Just two weeks ago, the Future Investment Initiative summit in Riyadh took place to international acclaim. Now, investor interest has turned to intense uncertainty, as power shifts unfold in the Gulf. But despite the short-term risks, Alex Damianou argues that the long term impact should be positive.
The 4th of November was an historic day in Saudi Arabia. King Salman and his son, Crown Prince Mohammed bin Salman (MbS), demonstrated their continued, almost Machiavellian determination to execute social and economic reforms under Vision 2030. Their goals – to usher in a new area of transformation, consolidate power, and re-assert themselves on the regional battleground towards Iran.
What happened?
The day began with the seemingly Saudi-influenced resignation of Lebanese Prime Minister Saad Hariri in Riyadh, citing Iranian influence and fears of an attempt on his own life. This was followed by a royal decree issued by King Salman, establishing the National Anti-Corruption Committee.
Chaired by Crown Prince Salman, the committee has a mandate to identify offenses, persons, crimes and entities involved in public corruption. The extensive powers of the committee include the ability to issue arrest warrants, restrict travel and freeze accounts. As the King put it in a televised address, “Laws will be applied firmly on everyone who touched public money and didn’t protect it or embezzled it, or abuse their power and influence”.
In another example of the autocratic liberalization we have come to see over the past year from the King and Crown Prince, the crackdown strategically targeted power players in business and government. This included 11 princes, dozens of businessmen and senior officials, and former and sitting ministers. Notable among them are:
Billionaire businessman Prince Alwaleed bin Talal, chairman of Kingdom Holding,
Prince Miteb bin Abdullah, Minister of the National Guard,
Prince Turki bin Abdullah, former governor of the Riyadh province,
Adel Fakieh, Minister of Economy and Planning,
Amr al-Dabbagh, businessman and former Governor of the Saudi Arabian General Investment Authority (SAGIA),
The elderly Saleh Kamel, a billionaire Jeddah businessman and Chairman of Dallah Albaraka Group & Jeddah Chamber of Commerce,
Bakr Bin Laden, another billionaire Jeddah businessman and chairman of the Kingdom’s historic and largest construction company, Saudi Binladen Group,
Waleed Al Ibrahim, Chairman of the Middle East Broadcasting Center (MBC),
and billionaire businessman Mohammed Al Amoudi, owner of MIDROC.
Three key trends
Make no mistake, this is a crucial development – but to view it just as a sensational power grab is to ignore three very important underlying trends.
First, the anti-corruption crackdown is a part of the Kingdom’s ongoing social and political transformation. Second, it relates to a consolidation of power by the Crown Prince and the re-structuring of the monarchy’s system of governance. And third, there is an element of regional hegemony as Saudi Arabia escalates its rivalry with Iran.
The convergence of these trends is likely to increase short-term risks for international investors, but also create long-term gains if these risks are quickly addressed and mitigated by the Kingdom.
1) Social and political reform
The King and Crown Prince are engaged in an effort to drag the Kingdom into the 21st century, under Vision 2030, with the support of the large youth population. Until given reason to believe otherwise, we should take at face value what the government has proclaimed: that this is a reflection of the seriousness with which the corruption is being taken.
It is no secret that graft has plagued the Kingdom for decades and that a system of “bakhshish” – or tradition of side payments – has existed. Therefore, it is entirely possible that all those who stand accused of corruption are guilty of it. Of course, the arrests can appear cynical, given that many others who are likely mired in corruption have not (yet) been targeted. Transparency and the legal system will need to prevail, for long-term stability and investor outlook will depend on it. But for now, the news of the crackdown has been well received by the Saudi public, especially the youth, who have seen the old guard enrich themselves through the system and want them held accountable in a new era.
2) Ongoing power consolidation
While many analysts have depicted the crackdown on influential figures this past weekend as an audacious power grab by the King and Crown Prince, it is nothing more than a continuation of a series of moves to permanently reshape the monarchy’s system of government and consolidate power in the hands of one branch of the family.
Gradual erosion of tradition
Since the 1930s, the Kingdom has operated on a system of checks and balances, where certain branches of the family were given independent power centers or fiefdoms, and governing decisions were made on a consensus basis with the Shura Council’s clerical religious stamp of approval. Over the past two years, King Salman has taken a series of moves to upend these traditions:
Neutering the religious body’s influence by passing laws such as allowing women to drive and reducing the influence of the religious police,
Dismantling independent power centers by big cabinet reshuffles that have removed influence from certain branches of the Saud family and either giving them to the Salman clan or its close allies;
Removing Prince Mohammed bin Nayef from the Crown Prince position and installing MbS in June 2016
Undertaking crackdowns on clerics and activists, such as the one six weeks ago.
Now, the removal of Prince Miteb bin Abdullah on corruption charges is perhaps the last swing of the axe at political obstacles. The King now controls all three branches of national security: the military, taken over by MbS when appointed Minister of Defense in 2015, the interior security forces, taken over from Mohammed bin Nayef and his clan in June 2017, and now the National Guard from the Abdullah branch of the family.
Towards an absolute monarchy
The system of checks and balances by family and the practice of governing by consensus have been dismantled. In their place is an absolute monarchy with power concentrated in the hands of King Salman, Crown Prince Mohammed bin Salman and his branch of the family.
While a descent into absolutism carries risks of arbitrary rule, in the Saudi context it can also be seen as a necessary step to effectively push through Vision 2030 reform.
However, this interpretation of the purpose of the corruption probe – of the need to consolidate power in order to achieve change – is challenged by the fact that influential, apolitical businessmen who supported the reform process, such as Prince Alwaleed, have been targeted.
Many didn’t pose an immediate threat to the power of the Crown Prince. Others like Adel Fakieh were working together with the Crown Prince on pushing Vision 2030.
That said, their inclusion may be an indication of the Crown Prince issuing a pre-emptive warning for the future, that no one is safe from scrutiny, no matter how close they are to the center of power. It could also be a potential exercise in gaining leverage, and raising revenue to replenish state coffers. As discussed below, the government has said that assets accumulated through corruption will become state property.
The most likely explanation is that individuals were selected as being representative of the old guard – all of them are over 55 – and that MbS is catering to a populist desire to level the playing field and usher in a new era.
3) Regional cold war with Iran
The ongoing consolidation of power has allowed the King and MbS to adopt a more assertive and agile foreign policy. Previously, with Mohammed bin Nayef (MbN) as Crown Prince and Interior Minister and consensus rule still the norm, the Saudi foreign policy approach was conservative and prioritized regional cohesion. Once US support shifted from MbN to MbS and the King removed MbN without universal approval from the allegiance council in June 2017, the Crown Prince was free to quickly assert himself and subsequently began the Qatar blockade that same month.
It appears that he has also taken the initiative in the latest installment of the regional proxy war for influence with Iran, which has re-emerged in Lebanon. Saudi-backed Sunni Prime Minister Hariri was summoned to Riyadh, then seemingly pushed to resign amidst concerns from the Kingdom that he has not done enough to curb the rise of his governing partner Hezbollah, a Shia group backed by Iran.
Meanwhile, the proxy conflict with Iran in Yemen has cost thousands of Yemeni lives, and taken billions from the Saudi budget. Efforts to bring Qatar to heel in the GCC alliance have stalled as the Qatar blockade adversely impacts all parties involved, while pushing the tiny gulf state into the arms of Saudi’s adversaries.
As the Crown Prince capitalises on newfound power to continue his brash foreign policy with the backing of the UAE and US – and more noticeably Israel, a notion inconceivable not too long ago – there is a real risk of further instability in the region and escalation towards direct war with Iran.
Outlook: Short term risks rise
Investors press pause amidst uncertainty
Efforts to improve investor confidence by the government this past weekend have inadvertently achieved the opposite in the short term. The lack of transparency and due process thus far, and the high business profile of the individuals targeted, is likely to foster a wait-and-see approach among existing and prospective investors.
Crucially, the shakeup is far from over. Attorney General Saud al-Mojeb stated that this was just the completion of Phase One of the anti-corruption push, with the Central Bank adding hundreds of names to an asset freeze list on a daily basis.
Given the uncertainty over the fate of potential business partners, new deals may be put on hold and locals may refrain from putting money into the Tadawul stock market, which saw declines in the past few days.
Capital flight will surely continue as more figures are targeted in the crackdown. Concerns over the fast-paced reform process in the past year had already led to outflows of money from Saudi businesses. Austerity measures, coupled with low (though rising) oil prices and slow non-oil growth, have created a stagnant economy that will end the year with close to zero percent GDP growth. On the other hand, the budget deficit is expected to narrow to around 8% of GDP this year, just over half of its level last year, while reserve depletion is slowing down after losing one-third of its value over the past two years.
Loss of private sector allies to drive growth
Many of the private sector tycoons arrested had been expected to boost growth and job creation in the private sector, in line with Vision 2030 efforts. And while the government set out a privatization drive and implemented reforms to open the economy up to foreign capital, this move has now likely frightened them for the time being. So, where is the fixed-capital formation and growth going to come from?
In the short term, the King and Crown Prince must now rely even more heavily on oil prices rising to keep a manageable budget deficit. Brent crude prices have recently broken the $60 a barrel barrier and the Saudi led OPEC is expected to extend production cuts at this month’s meeting. New taxes are underway, such as VAT in January 2018, and subsidy cuts are on the horizon. However, youth support for social liberalization and crackdown on the old guard’s graft will only last so long if employment prospects don’t improve and an autocratic environment persists, with unemployment at 12.8% total and hovering around 40% for the youth.
Asset seizure
Confidence in the Kingdom’s reforms to date has led to oversubscribed international bond offerings and high credit ratings from the agencies, while plugging the fiscal deficit. However, it seems that it is a very real possibility assets will be seized, worth in excess of $800 billion. The government may look to strike deals with some of the accused and now reluctant players, to play a role in private sector development in exchange for getting off lightly on their charges, along with perhaps a “fine” or “reclamation of stolen public funds”.
Conservative and royal pushback
Discontent from the religious class and branches of the royal family is a source of potential instability, as they may band together in opposition to the new norm, while the most extreme of them may go underground. However, given the absolute power of the King and Crown Prince today and the Saudi family’s desire for stability, it seems this risk is minimal.
The conservative religious class lauded the crackdown on the business elite, which suggests that they realize they have a lot to lose if they attempt to defy the new system, despite their curbed powers. \
Some royals may feel like they have less to lose, given their declining role in the governing system, whether through fiefdoms or input through the allegiance council. However, they still rely on wealth accumulated via the state’s stipend system that reaches thousands of the royal family, and has been driven by Saudi Aramco’s opaque revenue stream.
Therefore, as an indirect result of this situation, the King and Crown Prince may have an incentive to not IPO Saudi Aramco internationally yet, instead opting for a partial IPO on the local bourse while offering a private placement to the Chinese. This would fund projects by the Public Investment Fund and could keep disenfranchised royals at bay. A recent reference by President Trump appears to confirm that an international IPO is not imminent: he expressed a classic “Sad!” over the fact that regulatory hurdles to list in New York may be too much for the time being, after his phone call of support to the King.
Outlook: Long term gains?
The impact of the past weekend’s events will depend on investors’ time horizons. In the short term, it will change sentiment and postpone any potential business. How the legal system deals with those arrested will be a key indicator of whether the Kingdom intends to encourage transparency and a strengthening of the rule of law that will be prerequisites to inspire confidence in investors down the road.
In the medium to long term, if the dust settles and Mohammed bin Salman has effectively been able to demonstrate stability in the new governing system while keeping afloat economically and moderating society, as well as keeping Iran’s regional influence in check, then it will all have paid off.
Despite simultaneously tackling multiple domestic and foreign fronts, the King and Crown Prince find themselves emboldened by popular support and an unrivalled consolidation of power. Barring an economic (oil price) collapse, it is likely that we will look back at this past week and see that Machiavelli’s “The Prince” was referring to the determined Mohammed bin Salman all along, as his measures usher in a new, moderate, and stable society.
No comments:
Post a Comment