Riyadh to start delivering proposed changes in 2017

02 January 2017

The kingdom will need to make good on the economic reform promises made in its ambitious National Transformation Programme as well as pay more attention to foreign affairs

Following a landmark year that witnessed the launch of Vision 2030 and the National Transformation Programme (NTP), Riyadh does not have the luxury of taking a break as it charts a course through 2017. Now comes the hard part: realising the ambitious targets laid out in the plans without disrupting the oil-dependent economy or upsetting a public that faces a challenge to its living standards.

The next 12 months will present an enormous range of challenges for the Saudi leadership on both the domestic and external fronts.

Production cut

Hydrocarbons prices will inevitably figure prominently in shaping the kingdom’s economic outlook in 2017, with oil accounting for more than three-quarters of total export earnings. Having ended its loose market supply stance at the late September 2016 Opec summit in Algiers, Saudi Arabia went to the next meeting in Vienna at the end of November to convince fellow members – notably Iran – to agree a firm production cut.

The subsequent stabilisation of oil prices near the $50-a-barrel mark has given rise to expectations of higher oil export receipts for Riyadh, with the local Jadwa Investment forecasting a rebound to $160bn in 2017, compared with just $132bn in 2015. This would largely be on the basis of a recovery in prices, although that inevitably hinges on Opec members being disciplined in implementing output cuts.

King Salman bin Abdulaziz al-Saud must also ensure the reform drive announced in 2016 does not lose momentum in 2017. Despite the frequent public commitments from the powerful Deputy Crown Prince Mohammed bin Salman that his reforms will not be derailed by rising oil prices, he will need to show genuine progress on core components of the NTP and Vision 2030 if this is to be believed.

That challenge will be made more difficult by the fact that some of the reform measures will clearly hit the public where it hurts. The next 12 months should see further cuts to fuel subsidies and pensions, as well as new municipal fees (due to take effect from December 2016) and cuts to public sector wages.

Payment promises

The Finance Ministry has outlined a five-year target to reduce the public wage bill from SR480bn ($128bn) to SR456bn, which could bite into salaries in 2017. There may, however, be better news in 2017 for long-suffering contractors owed billions of riyals from unpaid invoices dating back to 2014, when the government instituted a clampdown on public sector spending. Statements were made in late 2016 that backlogged payments would soon be settled. If corporate payment schedules start to pick up again, it should provide a substantial uplift to economic sentiment.

National oil company Saudi Aramco, with its first ever public listing earmarked for 2018, will be expected to yield more light on its reserves position in 2017, although those expecting a full and frank exposition of the true state of its oil and gas fields may be disappointed. The Saudi Stock Exchange (Tadawul) authorities will, meanwhile, be hoping the bourse’s opening to foreign investors will lead US index compiler MSCI to include it on its Emerging Markets Index by mid-2017. That would give a massive boost to the capital markets, even if the country’s inclusion on the index would not be likely to take effect until the following year.

Yemen war

The government will be forced to pay more attention to foreign affairs in 2017, not least with a new and controversial occupant in the White House to deal with. The Yemen war could present the biggest challenge for the Saudi authorities, with little material political reward so far for the billions spent on the military intervention in the kingdom’s southern neighbour. The Saudi armed forces will likely continue to launch missile attacks on Houthi rebel positions in an effort to restore Yemen’s President Abdrabbu Mansour al-Hadi to power, despite growing international opprobrium at the humanitarian impact of the air-led campaign.

From Riyadh’s perspective, the campaign is still seen as strategically important to prevent Iran from obtaining a foothold in the Arabian Peninsula.

Relations with the Islamic Republic will remain tense. Riyadh will be wary of Tehran gaining advantage from the likely ousting of Islamic State in Iraq and Syria (Isis) from Mosul in Iraq in 2017, and the probability that the jihadists will lose territory in Syria to Iran’s allies too.

Where Saudi Arabia may play a more constructive role in 2017 is in Lebanon, following the nomination of its ally Saad Hariri as prime minister in Beirut. Although it is wary of Iran’s influence on the Lebanese government, there are indications the Saudi leadership is prepared to rebuild bridges with its Sunni allies in Beirut, after a serious rupture in ties in early 2016. With the new president, Michel Aoun, expected to visit Riyadh, Saudi Arabia may be looking to regain influence in Lebanon.

Blank slate

US president-elect Donald Trump presents a different kind of challenge. King Salman was one of the first global leaders to confer with him in November, offering congratulations on his surprise win. To the Saudi leadership, which had little time for Barack Obama, Trump represents a blank slate, but with clear potential for much closer bilateral relations built around a common distrust of Tehran. Trump’s view that the Iran nuclear agreement orchestrated by Obama was the “worst deal ever negotiated” will have been echoed in Riyadh.

Trump’s appointment of the fiercely anti-Iranian former general James Mattis as defence secretary should embolden Riyadh as to the likely direction of his Middle East policy. Earlier this year, Mattis said the Iranian regime is “the single most enduring threat to stability and peace in the Middle East.” Those words could just as easily have been said by a senior Saudi official. There is now a possibility of much closer security cooperation between the kingdom and the US, directed towards Iran.

The Saudi leadership will hope the new US president will retreat from previous calls for Riyadh to compensate Washington financially for the protection it offers the kingdom. Then there is the matter of the Justice Against Sponsors of Terrorism Act (Jasta) to deal with. In late September, US Congress voted to override the presidential veto on Jasta, raising the prospect of potential punitive action against Saudi Arabia and others. This is considered a low-probability event, given the logistical difficulties of proving alleged Saudi culpability in terrorist acts, but officials will be looking to a Trump White House to stop Jasta in its tracks.

Defence outlays grew to $87.2bn, making Saudi Arabia the world’s third-largest military buyer

There could also be tensions if Trump implements a campaign promise to block all Saudi oil exports to the US, as part of an agenda of securing energy independence for the country. Officials in Riyadh appear confident that the president-elect will pull back from this particular “rhetorical flourish”. The kingdom’s Energy Minister Khalid al-Falih noted in an interview in mid-November that Trump would see the benefits of Saudi oil imports and that the oil industry would advise him that blocking trade in any product is not healthy.  

Military outlays

Defence spending – buoyed by the Yemen war – can be expected to remain on an upward trajectory. In 2015, Saudi defence outlays grew by almost 6 per cent to $87.2bn, according to the Stockholm International Peace Research Institute, making it the world’s third-largest military buyer. Concern about Iran’s intentions – as witnessed in the Saudi offensive against the Tehran-backed Houthis – will underpin the increase in military spending. Defence budgets have not been affected by Riyadh’s austerity drive, and the sector now accounts for just over one-quarter of total government expenditure. The prospect of higher oil prices in 2017 provide another reason to continue with further purchases of arms and services.

However, there is likely to be a greater focus on building a domestic defence industry, a goal set out in Vision 2030. Deputy Crown Prince Mohammed bin Salman, who is also defence minister, is set to establish by the first quarter of 2017 a state-owned military holding company tasked with fostering a defence industry. New deals with external suppliers are likely to include commitments to develop local capabilities and generate more defence-related jobs.

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