The long-promised opening up of the Saudi Stock Exchange (Tadawul) to foreign investment has for years been hailed as the most significant liberalisation of the kingdom’s economy, with potential consequences reaching far beyond the equity markets.

But the bourse’s eventual opening on 15 June could not have come at a worse time for Saudi Arabia, with Riyadh today embroiled in a complex web of challenges that includes post-succession government restructuring, a war in Yemen, an upsurge in domestic terrorism and the prospect of a resurgent Iran, as well as adjusting to a new era of low oil prices.

This unprecedented confluence of events has damaged the country’s risk profile, raising the nerves of investors and other companies doing or looking to do business in the kingdom.

Watershed year

2015 is turning out to be a watershed year for Saudi Arabia, beginning in January with the passing of King Abdullah bin Abdulaziz al-Saud. His successor, King Salman bin Abdulaziz al-Saud, has made it clear the country is heading in a different direction and a new era of governance is being ushered in.

By the end of April, Crown Prince Muqrin bin Abdulaziz had departed to be replaced by Prince Mohammed bin Nayef, while King Salman’s son, Prince Mohammed bin Salman, was parachuted into the deputy crown prince role.

The changes mean the era of power being handed to various sons of King Abdulaziz, Saudi Arabia’s founding father is over and a clear jump to the next generation is under way. As well as adjusting the uppermost echelons of power, King Salman has revamped several government ministries and departments in order to further centralise the power base and reflect this new ruling elite.

He has also taken the exceptional step of leading the kingdom into war. The Saudi-led coalition forces trying to repel the Shia Houthi rebels and militia loyal to former president Ali Abdullah Saleh have carried out scores of raids into Yemen since late March.

The conflict took a worrying turn on 5 June, when a scud missile was launched into Saudi Arabia from Yemen. UN Secretary-General Ban Ki-moon has since called the situation in Yemen a “ticking time bomb”.

As MEED went to press, peace talks were due to be held in Geneva. How successful they will be remains to be seen, but media reports in Saudi Arabia say Riyadh will not be satisfied unless the exiled president, Abd Rabbu Mansour al-Hadi, is reinstated.

With the Houthis and their allies in such a strong strategic position, it is unlikely they will be willing to allow him back. If Al-Hadi is to return, it is more likely that he will need to be accompanied by a large contingent of Saudi-led troops.

The step-up in defence spending comes at a time when Saudi Arabia has seen its revenues cut dramatically as a result of the collapse in oil prices since mid-June 2014. Riyadh has played a hard ball game with US shale oil producers, maintaining output to safeguard market share rather than assuming its traditional role of swing producer and reining in exports to support oil prices. But it has come at a price.

The government relies on the hydrocarbons sector for 90 per cent of its revenues. With exports of about 8 million barrels a day (b/d), a $10 drop in the price of a barrel of oil can mean $29bn less in revenues. Riyadh earned an average of $300bn a year from 2012 to 2014, when oil prices were in triple figures. Based on selling crude at an average of $56 a barrel and exports of 8 million b/d for the whole of 2015, Riyadh would earn $164bn this year, far less than it has grown accustomed to receiving.

Oil income

The government has $736bn of foreign reserves accrued during years of surpluses to cover its outgoings this year, but it will face difficult choices in terms of spending priorities if oil prices stay low as expected and the war in Yemen drags on. Oil prices could take a further tumble if, as expected, a definitive nuclear deal is signed between Tehran and the P5+1 group of world powers on 30 June. The Islamic Republic has said it would increase oil production by 1 million b/d within six months of economic sanctions being lifted, as well as offering 35 million barrels of crude for immediate sale.

The impact on oil prices and the prospect of Iran increasing its influence in the oil producers’ group Opec are just two concerns for the Saudi leadership stemming from the potential Iran nuclear deal. Tehran is also Riyadh’s main rival in the region and the kingdom would not be quick to welcome an agreement that would enable the Islamic Republic to rebuild its economy and increase its political influence in the region.

[Riyadh] going into the battlefield against Iran would provide a perfect scenario for Isis to thrive

Saudi Arabia officially welcomed the signing of the preliminary nuclear framework at the start of April, when King Salman telephoned US President Barack Obama to say he hoped a final settlement of the nuclear dispute would “strengthen the stability and security of the region and the world”. However, the already-fractured relationship between the two Gulf countries has further deteriorated in recent months, with Saudi Arabia accusing Iran of providing support for the Houthi rebels.

King Salman’s swift and aggressive response to the Houthis’ advance across the country is based on the belief that they are acting as a proxy force for Tehran and that if Iran is fighting a war on its border, Saudi Arabia has no choice but to act. Tehran and Riyadh have also found themselves backing opposing sides in the Syrian civil war, with Iran continuing to support embattled President Bashar al-Assad against Sunni rebel groups.

Above all, Riyadh fears that a soft nuclear agreement would allow Tehran a path to develop a bomb. Suspicions of Iran rushing to weaponise its uranium enrichment programme could lead to a nuclear arms race in the region, with Saudi Arabia the next country in line to develop the weapons. “Whatever the Iranians have, we will have, too,” Prince Turki bin Faisal, the former Saudi intelligence chief, said at a recent conference in South Korea.

It is widely thought that Pakistan would be able to provide Saudi Arabia with the technology to produce nuclear weapons within a relatively short space of time.

The terms of the comprehensive agreement targeted by Iran and the world powers have not yet been confirmed. But the US will have its work cut out to convince its allies in Riyadh that Iran has not been given an easy ride.

Meanwhile, Riyadh is fighting a rising tide of domestic terrorism from elements sympathetic to the jihadist group Islamic State in Iraq and Syria (Isis). May saw two deadly suicide bomb attacks on Shia mosques in the Eastern Province. Westerners have also come under attack across the kingdom in the past year.

A risk analyst speaking to MEED dismisses fears Isis might attempt to breach the kingdom’s borders, saying the group’s greater threat to Saudi Arabia is ideological. “The government is worried how Isis’ ideology resonates with Saudi state religion and large sections of the population,” he says. This could inspire more lone wolf attacks of the type seen in the past 10 months or the development of a larger local franchise of the group.

Saudi Arabia has a strong central government and a well-funded civil defence force, so Isis will never be able to grow as quickly as it has done in Syria, northern Iraq and Libya. Riyadh also has a good track record in dealing with domestic terror threats, successfully dismantling Al-Qaeda following its 2003 attacks. A wave of arrests was conducted in May, which saw nearly 100 alleged Isis sympathisers apprehended. “The internal security mechanisms have gone up a gear due to the perceived threat,” says the risk analyst.

Hardline approach

King Salman has surrounded himself with a younger generation of royals who are keen to establish themselves as a decisive ruling elite, capable of tackling external or internal threats. If this means taking a more hawkish stance against Iran while surpressing threats in the kingdom then this is what they are prepared to do.

The problem with this type of aggressive positioning is that it can only be achieved by over-compensating, which brings the risk of mass arrests and pushing Iran into a region-wide sectarian war. Inflaming tensions that radicalise young Saudis as well as going into the battlefield against Iran would provide a perfect scenario for Isis to thrive.

Mid-way through 2015, Saudi Arabia is in a far different position to where it was in June 2014. Back then, Isis had yet to rampage through Iraq, oil prices had yet to plummet, the domestic terror threat was believed to be in check and King Abdullah was continuing his programme of social reform and economic diversification. The prospect of Iran and the West reaching a nuclear agreement was also remote as the first deadline passed without a deal.

Fast forward one year and analysts were warning the opening up of the Tadawul would pass with a whimper rather than a bang, as lower oil prices and slower GDP growth has depressed the market since September. In the event, the bourse closed the day down by 0.9 per cent. It will go down as one of the less memorable occasions in this year of unprecedented change for Saudi Arabia.

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