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Saudi Arabia Country Risk Report Q1 2016

Saudi Arabia Country Risk Report Q1 2016

Core Views

The replacement of Saudi Arabia's heir in April 2015, along with other major changes in the country's leadership, represent a further consolidation of King Salman's authority. That said, the elevation of the king's son as second in line to the throne is proving a controversial choice, and could spark future instability.

Growth in Saudi Arabia will slow sharply over the next couple of years as the government embarks on fiscal consolidation and oil production flattens. This, combined with statistical effects linked to the rebasing of the national accounts, has led us to revise our forecasts downward. We now project real economic growth of just 1.9% in 2016 and 2.3% in 2017.

A confluence of factors makes progress on subsidy reform in Saudi Arabia much more likely than even a year ago. Nevertheless, price liberalisation will remain limited and gradual, with Riyadh proceeding at a slower pace than the rest of the Gulf. Policy changes are likely to be first targeted at the industrial sector, with energy-intensive industries vulnerable to a decline in competitiveness and margins.

The Saudi-led military operation in Yemen has so far achieved few of its desired objectives. A move towards political dialogue between the warring factions is likely, but any agreement between Saudi Arabia and Yemen's Shi'a Houthi rebels will be difficult to reach and even more difficult to implement.

Continued heavy spending on the part of the government indicates its ongoing concerns about the need to shore up its key bases of support, given the persistent threat of public unrest. While we maintain that large-scale protests are unlikely to occur in Saudi Arabia, large youth unemployment coupled with a lack of political liberties mean that tensions will continue to linger.


Executive Summary
Core Views
Key Risks
Chapter 1: Political Outlook
SWOT Analysis
BMI Political Risk Index
Domestic Politics
Pressure Mounting On King Salman
The series of setbacks suffered by Saudi Arabia's King Salman risks undermining the legitimacy of the current ruling triumvirate. While
Salman's woes are still a long way away from constituting an existential threat to his grip on power, any further erosion in his standing
will both complicate the government's economic reform efforts and renew uncertainty over the line of succession.
TABLE: POLITICAL OVERVIEW
Long-Term Political Outlook
Scenarios For The Coming Decade
The Saudi royal family depends on steady oil revenues to maintain its tight grip on the population. As a result, a sustained downturn in
global oil demand could lead to substantial unrest and, potentially, regime change over the long term.
Chapter 2: Economic Outlook
SWOT Analysis
BMI Economic Risk Index
Economic Growth Outlook
Entering A Slowdown
Growth in Saudi Arabia will slow sharply over the next couple of years as the government embarks on fiscal consolidation and oil
production flattens. This, combined with statistical effects linked to the rebasing of the national accounts, has led us to revise our
forecasts downward. We now project real economic growth of just 1.9% in 2016 and 2.3% in 2017.
TABLE: ECONOMIC ACTIVITY
GDP By Expenditure Outlook
TABLE: COMPONENTS OF GDP (% OF TOTAL)
TABLE: GOVERNMENT CONSUMPTION FORECASTS
Economic Policy
Subsidy Reform Under Way At Last, But Expect Slow Progress
A confluence of factors makes progress on subsidy reform in Saudi Arabia much more likely than even a year ago. Nevertheless, price
liberalisation will remain limited and gradual, with Riyadh proceeding at a slower pace than the rest of the Gulf. Policy changes are likely
to be first targeted at the industrial sector, with energy-intensive industries vulnerable to a decline in competitiveness and margins.
TABLE: PRIVATE CONSUMPTION FORECASTS
TABLE: FIXED INVESTMENT FORECASTS
TABLE: NET EXPORTS FORECASTS
TABLE: GCC - INCENTIVES AND ROADBLOCKS TO SUBSIDY REFORM
Currency Policy
Riyal Devaluation Is Off The Cards
We regard a devaluation of the Saudi riyal as highly unlikely. Such a move would carry few economic benefits and come at the expense
of social stability. More importantly, the Saudi authorities easily retain the means to defend the peg, and comparisons with Kazakhstan
or other emerging markets are overblown.
Banking Sector Update
Banking Sector: Bonds Are Good News, But Lending To Fall
Increased government borrowing will create a new revenue stream for Saudi banks. Combined with higher interest rates from the end
of this year onward, we see scope for margin expansion over the coming quarters. However, lending activity will continue to weaken
throughout the rest of 2015 and 2016.
Regional: GCC Economic Policy
Fiscal And Monetary Tightening To Hit GCC Growth
The six economies of the GCC are set to face tighter fiscal and monetary conditions from 2016 onwards. A downward drag on economic
growth is inevitable. That said, the Gulf's large financial buffers, still-solid growth drivers in most countries, and efforts to attract greater
private investment will help to mitigate the impact of the oil price slump.
TABLE: GCC - BUDGET BALANCE, % OF GDP
TABLE: GCC - REAL GDP GROWTH, %
TABLE: FISCAL POLICY
Chapter 3: 10-Year Forecast
The Saudi Arabian Economy To 2024
Politics Main Risk To Long-Term Outlook
Assuming the survival of the current form of government into the medium term, we expect moderate growth over our forecast period,
driven by high investment and private consumption. Efforts towards the long-term goal of economic diversification will result in a broader
export base, but oil will remain a central part of the Saudi economy.
TABLE: LONG-TERM MACROECONOMIC FORECASTS
Chapter 4: Operational Risk
SWOT Analysis
Operational Risk Index
Operational Risk
TABLE: OPERATIONAL RISK
Education
TABLE: MENA - EDUCATION RISK
TABLE: GRADUATES OF TERTIARY EDUCATION, '000
Government Intervention
TABLE: MENA - GOVERNMENT INTERVENTION RISK
Chapter 5: BMI Global Macro Outlook
Global Outlook
Exit The Dragon
TABLE: GLOBAL ASSUMPTIONS
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %

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