Index Trend Previous Quarterly Editions
Expropriation Risk: 40 Political Violence Risk: 55 Terrorism Risk: 50 Exchange Transfer and Trade Sanction Risk: 36 Sovereign Default Risk: 36 38
Risk Temperature 46 (Medium) +1
TREND ▲ ►
Saudi Arabia’s international reputation has been damaged by the murder in October of the US-based journalist Jamal Khashoggi. He was killed inside the Saudi consulate in Istanbul, apparently by a hit team dispatched from Riyadh that allegedly had links to the office of Crown Prince Muhammad bin Salman (MBS). Outside the kingdom, it is widely assumed that this could not have happened without MBS’s sanction. Within Saudi Arabia, MBS has used the incident to increase his power though measures ostensibly designed to prevent any such acts taking place in the future. The Al-Saud family has rallied around him, and he has taken control of the Saudi intelligence service. A cabinet reshuffle saw the return of some experienced ministers and sweeping changes are being made to the Royal Court. With further arrests of critics and moves to exert even more power over broadcast and social media, the message is clear that no opposition, whether conservative, liberal, moderate or extreme, will be tolerated. At the same time, MBS will continue to advance the socially liberal policies that are popular among the 70% of Saudis who are under 30. These include a greater role for women in society and the economy, cracking down on corruption, and advocating a more moderate form of Islam. But he will move cautiously to avoid alienating the conservative Ulama while ensuring the loyalty of senior princes. He must also retain the confidence of the business community, which was shaken by the manner of the anti-corruption crackdown of 2017, and the professionals who are essential to delivering his economic development and reform programmes. While avoiding direct criticism, the international community has put pressure on Riyadh to support UN efforts to start peace negotiations in Yemen and to end the boycott of Qatar. The 2019 budget raises spending by 9% compared with 2018 but projects a deficit that is lower than last year at just over 4%. Government estimates put GDP at 2.3% in 2018, with an expectation of 2.6% in 2019. The Saudi stock market has been doing well but this is partly due to the purchase of stock by government agencies to help boost confidence. A better test of investor sentiment will come when Saudi Aramco seeks to raise the 70 billion dollars needed to finance its acquisition of the 70% stake in chemical giant SABIC that is currently held by the state’s Public Investment Fund (PIF). MBS portrays this deal as a highly desirable consolidation of petrochemical investments that will also boost Saudi Aramco's value ahead of the long-promised sale of an initial 5% stake. The PIF is expected to use the proceeds of the sale to SABIC to resume the aggressive global acquisition programme that began when MBS took charge of the fund in 2015. Oil prices have been falling but the combined efforts of Saudi Arabia and Russia to cut production in order to reverse the slide may be starting to have an effect.
Saudi Arabia’s international reputation has been damaged by the murder in October of the US-based journalist Jamal Khashoggi
Expropriation Risk 40 (Medium) TREND ► ▲
Foreign direct investment, which fell to 1.4 billion dollars in 2017 from 7.5 billion dollars in 2016, is unlikely to recover much in 2019 as international companies remain cautious after the Khashoggi incident. Saudi investors are also proving reluctant to invest at home, with 90 billion dollars moved out of the kingdom in 2018. The government will need to do more to incentivise investors, especially into the non-oil sector. The passage of a new bankruptcy law and a proposed law on public private partnerships should help but these will need to be followed up by other business-friendly measures and legal changes that MBS has promised, together with more attractive and better prepared privatisation offerings.
Saudi Arabia is co-operating with the UN Special Envoy to end the war in Yemen, but it will take many months, if not years, to achieve peace
Political Violence Risk 55 (Significant) TREND ► ►
The country’s Shia regions remain restive despite government efforts since 2015 to improve conditions and tone down anti-Shia rhetoric. More needs to be done to support those Shia leaders who argue that their community’s best interests are to work with the regime rather than against it. Saudi Arabia is co-operating with the UN Special Envoy to end the war in Yemen, but it will take many months, if not years, to achieve peace. Riyadh senses that the Houthis may be weakening and, while working to bring the key port of Hodeida under UN control, it will continue to put military pressure on the Houthis in other parts of Yemen. Although Saudi armed forces continue to suffer casualties from small-scale cross-border Houthi attacks, the Houthi capacity to hit Saudi cities with ballistic missiles has been reduced by anti-missile defences and greater efforts to prevent missile parts being smuggled in from Iran.
Terrorism Risk 50 (Significant) TREND ► ▼
The absence of any terrorist incidents or arrests of suspects in recent months indicates that Saudi counter-terrorist measures are working despite the many changes made to the security and intelligence services in the last two years. The threat from AQAP and ISIS in Yemen has been reduced following the deployment of UAE-trained counter-terrorist forces.
Exchange Transfer and Trade Sanctions Risk 36 (Medium-Low) TREND ▲ ►
The 2019 budget appears to assume an oil price close to 75-80 dollars a barrel compared with an actual price below 60 dollars at the end of 2018. If, as seems likely, the oil price projections prove too optimistic, Riyadh will either have to introduce further fiscal tightening measures by mid-year or resort to heavier borrowing than planned.
Sovereign Default Risk 38 (Medium-Low) TREND ▲ ►
Although total government debt is rising rapidly and could soon reach 150 billion dollars, foreign reserves were still above 500 billion dollars at the start of 2019. Although further production cuts should produce some recovery in the oil price during 2019, the budget will still have a gap that needs to be filled by foreign and domestic borrowing because, in the current situation, MBS will not want to cut subsidies or increase taxes. The government was glad to see a new bond issue of 7.5 billion dollars being well received in January 2019 and may follow it up with a 10 billion dollar issue before mid-year.
