Country Report Saudi Arabia
Economic growth has slowed down and government finances have deteriorated quickly as a result of lower oil prices. After his accession, King Salman has made major changes to the leadership that have consolidated power in the Sudairi clan.
Strengths (+) and weaknesses (-)
(+) Strong external and fiscal position
High current account and budget surpluses posted in recent years on the back of high oil revenues, have allowed Saudi Arabia to keep public and foreign debt low and build sufficient buffers to weather a period of low oil prices.
(+) “Central bank of oil”
Saudi Arabia’s large spare oil production capacity makes it the world’s only “swing producer” and allows it to influence oil prices. Consequently, Saudi Arabia enjoys significant international clout.
(-) Hierarchical feudal political system limits democratic progress
Progress on reforms towards more democracy promised in 2003, such as holding provincial elections, has been slow. So, real democratic space remains limited.
(-) Narrow economic base
The oil sector accounts for roughly 40% of GDP, 90% of government revenues and 85% of export income, making Saudi Arabia highly reliant on the hydrocarbon sector and, thus, highly susceptible to developments on global oil markets.
1. Low oil prices lead to lower economic growth and high budget deficits
In the second half of 2014, economic growth slowed down significantly from an average 5.1% yoy growth in the first half of the year to 2.2% yoy in the second. This slowdown is primarily the result of sharply lower global oil prices (figure 1). The oil price dropped by almost 45% in the past year, from an average 109.3 USD/bbl in May 2014 to an average 62.6 USD/bbl in December 2014 (Brent). It is expected that the oil price will recover somewhat during 2015, but it will remain significantly below the fiscal breakeven oil price, which is estimated by the IMF at 103 USD/bbl in 2015 for Saudi Arabia. Therefore, the impact of the oil price plunge on government finances has been pronounced. The government budget weakened significantly during 2014 and is expected to deteriorate further in 2015 ( to -14.2% of GDP). On the back of an expected recovery of oil revenues, the fiscal position will improve slowly but remain in deficit in 2016. Reforms of the costly public wages and pensions could improve the fiscal position, but could also lead to social unrest. Fortunately, the Kingdom’s high buffers – public net assets stood at 100% of GDP in 2013 – provide comfort.
Meanwhile, non-oil economic growth is slowing down as well, but will remain supported by countercyclical fiscal spending. The government announced a fiscal package worth around 4% of GDP in February 2015 and will probably further stimulate the economy when necessary. Still, a slowdown of non-oil sector growth to 4.6% in 2015 and 3.7% growth in 2016 is expected, both are far below the 5-year growth average (6.7%).
2. Smooth accession of King Salman, but major changes to the leadership
The Saudi Arabian political system resembles feudal structures and political influence is divided amongst the various clans within the al-Saud royal family. The Sudairi faction has been historically the largest and most influential clan, and a rival of the Abdullah faction, to which the former king (King Abdullah) belongs. After the passing away of King Abdullah on 23 January 2015, the new King, King Salman, introduced major changes to the leadership. He concentrated power in his own Sudairi wing of the royal family by replacing almost all posts in the Cabinet by a Sudairi or a non-royal technocrat. Almost immediately after enthronement, he installed Prince Mohammed bin Nayef as deputy crown prince and chair of the newly set up Council of Political and Security Affairs. He promoted his son, Prince Mohammed bin Salman as Minister of Defence, secretary general of the Royal Court, and chair of Council for Economic and Development Affairs. In April, he removed Prince Muqrin as the crown prince and replaced him by the former deputy crown prince Mohammed bin Nayef. It is the first time since the rise of the al-Saud family that a crown prince has been removed. Since Prince Muqrin does not have any tribal backings, the removal was unproblematic. At the same time, King Salman installed his son Mohammed bin Salman as deputy crown prince. The above described changes to the leadership effectively mean that almost all power in the government is consolidated in the hands of the Crown Prince and the Deputy Crown Prince. In the short-term, it is not expected that these changes will bring major policy changes. Over the longer term, however, it can give rise to instability. First, Mohammed bin Salman has almost no experience in policy making. Second, when the Crown Prince comes to power, he will be the first King that is no son of the founder of Saudi Arabia, Ibn Saud. This generational change will make leadership by consensus more difficult and increases the risk of internal divisions within the Royal family. A last risk is the socioeconomic challenges that the large number of young people in the Saudi society may pose. The current King, Crown Prince and Deputy Crown Prince are more conservative than the late King Abdullah.
3. Saudi Arabia – more assertive foreign policy
With the accession of King Salman and the installation of his son as Minister of Defence, foreign policy has become more assertive. The prime example of this new policy is the Saudi Arabian led intervention in Yemen which aims to weaken the military capabilities of the Shia Houthi group. This intervention was supported by other Sunni Arab states. A core interest to the Sunni Arab states is the security of the Bab-el-Mandab Strait, which is of part of the connection between the Mediterranean Sea and the Indian Ocean and, therefore, of strategic importance to oil exporters. The conflict in Yemen poses security challenges for Saudi Arabia. If the conflict prolongs, there will be a risk of that the intervention becomes a direct conflict between Saudi Arabia (Sunni) and Iran (Shia) and therefore a destabilizing regional confrontation. Moreover, a prolonged intervention in Yemen will probably raise Sunni-Shia tensions in the Shia-dominated oil producing Eastern Province.
Saudi Arabia has an oil-based economy under strict government control. The country holds a leading role in the OPEC, as it possesses 16% of the world's total proven oil reserves and is the largest oil exporter worldwide. Huge financial buffers built from oil revenues have turned the country into a strong net external creditor. This is reflected in a strong net external asset position, 130% of GDP in 2013, and large net portfolio and other capital outflows on the balance of payments. Saudi Arabia is slowly developing the non-oil private sector in order to diversify its economy and reduce dependence on foreign labour. Expats accounted for almost 30% of the population and 85% of the private sector workforce in 2013, though drastic measures under the Saudization programme have reduced their number by 1.4m. As a main source of remittances and financial assistance to other countries, Saudi Arabia is a regional power. This translates into a structurally negative current transfers balance on the current account. Saudi Arabia has no political parties, its monarchy is hereditary and the political decision-making in the country is dominated by the al-Saud royal family. Royal decrees of 2003 and 2006 promised democratic reforms, but progress has been slow. Councillors are appointed by the monarch in what is basically a hierarchical feudal political system. Similarly, the legal system is far from modern and is largely based on Islamist sharia law. In line with the belief in Islamic religious supremacy, the country has not committed itself to accept any jurisdiction of the International Court of Justice. There is some sectarian violence in the oil-rich Eastern Province, where most of the minority Shia Muslims live. Relations with Iran have been tense for decades, due to sectarian differences, as well as fighting for regional hegemony.