Previous Quarterly Editions
Expropriation Risk: 46 46 46 46 ► Political Violence Risk: 49 49 51 51 ► Terrorism Risk: 48 45 40 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 will remain cool despite a visit by the Saudi defence minister to Washington as a result of the Biden administration’s policy of judging Saudi Arabia on its future actions (in the light of the killing of Jamal Khashoggi in 2018) and a reduction in US support for the Saudi military operations in Yemen.
In August 2021, Saudi Arabia signed a military cooperation agreement with Russia. Details are vague and the move seems designed as a tactical response to the hardening US attitude. The United States will continue to support the so far successful Saudi defences against Houthi missile and drone attacks directed at economic targets and Saudi cities, which have been increasing in frequency and range thanks to Iranian assistance.
Saudi Arabia is concerned by the Biden administration’s attempt to return to the Joint Comprehensive Plan of Action (JPCOA), otherwise known as the 2015 Iran nuclear deal, but has itself been trying to improve relations with Iran via meetings of intelligence officials in Iraq. The stalemate in Yemen will continue. None of the main Yemeni or regional protagonists are willing to make the concessions required for a settlement -- which is likely to leave the Houthis as the strongest political group in what will remain an unstable country on the kingdom’s southern border.
Domestically, Saudi Crown Prince Mohammed bin Salman (MBS)’s position is unchallenged. He retains his popularity among younger Saudis, who welcome his focus on job creation through investment and the Saudization of the labour force. The regime is given credit for handling COVID-19 well, as concern grows about the spread of the Delta variant of the virus.
Meanwhile, high oil prices have boosted business confidence, resulting in increases in private sector investment and in the growth of non-oil Gross Domestic Product (GDP). Government policy is to use the Saudi Public Investment Fund (PIF) to invest in Saudi infrastructure and industry. Relations with the United Arab Emirates (UAE) were under strain following an attempt by Abu Dhabi to increase its oil export capacity against Saudi wishes. Other causes of friction have been Saudi Arabia’s decision to set up a new national airline, potentially competing against Gulf companies, an announcement that from 2024 the state would not do business with international companies whose regional headquarters are outside the kingdom (most are in Dubai), and moves that would have the effect of cutting some imports from Gulf states. The Gulf Cooperation Council economies are similar in structure so that competition is endemic, but MBS’s more assertive approach and use of Saudi economic power are exacerbating tensions with the UAE.
Omani-Saudi relations have greatly improved as the new Sultan Haitham needs support for Oman’s struggling economy and has agreed that that Saudi Arabia can build a new pipeline to transport Saudi oil to Duqm in Oman, bypassing the Strait of Hormuz.
Saudi Arabia needs and wants a much higher level of foreign direct investment and is therefore persuading more international companies to set up their regional headquarters in the kingdom. Riyadh knows it must address their concerns.
Riyadh is 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. 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.
The Houthis continue to increase the frequency and range of missile and drone attacks against Saudi cities and economic targets, but most are brought down by Saudi defences. The risk of strikes causing serious casualties, especially in the south of the kingdom, is slowly rising. In Yemen, the forces supporting President AbdRabbu Mansour Hadi, backed by the coalition air attacks, have so far prevented the Houthis taking the strategically important MAIB and its oil, gas and electricity facilities. However, those parts of Yemen notionally loyal to Hadi are fragmenting to a degree that will greatly complicate the rebuilding of a stable Yemeni state, or possibly states.
The inauguration of a new hard-line president in Iran is likely to raise tensions between Teheran and Riyadh in the region. In Saudi eyes, the US rapprochement with Iran will only encourage Tehran to support anti-Saudi forces in the region. However, there has been a further meeting in Iraq of Saudi and Iranian intelligence officials to try to improve relations, though without any visible sign of success so far.
Saudi Arabia will take a cautious approach to Afghanistan, which late this year fell back under the control of the Taliban after international coalition forces departed. Riyadh has poor relations with the Taliban, whose vision of an Islamic state differs from, and potentially challenges, the Saudi version. Consequently, Riyadh will seek to increase its influence in Pakistan and worry about any sign of increased Iranian activity in Afghanistan.
Al-Qaida in the Arabian Peninsula (AQAP) and Islamic State (IS) no longer pose serious threats within Saudi Arabia or from Yemen, though they may still be capable of launching an occasional attack. Saudi security forces have demonstrated a capacity to pre-empt nearly all attacks. Riyadh will be concerned that IS clearly has a strong presence in Afghanistan and that Al-Qaida may attempt to regroup there.
Despite the execution of a Shia in 2021 for offences committed as a teenager rebel in 2017, Saudi Arabia’s Shia community mostly support leaders who argue that it is better to work with the regime rather than against it -- 68 Palestinians and Jordanians have been given prison sentences of up to 22 years for raising funds for a terrorist organisation, probably Hamas.
GDP is expected to grow by just under 2% in 2021. The International Monetary Fund (IMF) expects the non-oil sector to grow strongly, a key element in the country’s long-term aim of reducing dependency on hydrocarbons. Saudi Arabia is looking for innovative ways to increase foreign direct investment. Riyadh is also easing labour laws to enable foreign workers to change employers and has stepped up the Saudization of jobs, as it announced that its population was now over 35 million and is still growing at over 2% annually. The general trend in Saudi policy strongly suggests that the risk of trade sanctions is low.
Foreign reserves have been rising and were at USD446bn in mid-2021. Leading credit rating agencies have raised scores for long-term Saudi debt, noting the strong sovereign assets and external financial resources supported by high reserve coverage ratios. Government debt is estimated at 31% of GDP compared with earlier estimates of over 39%. Actual performance will depend on oil prices remaining high, the world economy recovering and the potential impact of COVID-19’s Delta variant in the kingdom.
Thanks to higher oil prices and an increase in value-added tax, government revenues have risen sharply above levels for the previous year. Spending has been up by 4% and the fiscal deficit for the year is likely to be 3-4% and will lead to a much lower fiscal deficit than forecast for the 2021 budget (4.9%). Oil prices in August were just above the USD68 per barrel, which the IMF assesses is the figure assumed for the Saudi budget (Saudi sources says it is under USD60). Overall debt by the end of 2021 is predicted to be 37.5% of GDP.
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