Previous Quarterly Editions
Expropriation Risk: 40 38 38 40 Political Violence Risk: 55 56 58 56 Terrorism Risk: 50 48 48 46 Exchange Transfer and Trade Sanction Risk: 36 36 38 38 Sovereign Default Risk: 38 38 38 39
TREND ▼ OUTLOOK ▲
Oil once again dominated the Saudi landscape during the second half of 2019. September saw the use of missiles and drones in an attack against its Abqaiq and Khurais oil processing facilities. This knocked production of almost 5.9 million barrels a day offline, although the impact was brief as spare processing capacity was available. The attack was claimed by Houthi forces fighting the Saudi coalition in Yemen, but Riyadh was quick to blame Iran. Washington, which shares Saudi concern about Iranian intentions, has supplied two Patriot missile batteries and an advanced air defence system to help protect crucial energy infrastructure, but the relative ease with which such damage was done was a shock both inside and outside the kingdom. The attacks were one factor in dampening potential demand for the IPO of 1.5% of Saudi Aramco. Its shares were listed for the first time on Riyadh’s Tadawul stock exchange on December 11, when they rose by the maximum possible 10% to give the company as a whole a valuation of 1.88 trillion dollars. Although the stake of 1.5% was substantially lower than the 5% originally envisaged, it netted a record 25.6 billion dollars for the Public Investment Fund (PIF). The shares were sold mainly to Saudi and regional investors, who were heavily encouraged to participate. Only if the valuation moves closer to two trillion are previous plans for an international listing likely to be revived. In advance of the IPO, important changes were made to key personnel, with the most notable being the replacement of the oil minister by Prince Abdulaziz bin Salman, a brother of Crown prince Mohammad bin Salman (MBS), who has long experience in the oil ministry. The move to install Yasir al-Rumayyan, head of the Public Investment Fund, as chairman of Saudi Aramco is an indication of the growing influence of the PIF. However, the continuing lack of an effective regulatory structure was another factor that may give potential investors pause. Meanwhile, MBS further strengthened his now unassailable control over all aspects of government with new appointments to the Royal Court, which has now been substantially overhauled since the Khashoggi killing in 2018. The appointment of Prince Faisal bin Farhan as foreign minister is another move in the MBS strategy of drawing distant parts of the ruling family into his inner circle. He will be expected to continue efforts to repair the damage done to the kingdom by the killing of Khashoggi. More quietly, MBS has also delegated responsibility for Yemen to his brother Khalid, in his role as deputy defence minister. Although the disruption following the September oil infrastructure attack was relatively minor, the loss of revenue was one of the factors that has widened the deficit to 6.5% of GDP, although the relatively low level of oil prices was the main factor.
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The boost to the stock market that came from its inclusion in the MSCI Emerging Markets Index in May was followed by additional measures to encourage more foreign strategic investors. However, the market fell in September, probably as investors reduced holding in other stocks in preparation for buying Aramco. Local investors were heavily encouraged to buy into the IPO. The objective of the Aramco IPO is to provide funds to enable the PIF to invest more widely in the Saudi economy and generate support for mega projects aligned with the MBS vision for growth. The role of the PIF is crucial because Saudi businessmen have been reluctant to invest domestically, with the community still feeling the effects of the MBS crackdown on corruption in 2017. However, PIF had problems with its foreign investments during 2019, with critics questioning its sizeable stake in troubled US office rental business WeWork.
The Saudis are looking for ways to end the war in Yemen or at least to freeze the conflict. It is seen as a substantial and prolonged cost in Riyadh now that Saudi forces have replaced UAE troops on the ground in Yemen. These forces will now have to manage the tensions between the Hadi government and the Southern Transition Council that led to an eruption of fighting in September. That was ended by an agreement negotiated in Riyadh, but Saudi Arabia now has to apply sustained pressure on the parties to implement it. With Saudi Arabia and Iran supporting contending factions in Iraq and Lebanon, and the Iranian economy under pressure from US-led sanctions, the risk that it may take further carefully calculated and deniable measures against Saudi oil facilities will increase.
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There was only one small, unsuccessful terrorist attack during 2019, indicating that security authorities remain capable of dealing with the terrorist threat within the kingdom. Al Qaida and Islamic State currently focus on Yemeni internal targets but retain the long-term aim of attacking Saudi Arabia. Within the kingdom, the Shia community follows leaders who calculate that they have more to gain by supporting rather than opposing MBS’s policies, which include some steps towards ending anti-Shia discrimination.
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Growth expectations for 2019 fell noticeably during the year to end at 0.2%, down substantially from mid-year, but the IMF expects a recovery to above 2% in 2020. The causes are lower oil prices, the exodus of 1.2 million foreign workers since 2017, and the rise in regional tension. The Fund continues to urge further reforms to the capital markets, the country’s legal framework and its business environment, as well as specific measures to boost small- and medium-sized enterprises. The central bank continues to follow the Fed, cutting its rate three times during 2019.
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Oil prices ended the year well below the range of 75-80 dollars that Riyadh used when drawing up the 2019 budget. The result is likely to be a fiscal deficit of around 6.5% in 2020. Foreign exchange reserves, which reached an 18-month high in mid-2019, ended the year down slightly but were still above 500 billion dollars. Fitch Ratings has downgraded its credit rating from A+ to A with a stable outlook on the economy’s continuing exposure to the oil sector and the prospect of a rising fiscal deficit.
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