increase foreign direct investment and has announced that Riyadh will give priority in government contracts to international firms that establish their regional headquarters in Saudi Arabia- a move designed to attract companies from Dubai. Riyadh is also easing labour laws to enable foreign workers to change employers.
Revenue and expenditure in the 2020 budget were both lower and the budget deficit is expected to fall from 12% of GDP in 2020 to 4.9% in 2021. The International Monetary Fund suggests that the budget is based on an oil price of USD68 per barrel (Saudi sources say it is under USD60). Overall debt by the end of 2021 is predicted to be 37.5% of GDP. Tax revenue, mainly from higher value-added tax, will rise by 48%. 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. Saudi Aramco’s earnings in the first quarter of 2021 were 30% higher than in 2020.
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