In this August 2018 update, IHS Country Risk looks at current key risks and forecasts for Saudi Arabia.
- Pledges of support by the Saudi elite and a cabinet reshuffle indicates domestic dissidence is likely to be mitigated for the immediate future; a foreign or domestic economic policy success would increase the probability of an early abdication
- The Saudi kingdom will prioritise managing economic slowdown via significant economic and social policy reforms
- Saudi bankruptcy law is intended to improve investment confidence, encouraging growth in SMEs and regulatory efficiency
Analysts determine scores based on qualitative guidance. Each score represents the average expected level of risk over the coming year, and each outlook represents the projected direction of risk trends after that 12-month period. Overall risk scores are calculated as equally weighted averages of the six aggregate categories – Political, Economic, Legal, Taxation, Operational and Security. Risk is scored on a 0.1-10 scale. The scale is logarithmic, with intervals of 0.1 magnitude. This range is split into seven bands, ranging from Low to Extreme risk.
Business Environment Strengths & Weaknesses
Consolidation of the crown prince's authority unlikely to be challenged in the coming year, increasing the likelihood that policy-making will remain consistent with his stated modernisation efforts.
The government seeks to increase investment flows through public-private partnerships, to keep projects active in line with the Vision 2030 goals.
Despite some credit issues, effective regulation and strong capitalisation reduce financial-sector risks.
Lack of strong political institutions independent of the economic and financial-sector challenges, including sizeable fiscal and external deficits, tighter financial liquidity, higher government fees on expatriates leading to a population and skilled worker fall, higher prices for government services and regularly recurring arrears in state and private sector payments.
Houthi missile attacks on Riyadh and southern cities, including strategic infrastructure and hydrocarbon facilities, are likely to continue in the six-month outlook.
The investment environment is made considerably less certain by the targeting of senior businessmen, media figures, and royals with extensive business interests. Non-Muslim, non-Arab foreigners are unlikely to be targeted.
Country risk - overall statement
King Salman is reportedly in poor health, but has considerable personal authority within the ruling family and among conservative members of the clerical establishment from his time as the governor of Riyadh and the internal arbiter of familial disputes. He has passed much of his power to Crown Prince Mohammed bin Salman, who has centralised control of the decision-making process. He controls the most important economic, security, and political institutions of the state. However, this leaves him politically vulnerable should his intended social and economic reform programmes be perceived to fail by a large number of members of the al-Saud family, or be publicly rejected by the Saudi clerical establishment. Should the monarchy's attempts at reducing high youth unemployment not live up to expectations while cutting social benefits, the risk of a serious threat to state stability emerging would grow sharply. The monarchy's security priority will be to contain Iranian regional influence, ensure that the Yemen war is contained and that Houthi missile attacks do not damage strategic infrastructure.
Pledges of support by the Saudi elite and a cabinet reshuffle indicates domestic dissidence is likely to be mitigated for the immediate future; a foreign or domestic economic policy success would increase the probability of an early abdication
Amongst some members of the Saudi elite, there has been growing resentment of Crown Prince Mohammed bin Salman as a result of his decision to detain senior family members on corruption charges and to extract financial concessions from them to secure release. Their detention in November 2017 was a means of the crown prince temporarily removing any potential avenues of dissent. Indeed, the majority of the ruling family council (31 out of 34) pledged their allegiance to the new crown prince in June 2017, and potential rivals from within the family were further weakened by the anti-corruption campaign. The crown prince took control of all three branches of the security forces in 2017, and it is extremely unlikely that there is currently a viable avenue for potential opposition to his centralisation of political control to successfully develop.
The crown prince's break with the traditional consensus-based approach to governing and settling familial disputes will ensure that he remains vulnerable for as long as he has nothing concrete to show for his flagship economic reforms, such as increasing the Saudi proportion of the workforce, and successively settling the Saudi-led intervention in Yemen, which would demonstrate his capacity as an administrator. If he is perceived to fail in the restructuring of the Saudi economy and providing an acceptable level of employment opportunity for Saudi’s youth bulge, it would risk unifying the royal family and religious establishment against him, potentially leading to a coup and division within the royal family.
A cabinet reshuffle on 1 June 2018 will probably contribute towards the crown prince’s building of an independent power base to secure his position outside his father's influence, particularly as it included a prominent moderate cleric as minister of Islamic affairs. If he can provide tangible economic improvements that would improve his authority within the family and improve investor confidence diminished following the anti-corruption detentions, King Salman will be more likely to abdicate in favour of his son during the coming year, or partially cede control – likely retaining his role as Guardian of Mecca and Medina but allowing his son to establish full control of the administrative role of the monarch.
The Saudi kingdom will prioritise managing economic slowdown via significant economic and social policy reforms
Crown Prince Mohammed bin Salman is leading a long-term administrative strategy to diversify the economy away from oil, which is being introduced through a high-level strategic framework, Saudi Vision 2030, and the National Transformation Programme (NTP). These plans aim to improve state efficiency, reduce costs, and fund large sovereign wealth funds capable of generating large revenue streams and cushioning the effects of probable cuts to government subsidy and employment programmes that are necessary to offset declining oil export revenue, as well as attracting foreign investment in defence. Implementation of Vision 2030 likely to face bureaucratic resistance and drive contract frustration risks over coming year. Accordingly, the ambitious plan is unlikely to meet all set targets.
During the coming year, the crown prince will probably adopt a policy of reforms prioritising tourism and supporting initiatives backed by the General Authority for Entertainment, as well as defence spending, to build Saudi Arabia's nascent defence industry in partnership with the United States. A priority for the crown prince's economic programme is increasing the proportion of locally manufactured content in Saudi industry to 70%, focusing on the downstream hydrocarbon sector, but this will probably be complemented by increasing the number of sectors that allow full foreign ownership beyond healthcare and education.
The 1 June appointment of moderate cleric Abdullatif bin Abdulaziz al-Sheikh as Minister of Islamic Affairs is probably an attempt to reduce the controversy surrounding the reforms of social and gender relations in Saudi Arabia, such as the introduction of female driving, increased access for mixed gender activities, and generating more employment opportunities for women.
Saudi bankruptcy law is intended to improve investment confidence, encouraging growth in SMEs and regulatory efficiency
Saudi Arabia implemented a bankruptcy law on 18 July 2018. A draft of the law had been approved by the Shura Council, the government's advisory body, in December 2017. Exact details of the legal framework have not been released but it is likely to be in keeping with an earlier draft that would permit debt restructuring if a minimum of two-thirds of creditors approve.
The law covers banking, finance, telecommunications, mining, utilities, and transport infrastructure. Prior to the bankruptcy law, companies entering insolvency had to either liquidate or rely on stakeholders to provide financial support. The bankruptcy law is an important step for institutionalising the Saudi business environment and is most likely aimed at increasing the role of small and medium-sized enterprises (SMEs) in the Saudi economy, and encouraging growth in SMEs already in the one-year outlook. Improving entrepreneurship in Saudi Arabia is likely to be a necessary factor of fully implementing the Crown Prince's ambitious economic reforms. Providing an institutional framework for investment risks would be an important aspect of the economic reform.
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