Saudi Arabia’s high risk gamble

The smokescreen created by Saudi rulers over Iran’s criticism of prominent cleric Sheikh Nimr al-Nimr’s execution partly serves to conceal the kingdom’s economic troubles. 

The fallout from Saudi severing of diplomatic ties with Iran has raised fears of an escalation in a region already riven by the world’s worst conflicts in recent years.

However, what has gone less noticed is the crisis which Riyadh is facing with its balance sheets.

The steep slide in oil prices, a mess of the kingdom’s own making, has blown away big chunks of foreign reserves and liquidated public finances in a country where 90% of the economy suckles on the big oil money.

The International Monetary Fund (IMF) expects Saudi Arabia to run a budget deficit of 19.4% in 2016 and run out of financial assets within the coming five years.

Several key factors are currently shaping the kingdom’s outlook, most important of which are deepening regional conflicts and slumping oil prices.

Structural changes and risks

New Saudi rulers are stirring up regional tensions in order to divert attention from a convoluted power restructuring which is currently underway in the kingdom.

As part of the plan, the current Oil Minister Ali al-Naimi, a technocrat and not a royal by blood, is said to be replaced by Abdulaziz bin Salman, one of King Salman’s sons.

The appointment would put the most important sector of the country under the new royal family’s clutches and consolidate its power.

King Salman launched its coup by naming another son, Mohammad bin Salman, as defense minister. The young prince is already believed as the real ruler and the driving force behind Saudi Arabia’s current confrontational policies.

The prince has also unveiled a raft of plans to cut spending, privatize basic services such as healthcare and education and raise taxes.

Such measures carry high risks in a country where a clan-based system of vested interests is unlikely to brook any major changes.

Meanwhile, dictating austerity on a community long used to a lavish lifestyle while the royal family and the elite continue with their opulent ways could fuel dissent.

Costs of kingdom

Populist spending is the glue which keeps the tribal community together in Saudi Arabia. King Salman splurged $32 billion in his coronation as bonuses to all workers and pensioners.

There is already bottled anger lurking beneath in the oil-rich Eastern Province which could boil over at any moment after the execution of Sheikh Nimr.

However, it is the youth unemployment which provides the powder keg in the country of 31 million where a third of the first-time job seekers are out of work.    

The kingdom is also running a costly patronage system and acting as a pack-builder, explaining why a curious set of states such as Djibouti, Bahrain, Sudan and Somalia took Riyadh’s lead in cutting ties with Iran.

That comes with costs and obligations, however. For example, Saudi rulers have had to splash out $11 billion on Sudan to make the African country turn its back on a quarter-century alliance with Iran. 

The collapse in oil prices, military expenses in Syria and Yemen and the fallout from severing of ties with Iran, however, are burning through foreign reserves at an alarming pace.

In 2015, those reserves fell by $100 billion at a pace which is accelerating with the kingdom's raising of the ante.

According to the Forbes magazine, Saudi Arabia’s decision to sever diplomatic ties with Iran could cost it about $3 billion a year if Tehran decided to halt Hajj pilgrimage. 

Last year, Riyadh opened its stocks to foreign buyers for the first time and is even mulling to sell stakes in the national firm Aramco, the world’s largest oil behemoth.

Saudi Arabia’s further vulnerability is from its currency which is increasingly under pressure from depleting foreign reserves because it is pegged to the US dollar.

According to the IMF, the kingdom would need an oil price of $106 a barrel to balance its budget. The crude oil has fallen below $35 a barrel and continues its downward spiral. 

Conclusion 

Saudi rulers depend on oil to fuel their geopolitical ambitions and maintain internal stability which is also tied to the massive oil wealth. With the oil revenues dipping to historical lows, they dread disarray among regional allies and unrest at home as living standards fall. 

Those fears explain to a great extent the recent brinkmanship by the new rulers, including their sudden execution of Sheikh Nimr and vitriolic attacks against Iran.

But it is a high risk gamble which could backfire and lead to serious complications with intractable consequences. 

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