LSE - Small Logo
LSE - Small Logo

Steffen Hertog

May 24th, 2017

A New Saudi State?

6 comments | 1 shares

Estimated reading time: 10 minutes

Steffen Hertog

May 24th, 2017

A New Saudi State?

6 comments | 1 shares

Estimated reading time: 10 minutes

 by Steffen Hertog

The demise of King Abdullah of Saudi Arabia in January 2015 was only the latest in a long string of deaths among senior Al Saud brothers who had dominated Saudi politics since the early 1960s. Yet different from previous changes of guard, it has ushered in a new era of Saudi politics. Under Abdullah’s half-brother and successor King Salman, the ruling elite has been fundamentally reconfigured at a pace that few observers had expected: After decades of collective princely rule, political power is now almost entirely concentrated in the hands of Salman and his 31-year old favourite son Mohammad, whom he made second deputy prime minister and deputy crown prince in April 2015. While Mohammad bin Salman’s 26 year older cousin Crown Prince Mohammad bin Naif is technically his senior, Mohammad bin Salman has played a much more central and visible role in policy-making since 2015.

Before 2015 a range of powerful, ageing princes kept each other in check and often slowed down policy-making to a crawl. Now, most policies are driven by the King’s young son, with input from a small set of commoner advisors and international consultants. This centralisation of power within the elite has led to a drastic acceleration in the pace of decisions. Combined with a brewing fiscal crisis due to low oil prices, this has greatly increased both upside and downside risks for the Kingdom. Politics in Saudi Arabia, long anaemic if not paralysed, has suddenly become unpredictable.

Since the collapse of oil prices in 2014, Saudi Arabia has faced double-digit fiscal deficits and a rapid drawdown of the overseas reserves held by its central bank, the Saudi Arabian Monetary Agency (SAMA).

Figure 1: SAMA overseas assets (in million USD)

Saudi-State-001
Source: SAMA

The Kingdom has weathered fiscal crises before: After the first oil boom of the 1970s, it incurred deficits in every single year from 1983 to 1999, peaking at -25% of GDP in 1987. But back then, crisis management consisted of cutting infrastructure spending and otherwise hunkering down. Different from then, the government under Mohammad bin Salman has initiated full-on fiscal reforms that are set to slaughter many holy cows of the Saudi distributive state. The ambitious 2016–2020 ‘Fiscal Balance Program’ aims to reform domestic energy prices, levy substantial fee on foreign workers, introduce VAT and various excise taxes, and subject both operational and capital expenditure to a thorough review.

The Program has found general approval among economists and international financial institutions. While it does not fix the Saudi economy by itself, it could give the government a considerably longer budgetary runway. It also aims to reduce economic distortions created by subsidised energy, while providing cash grants to compensate lower-income households for the resulting higher costs of living. It constitutes a great improvement over the ad-hoc, badly communicated public sector allowance cuts and freezes on contractor payments that scared the local private sector and led to a brief recession in the second half of 2016.

While low oil prices make fiscal reform inevitable, the new leadership has also initiated more speculative policies. These include the planned initial public offering (IPO) of up to 5% of national oil company Saudi Aramco, a project that many technocrats in the oil sector criticise in private, and that in effect represents a partial sale of the Kingdom’s only reliable source of income. Many old Saudi hands see the planned investment of up to 45 billion USD in a new tech and venture capital fund operated by Japanese Softbank as similarly risky – especially at a time when liquid assets might be needed to defend the Saudi currency. Many of the economic targets of the ‘Vision 2030’ strategy document published in 2015 go in the right direction, but are practically unattainable as they implicitly require faster economic and export growth than any mid- or high-income country has ever attained in human history.

Seasoned observers and technocrats are worried about the delivery capacity of the bloated and fragmented Saudi bureaucracy which – despite all the change in the regime’s top echelon – still looks pretty much the same on the operational level. Vision 2030 and the accompanying 2016–2020 ‘National Transformation Plan’ contain hundreds of targets and initiatives, but give little sense of prioritisation or implementation mechanisms. The Saudi system might well lack the bandwidth to deal with the flurry of new initiatives.

One thing that seems certain is that in the short- to mid-term future, growth will remain modest as state spending is reined in and the government imposes increasing levels of domestic taxation. The local private economy is almost exclusively dependent on state-generated demand and its size has closely tracked that of government expenditure (see Figure 2). This means that lower net flows from government through either taxation or expenditure-side austerity will hit private business directly.

Figure 2: Private sector contribution to GDP vs. total government expenditure (million SR)

Saudi-State-002
Source: SAMA

This will impact private job creation exactly at the time when it is most needed due to a de facto public sector hiring freeze. For the foreseeable future, Saudi households will remain deeply state-dependent. About two thirds of Saudis in employment continue to hold state jobs, while a good share of privately employed Saudis are in low-paid ‘phantom jobs’ that exist only to fulfil state-imposed Saudisation quotas.

While these are not great news for either job-seekers or entrepreneurs, the leadership has been able to impose a surprising amount of pain on businesses and households without creating any sign of open resistance. Saudis are grumbling about austerity but, at least for the time being, see no way to resist it. The Saudi distributive regime with its vast toolkit of patronage and co-optation has historically prevented independent social and political groups from emerging. This provides the leadership with considerable political autonomy – probably more of it than previous kings, instinctively afraid of taking unpopular decisions, realised they had.

Control over political space has further tightened in recent years. Saudis are also discouraged from political mobilisation by a widespread fear of instability, stoked by the political chaos that has engulfed the Arab world in recent years. This all means that the leadership could have plenty more room to both pursue austerity and experiment with new economic policies.

Predicting political paralysis was a safe bet for Saudi watchers during the last 50 years. Now the only certainty seems to be that more surprises will emerge from what has become a much more centralised, personalised, and politically autonomous regime.

Mohammad bin Salman clearly remains in charge of most policy areas, but this also could change given formal rules of seniority and succession. Crown Prince and Minister of Interior Mohammad bin Naif has been laying low while his cousin’s whirlwind of reforms unfolded. King Salman appears reasonably sprightly for his 81 years, but should he die, it seems more likely than not that the ruling family would stick to protocol and Mohammad bin Naif would emerge as the new King. Given the absence of strong rival power centres in the family, his rule would likely remain quite centralised. Given his different age, temperament and socialisation, however, his leadership might well bring the Kingdom back to a much more cautious and consensual style of elite decision making, with all its advantages and disadvantages.

This article was originally published by the LSE Institute for Global Affairs (IGA).

Print Friendly, PDF & Email

About the author

Steffen Hertog

Steffen Hertog is Associate Professor in Comparative Politics in the LSE Department of Government. He was previously Kuwait Professor at Sciences Po Paris, lecturer in political economy at the University of Durham and post-doctoral research fellow at Princeton University. He holds an MA from the University of Bonn, an MSc from the School of Oriental and African Studies and a D.Phil. from the University of Oxford.

Posted In: GCC

6 Comments

Bad Behavior has blocked 2627 access attempts in the last 7 days.