Special Report contents:

• Saudi Arabia: Balancing austerity with growth
• Tough decisions ahead for Saudi spending plans
• Saudi projects market faces slow 2016
• Cautious optimism for Saudi Arabia’s mining prospects
• Riyadh expected to maintain oil strategy
• No gain without pain for Saudi projects sector
• Databank: Saudi Arabia key economic indicators

The economic situation for Saudi Arabia looks tough these days, but the political situation is hardly any better. There are difficulties and potential challenges in almost every direction for Riyadh.

To the east, the resurgence of Iran in the wake of the deal to lift sanctions is viewed with deep suspicion, while to the south the ongoing war in Yemen is costing a lot of money, as well as the lives of Saudi and Gulf servicemen, and political capital on the international stage.

To the north, the conflict in Syria is proving to be a draw for a significant number of young and disenfranchised Saudi nationals and runs the risk of radicalising the next generation.

The war also feeds into concerns about an arc of Shia regimes from Iran, to Iraq and Syria, all of which are seen as hostile to the interests of the kingdom. And to the west, the cost of propping up the Egyptian regime of President Abdul Fattah al-Sisi is proving to be an increasingly unwanted burden at a time of austerity at home.

All these issues have the potential to cause political trouble within Saudi Arabia.

They are also coming at a time when the country feels more exposed internationally than for many years, with doubts about the commitment of the US to the region.

The risk of Islamist extremism, in particular, is a huge challenge for the Saudi authorities.

Radicalisation concerns

At the start of the year, the London-based International Centre for the Study of Radicalisation & Political Violence (ICSR) estimated that as many as 2,500 Saudis had gone to Syria and Iraq to join Sunni militant organisations such as Islamic State in Iraq and Syria (Isis), a figure matched only by the number that have joined from Tunisia.

About 5-10 per cent of recruits are likely to have died, while a further 10-30 per cent have left the conflict zones and either returned home or moved on to a third country.

It is the returnees that are the greatest source of concern, with the risk that they may either launch terrorist attacks within the country, or encourage others to do so.

Isis has claimed responsibility for a series of attacks on mosques in the south and east of the country this year, killing dozens.

While there have reportedly been hundreds of arrests against suspected terrorists in the kingdom, the fact is that there is a ready constituency within Saudi Arabia for those preaching a diet of extremist Wahhabi ideology and the problem continues to fester.

The most recent attack came in late October in the southern city of Najran, which lies close to the Yemeni border. At least one person was killed in an attack on a Shia mosque in the city.

The Yemen conflict itself has the potential to be just as damaging, if not more so.

Military campaign

The Saudi military campaign, which began in March, has led to the deaths of well over 100 Saudi personnel and many thousands of Yemenis.

Waging the war is likely to be a significant drain on the Saudi government at a time when it needs to severely curtail its spending in other areas in response to low oil prices.

Although the cost is certainly large, the precise scale of it is unknown. According to the International Institute for Strategic Studies (IISS), a UK-based think-tank, Saudi Arabia spent $81bn on defence in 2014, a figure that has been steadily rising over recent years – in 2010 it was $45bn.

The 2014 figure was the third-largest military budget in the world behind the US and China. The cost of the assault on Yemen means the figure for this year is likely to be higher still.

When oil prices were high, such spending could be relatively easily afforded, but now things are rather different.

But it is not just the cost that is troubling. The conflict has led to accusations from Amnesty International that the Saudi-led coalition forces have been guilty of war crimes.

There is also a sense among many people both inside and outside Saudi Arabia that there is no clear strategy underlying the military activity.

“I don’t think they necessarily thought it would last this long,” says Kristian Coates Ulrichsen, Middle East fellow at Rice University in the US, and author of the newly published book The Gulf States in International Political Economy.

“There’s no plan, no exit strategy and it’s not clear what victory would look like. People are privately expressing a sense of disquiet.”

Political risk

Within Saudi Arabia, the Yemen campaign is closely linked to the Deputy Crown Prince and Defence Minister Mohammed bin Salman, the son of King Salman bin Abdulaziz al-Saud. The longer the conflict continues, and the more destruction and deaths that are caused, the greater the potential risk to his reputation and authority.

“His close association with the Yemen war exposes him to a lot of risk,” says Jane Kinninmont, deputy head of the Middle East programme at UK-based think-tank Chatham House.

“It is probably too early to say definitively what that means. I suspect the longer it goes on the more questions there will be. Conversely, if they are able to back up military might by showing diplomatic abilities and reconstruction abilities that could be much more of a measure of success, but that’s still quite questionable.”

Signs of unease within the royal family about the direction the country is going in broke into the open when two anonymous letters, apparently written by a senior Saudi prince in September, were leaked. The letters heavily criticised King Salman and his anointed successors and called for other senior family members to force a change in leadership.

It is unclear how widely held such views are within the family, but it is a stark reminder that, despite the efforts of the Al-Sauds to project an aura of stability and unassailable control, the country has faced palace rivalries in the past. King Saud was forced to abdicate in favour of his brother Faisal in 1964 and a nephew then assassinated King Faisal in 1975.

“It would be very odd if there wasn’t dissent in the royal family, because a whole bunch of people have been shunted to one side,” says one political analyst. “It’s unprecedented for a king to empower his son so much. In what is a conservative country dominated by older princes, there’s bound to be controversy.”

Hajj deaths

The sense of the regime being increasingly vulnerable to criticism was heightened by the deaths at this year’s Hajj.

More than 1,000 people are believed to have been killed during a stampede during the religious pilgrimage this year, just a few days after more than 100 were killed by a collapsing crane in the Grand Mosque in Mecca. The incidents have opened the regime up to charges of incompetence, and given room for the likes of Iran to make political capital out of it.

All these problems are coming at a time when the fiscal position for the government is much tighter than for many years.

Low oil revenues and a large budget deficit mean the country cannot afford to use the one policy instrument it has turned to whenever there have been signs of discontent in the past, namely a large government handout.

When the Arab uprisings were gathering momentum, King Salman’s predecessor, King Abdullah bin Abdulaziz al-Saud, awarded large pay rises, spending $129bn on measures including on unemployment benefit, paying bonuses to state employees, increasing wages, and building new homes. When King Salman came to the throne earlier this year he too went on a spree, giving away an estimated $29bn.

Such profligacy has been taken off the list of policy options for now, while the government tries to put its finances on a more sustainable footing, but making any cuts also carries the risk of prompting protests.

“Political pressures are certainly going to make the king’s advisers, particularly his son, wary of where exactly any fiscal consolidation takes place,” says one economist. “They’ll be very cautious of any potential to stir unrest.”

Economic transformation

On the plus side for the government, more Saudis are now finding jobs in the private sector, which helps to reduce the burden of wages on the state.

However, that development also carries some potential risks. The social contract between the ruled and the rulers in Saudi Arabia is predicated on the notion that political rights are waived in return for guarantees such as economic security and personal safety.

If more Saudis are having to earn their own living in the private sector, and perhaps soon having to start paying higher prices for what until now have been heavily subsidised items such as fuel, then the basic understanding at the heart of the system becomes open to question.

“There is a big economic transformation going on and that’s bound to have political ramifications. The loyalty [to the regime] is based on various factors, but certainly the provision of services and job opportunities is one of them,” says Kinninmont.

“If the state has less ability to provide economic benefits to the citizens, what happens to compensate? Maybe the citizens will demand more of a say and more scrutiny. You’re seeing signs of that with people’s increasingly vocal use of social media, for example.”

More stable than most

Gauging the seriousness of the political threats facing the country and its rulers is always extremely difficult, given the secrecy with which the royal family tends to conduct its affairs and the lack of any organised, public opposition.

However, the kingdom certainly appears more exposed to problems than for many years. If it proves unable to get to grips with some of the issues facing it, then the risk of instability is only likely to rise.

Having said that, the regime can at least comfort itself with the knowledge that the recent political upheavals in other countries around the region do not offer a path that many Saudi nationals will want to follow.

“I don’t see the country facing large-scale, organised opposition,” adds Kinninmont.

“The models for political change in the region are unappealing. The rulers may not satisfy everything that the people want, but they are known and they provide a basic stability and living standard. And all around there are states collapsing.”special