Previous Quarterly Editions
Expropriation Risk: 38 40 40 38 Political Violence Risk: 55 55 55 56 Terrorism Risk: 55 50 50 48 Exchange Transfer and Trade Sanction Risk: 35 35 36 36 Sovereign Default Risk: 36 36 38 38
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Within Saudi Arabia, Crown Prince Mohammed bin Salman (MBS) has successfully navigated the potential difficulties surrounding the Khashoggi affair. Indeed, he has managed to increase his authority by rallying the ruling family in response to international criticism of the circumstances surrounding the journalist’s death. His position is now unassailable. He has brought his brother Khalid back from Washington as deputy defence minister and appointed a female relative as ambassador to the United States. The latter move is intended to build better relations with Congress after it forced President Trump to use his veto to defeat a bill that would have limited defence cooperation with Saudi Arabia over the war in Yemen. The Trump administration remains solid in its support for MBS but will look to him to back the launch of a peace plan for the Israeli-Palestinian conflict that will favour Israel, and which will expose both Washington and Riyadh to much criticism in the region. Washington is also looking to Riyadh to increase oil production to make up for the further fall in Iranian exports caused by the ending of waivers on US sanctions. The government has sent a clear message that criticism will not be tolerated from any quarter, although it will continue to take steps to implement the socially liberal reforms that are popular with those under 30. Despite higher oil prices and the successful initial bond sale by Saudi Aramco, which was ten times over-subscribed, parts of the domestic business community seem to be holding back from investment. This may still be related to the manner of the anti-corruption crackdown of 2017 and possibly a reaction to the faltering progress towards the goals of the MBS Vision 2030 plan. Foreign direct investment (FDI) also remains quite low over the same concerns. Although improving, it is still significantly below the 7.4 billion dollars reached in 2016. However, money raised by the purchase of SABIC by Saudi Aramco, to be completed later this year, will enable the Public Investment Authority (PIF) to invest widely in the Saudi economy while pursuing acquisition of global assets. Youth unemployment has fallen sharply in response to MBS policies but remains too high despite the intensifying drive towards Saudisation of jobs that saw one million foreign workers leave the kingdom in 2018. Within the region, Saudi Arabia and the UAE continue to boycott Qatar, to support General Haftar in Libya, and to welcome President El Sisi’s moves to ensure he retains power in Egypt until 2030. They are also closely watching developments in Sudan and Algeria, wary of the possibility of a new Arab Spring. While accepting UN-staged preliminary peace talks, neither Riyadh nor Abu Dhabi are close to ending the war in Yemen and appear prepared to take the crucial port of Hodeida if the current peace moves fail. The humanitarian disaster that is expected to result from such an attack would anger the international community and could jeopardise some of the recent improvements in FDI.
Saudi Aramco raised 12 billion dollars in its initial bond sale in April as demand exceeded 100 billion dollars, allowing it to offer a lower price than the country’s own successful sovereign bonds. Aramco, which made a profit of 111 billion dollars in 2018 while paying only 160 million dollars in taxes and royalties, will spend 70 billion dollars in absorbing SABIC, the country’s state-owned chemical giant. There are likely to be difficulties in achieving the merger given the different corporate cultures, but both companies have worked closely together before on joint ventures and the government is counting on synergy in the petrochemical sector. The money received by the government for the sale of its 70% of SABIC will be used by PIF to encourage diversification in the Saudi economy. This should be helped by some easing of the country’s strict residency rules for foreign nationals.
TREND ▲ OUTLOOK ▼
Despite government efforts since 2015 to reduce discrimination and tone down anti-Shia rhetoric, the execution of 33 Shia prisoners convicted on terrorism charges in April could lead to some disturbances in Shia-dominated towns. Huthi forces in Yemen have stepped up their attacks across the Saudi border in response to greater Saudi military pressure within Yemen and have threatened to fire missiles at Riyadh. In response, Saudi Arabia has increased measures to prevent the smuggling of Iranian rocket parts and has deployed anti-missile systems that have so far proved to be effective. Riyadh is stepping up diplomatic activity in Iraq to counter Tehran’s influence and welcomes President Trump’s increasingly tough stand on Iran, including the military threats as well as US oil sanctions.
Although four terrorists were killed in a failed attack by ISIS on security forces in a small provincial town in April, this was the first terrorist incident for over a year and is unlikely to mark the start of a new campaign. The security authorities, despite undergoing several organisational changes, remain capable of dealing with the terrorist threat within the kingdom. The threat from AQAP in Yemen has been reduced, although not eliminated, as a result of UAE-sponsored counterterrorist operations.
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Growth could fall back slightly in 2019 from the 2.2% seen in 2018, in part because of the exodus of foreign workers. Saudi leaders assume that there will be some impact from the post-Khashoggi concerns but expect that the opportunities in the country are too good for investors to resist. The stock market will be boosted by its admission to indices run by FTSE Russell and S&P Dow Jones.
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Oil prices have risen above 70 dollars per barrel as a result of the production cuts that OPEC has coordinated with Russia. This will ease the pressure on the budget for the current year, although as this appears to have been based on prices of 75-80 dollars a barrel there will still be some strain. Any shortfall in income will be met by borrowing, and the government is unlikely to use any new fiscal tightening measures during the remainder of 2019.
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