Previous Quarterly Editions
Expropriation Risk: 36 35 38 40 Political Violence Risk: 59 57 55 55 Terrorism Risk: 56 57 55 50 Exchange Transfer and Trade Sanction Risk: 35 35 35 35 Sovereign Default Risk: 35 34 36 36
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Crown Prince Muhammad bin Salman (MBS) added to his unprecedented power over the kingdom’s defence, security, and economy in August by taking charge of a new committee on hydrocarbons policy. MBS sees his role as driving change from the top but his social reforms, including a greater role for women in society and the economy, his high-profile crackdown on corruption, and his calls for a more moderate form of Islam are all appealing to the younger Saudis who make up the majority of the population. As they will expect further liberalisation, MBS will need to tread a careful path between delivering this and maintaining the support of the older generation, particularly the more conservative Islamic Ulama. At the same time, MBS has made clear that he will not tolerate criticism, with critics ranging from extreme Islamists to liberals and women’s rights activists being arrested. Saudi Arabia took a series of strong measures against Canada in August after Ottawa had expressed mild concern over the arrests of human rights activists. The impact will not be great for either country but the move was an example of the MBS style and a warning to others that Riyadh will not tolerate public criticism by foreign governments. With the unemployment rate for Saudis still close to 13%, the process of Saudisation under which foreign workers in the kingdom are replaced by Saudis is being intensified further as women are encouraged into the workforce. Nearly 800,000 foreign workers have left since early 2017. The downsides are a skills shortage that hits investors and the impact on the urban rental and retail sectors dependent on spending by migrant workers. The long-promised IPO involving the sale of 5% of Saudi Aramco has been put on hold due to concerns about its likely yield and the scrutiny required for listing on major international exchanges. Meanwhile, the government is looking for other means of generating funds for investment through privatisations and greater borrowing. More encouragingly, prospects are good for further growth in Saudi stocks in the run up to the stock market’s inclusion in the MSCI in 2019. Saudi Arabia has welcomed President Trump’s rejection of the nuclear deal with Iran and his threats to do more to counter Iranian actions in Iraq, Syria and Yemen. Riyadh accuses Iran of supporting the Houthi rebels in Yemen, where the war has intensified but seems no closer to resolution. Houthi attacks on shipping in the Bab al Mandab straits at the southern end of the Red Sea led to the temporary suspension of crude oil shipments through the area in July.
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Government attempts to encourage domestic investment by Saudis are having little success after the recent anti-corruption campaign, with many preferring to invest abroad. At 14.4 billion dollars, capital outflows into foreign equities reached their highest level for a decade in the first quarter of 2018. With foreign direct investment also falling, the government will need to do more to incentivise investors. The passage of a new bankruptcy law and a proposed law on public private partnerships should help but will need to be followed up by other business-friendly measures and legal changes that MBS has promised, and by better prepared privatisation offerings.
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The Shia regions of Saudi Arabia have not seen serious violence recently but remain restive in the face of what the Shia see as discrimination. Most Shia leaders accept that their interests are best served by working with the regime rather than against it, but this alignment should not be taken for granted. The threat of a Saudi-led coalition attack on Hodeida, Yemen’s main port through which most of its food is imported, has alarmed the international community, which is concerned about the impact on the already dire humanitarian situation. Although Riyadh’s western allies are pushing hard for a peace deal, Saudi Arabia appears to need a victory that it can point to before it will negotiate. The Houthis have failed to hit Saudi cities with ballistic missiles thanks to effective Saudi defences but occasional attacks on shipping in the Red Sea are of concern.
The security forces, which have gone through considerable change since MBS took responsibility for internal security, recently arrested over 30 foreigners suspected of terrorism in an intelligence-led operation. They continue to monitor Saudis returning after fighting with ISIS and other groups in Syria and Iraq. Coalition forces in Yemen have increased pressure on militants based there, leading to a significant reduction in attacks within Saudi Arabia.
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The Public Investment Fund (PIF) is to sell most of its stake in Saudi Basic Industries Corporation (SABIC) to Saudi Aramco to raise funds for investment, with Aramco financing the purchase by borrowing abroad. As part of its new role as a main driver of economic diversification, over the last twelve months the PIF has invested in Richard Branson’s Virgin Galactic space tourism company and a solar energy project with Masayoshi Son of SoftBank, as well as Elon Musk’s Tesla. The PIF also plans to borrow in order to finance other investments in the kingdom and aims to increase its assets from 230 billion dollars to 400 billion by 2020. With growth in 2018 now expected to be above 2% thanks to higher oil income, some of the additional revenue will be used to reduce the budget deficit.
Total government debt is rising rapidly and could reach 150 billion dollars early in 2019. However, the 11 billion dollars raised in April when the government returned to the bond market for the third time in three years should meet its hard currency needs for the rest of the year, and a further international issue is not expected soon. Foreign reserves have risen with oil prices, gaining more than 10 billion dollars in the first half of 2018 to reach 506 billion dollars in June.
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