Saudi Arabia is the Gulf Cooperation Council’s largest economy, but major economic, political and social challenges threaten the kingdom’s immediate economic future. Reducing its dependence on oil and gas is now a case of when, not if.

Author: Mark Townsend

IT’S NOT JUST THE ECONOMY, STUPID

Saudi Arabia has been able to shake off economic shocks before, but the difference this time is that the kingdom’s assertive foreign policy is being called into question. What concerns analysts is that all roads increasingly trace back to Mohammad bin Salman. Even in the Gulf’s lexicon of grand titles, his breadth of influence—deputy crown prince, second deputy prime minister, minister of Defense, secretary general of the Royal Court and head of the kingdom’s Council of Economic and Development Affairs—is formidable.

When King Salman acceded to the throne in January 2015, he swept through royal ranks, dismissing former crown prince Muqrin, placing his son, Mohammad bin Salman, as second in line to the throne. Skipping a generation has fueled unease in the royal family, according to analysts. “The degree of change within the ruling family and the rapidity of Mohammed bin Salman’s rise over the past year has reinforced a sense of bewilderment in many Saudi watchers, who find themselves struggling to make sense of where the drivers and objectives of policy lie,” says Kristian Ulrichsen, a fellow for the Middle East at Rice University’s Baker Institute for Public Policy. The move, Ulrichsen says, has worried observers.

In an unusual public statement in December, Germany’s intelligence agency, the BND, expressed concern the kingdom was becoming impulsive in its foreign policy. Saudi Arabia’s execution of 47 so-called terrorists in early January, including a
high-profile Shiite cleric, had political ramifications that ricocheted across the Middle East, not least with Saudi Arabia’s Shiite neighbor Iran, where the public responded to the executions by attacking Saudi diplomatic missions. Saudi Arabia severed diplomatic ties with Iran in January, adding a further dimension to an already edgy regional geopolitical environment.

Diplomatic tensions aside, the key to the kingdom’s economic fortunes will be the speed with which it is able to implement reforms. Last year the Saudi Capital Market Authority allowed foreign financial institutions to buy and sell stocks on the Tadawul, the Saudi stock exchange, for the first time. There has been little feedback on the take-up by foreign investors since the change in regulation. The IMF has urged Saudi Arabia and other GCC countries to deepen capital markets as a way to strengthen their economies. If Saudi Arabia does tap international bond markets this year, it might be an appropriate time to develop a secondary market in local currency debt.

With a nominal GDP of around $644 billion, Saudi Arabia is still the Gulf’s largest economy by far. But investors will have to weigh risk more carefully than they have ever done before. 

GFmag.com Data Summary: Saudi Arabia

Central Bank: Saudi Arabian Monetary Agency

International Reserves                 

$744.4 billion

Gross Domestic Product (GDP)

$632.1 billion*

Real GDP Growth

2013
2.7%

2014
3.5%

2015*
3.4%

GDP Per Capita—Current Prices

$20,138*

GDP—Composition By Sector*  

agriculture:
2%

industry:
57%

services:
41.1%

Inflation

2013
3.5%

2014
2.9%

2015*
2.1%

Public Debt (general government
gross debt as a % of GDP)

2013
2.7%

2014
1.6%

2015*
6.7%

Government Bond Ratings

(foreign currency)

Standard & Poor’s
A+

Moody’s
Aa3

Moody’s Outlook
STA

FDI Inflows

2012
$12.2 billion

2013
$8.9 billion

2014
$8.0 billion

* Estimates                                                                                                                      
Source: GFMag.com Country Economic Reports

 

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