Saudi Arabia: The wake-up call

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Saudi Arabia: The wake-up call
Roula Khalaf, Lionel Barber and Simeon Kerr


Ensuring stability will be crucial for Riyadh's power brokers as they face discontent and war
Saudi Defence Minister Mohammed bin Salman bin Abdul Aziz attends a meeting with French Prime Minister Manuel Valls (unseen) in the Saudi Capital Riyadh on October 13, 2015. France announced a series of deals worth 10 billion euros ($11.4 billion) with Saudi Arabia to reinforce links with the conservative Islamic kingdom despite persistent criticism from rights activists of the kingdom's record on civil liberties.

Inside the sprawling royal court in Riyadh, a team of technocrats is putting the final touches to plans for a drastic overhaul of the Saudi Arabian economy. Backed by an army of highly paid western consultants, the royal aides have identified billions of dollars of waste and government largesse that the desert kingdom can no longer afford.
Ten months after acceding to the throne, King Salman bin Abdulaziz, 79, faces the daunting challenge of managing a new era in Saudi Arabia. The world's largest oil producer and longstanding US ally has adopted a policy that protects its market share rather than the price, which has more than halved since June 2014. But while the effect has been cushioned by $640bn in foreign-exchange reserves, the age of $100-a-barrel oil has receded and budget surpluses have been replaced by yawning deficits.
"The collapse in oil prices is a wake-up call," says an official in Riyadh. "We've had a long history of bad practices because of our overreliance on oil."
The belt-tightening comes at one of the most testing times in the kingdom's history, with the Sunni Saudi monarchy locked in a regional power struggle with Shia Iran and sectarian tensions flaring across the region. Determined to reassert its leadership role in the Sunni Muslim world and confront Tehran, Riyadh in March launched a military campaign in neighbouring Yemen to push back Iran-backed Houthi rebels.
Amid the turmoil of the Arab uprisings that convulsed the region in 2011, Saudi Arabia has positioned itself as one of the last bastions of stability compared with Iraq, Syria and Yemen, the failing states from which the Sunni jihadis of Isis have projected terrorist power across the Middle East and beyond. A senior western diplomat in Riyadh says: "Whatever you think about the policies of the government, the stability of Saudi Arabia really matters."

Saudi authorities have cracked down on Isis cells in the country in recent months. But while Saudis see themselves as victims of Isis, many outsiders consider the kingdom's dependence on the clerical establishment, and its determination to spread its Wahhabi brand of Islam worldwide, as part of the problem, contributing to the radicalisation of Sunni youth and breeding jihadis.
"The picture is bleak," says a Riyadh businessman. "The longer oil prices are depressed and turmoil in the region continues and the longer we have security issues in the country, the less options there are and the more dire the situation will be for Saudi Arabia."
Next generation
The faces of the three leading men of Saudi Arabia stare down at visitors on the streets of Riyadh: King Salman is in the middle, flanked on one side by his nephew, crown prince and interior minister, the 56-year-old Prince Mohammed bin Naif; on the other is his favourite son and deputy crown prince, the 30-year-old Prince Mohammed bin Salman. Ask any Saudi where power is concentrated today, however, and they will point to the younger royal.
While the crown prince heads the security council and is credited with repelling the al-Qaeda threat over the past decade, Mohammed bin Salman leads the team working on restructuring the economy. As defence minister, he is the point man on the war in Yemen. Increasingly, he is also his father's representative on foreign policy, meeting Russia's Vladimir Putin twice this year and Barack Obama, US president, once. He oversees the operations of the royal court, the most powerful body in the absolute monarchy. Saudi Aramco, the state oil company, as well as the Public Investment Fund, with $5.3bn in assets, are also under his purview.
Known for his appetite for detail and data, the young prince has been preparing for his father's succession for several years. He asked aides to identify areas in need of reform and officials who could be promoted. His spadework led to what analysts describe as a tsunami reshuffle when the monarch assumed the throne in January, on the death of his half-brother King Abdullah. Never in the kingdom's history had so many royal decrees been issued at once, with dozens of new officials appointed to government.
King Salman also broke with tradition by shifting power to the second generation of princes. Officials speak of a different "tempo" and a willingness to challenge the way things have been done in the past. They argue that the collapse in oil prices should be seen as an opportunity to clean up Saudi finances and diversify the economy. The sidelining of other royals and the accumulation of power in the hands of Mohammed bin Salman have, however, sparked speculation of royal infighting.
Close watchers of the al-Sauds say dissent in the family is real, but that those who have lost out lack the momentum to present a threat to the king. Of greater concern to observers are perceptions of a power struggle between the crown prince and the deputy crown prince.
"Until recently we had several independent power centres in Saudi Arabia, with each senior prince taking decisions, and there was no long-term planning. Now you can have a united decision-making process — but the big concern is that a lot of power is with one prince," says a Riyadh-based analyst.
Palace intrigue
As Mohammed bin Salman looks to consolidate his position, the success or failure of his economic plans — and the war in Yemen — will be the yardsticks against which he is measured.
Success could vindicate his ageing father's bet on his inexperienced son, whose challenge now is to translate a grasp of detail into policy delivery. Failure could sour the national mood and embolden dissenters who say he is too young to take on the myriad challenges.
The government has slashed public spending by a quarter, raised $27bn through local debt issuance this year and is considering an international bond programme in 2016. The swingeing $80bn in cuts, bringing spending down to $267bn, will be followed by more austerity next year as the government looks at a budget of $229bn-$240bn.
"Spending was completely out of control and oil prices were going down so we looked at everything," says one official.
Among the priority targets are energy subsidies that cost the treasury 13.2 per cent of gross domestic product, less than half of which go to households. Officials are studying ways of raising non-oil revenues via government fees and a sales tax. But they will broaden existing welfare payments to redistribute money to poor and middle-class Saudis who will be hit hardest by higher electricity, water and petrol prices.
Sceptics say promises of reforms have been made in the past but not delivered. Arbitrary decision-making and the absence of checks and balances in the system also undermine fiscal discipline: when King Salman took over he announced a salary bonus for public sector employees and utilities investment totalling an estimated $30bn.
An ingrained administration that is resistant to change is a further impediment. When the royal court this year asked for proposals for cuts to departmental spending, most responded by asking for a 25 per cent increase in allocations.
"This [situation] presents a unique opportunity to accelerate the diversification of the economy," says Masood Ahmed, director for the Middle East and Central Asia at the International Monetary Fund. "Achieving that goal will require both bold reform decisions and sustained and effective implementation," he warns.
There are signs that government cuts are damaging business confidence. The private sector, dependent on government spending, is reeling from the sharp retrenchment. "The business community feels there are too many sudden changes in regulations and where we're going. We need stability in the way we move forward," says Lama al-Sulaiman, vice-president of the chamber of commerce in Jeddah.
Private sector growth, which has this year fallen to 2.9 per cent from 5 per cent last year, is crucial for creating employment for the hundreds of thousands of Saudis who enter the job market every year, especially given the limits on expansion in the public sector.
The ruling family, backed by the clerical establishment, have for decades provided jobs and a cheap cost of living for their subjects in return for loyalty to the tribally based, authoritarian system of governance. At the height of the unrest that swept the Arab world, the government showered the population with salary increases and new social spending while cracking down on dissent. Five years on, moves to change the social contract threaten to upend that delicate balance of power as regional threats abound.
Human rights groups say the government continues to use the judicial system to stifle dissent by jailing Shia and pro-democracy activists for anti-government activity, as well as religious crimes such as apostasy or insulting Islam. The number of executions this year has risen to the highest level in two decades, prompting increasing scrutiny of the tough judicial system that mirrors some of the punishments meted out by Isis in the areas it controls in Syria.
Spectre of Iran
The new Saudi regime boosted its popularity in the first months in office with the launch of a bombing campaign in Yemen as Houthi rebels moved south after taking over the capital Sana'a. Mohammed bin Salman was cast as the warrior flexing his military muscle to counter Iran's expansionist designs on the Arab world. Despite doubts in western capitals about the extent of Iranian support for the rebels, Riyadh was convinced that Tehran was using the Houthis to create a proxy force on Saudi Arabia's borders.
Vacillations in US regional policy, coupled with messages from Washington that Saudi Arabia should match its high defence spending with more responsibility, also encouraged Riyadh. The west's rehabilitation of Iran through the nuclear agreement with world powers was the final straw. "The Yemen war was about not being pushed around any more," says one western official who closely watches the kingdom.
Thousands of civilian casualties have raised western concerns about the military campaign, which appears to have settled into a war of attrition, even as public support in Saudi Arabia remains strong. While there is some cautious talk in Riyadh about a truce, the fact is that the Saudis will have to pick up the cost of rebuilding its impoverished neighbour, having spent billions of dollars on helping to demolish it.
"There's a lot of frustration about how they've run the campaign," says a senior western official amid concerns that jihadis have exploited the conflict to widen their presence in the country.
Observers say the Yemen campaign has also reinforced anti-Shia sentiment in Saudi Arabia, where a Shia minority in the eastern province already feels marginalised. "Support for the campaign has been partly built on sectarianism and hatred towards the Shia," says one Riyadh-based observer.
Even if the military campaign wraps up, the power struggle with Iran will persist, playing out in other arenas, primarily Syria, where Saudi Arabia is on the side of the rebels and Iran is supporting the regime. "We're obsessed with Iran," says one Saudi political observer. "For us Iran is an issue of security."
Delivering a radically different Saudi economy and a more assertive foreign policy are in line with the aspirations of an overwhelmingly young Saudi population: 60 per cent are under the age of 30. A kingdom that is friends with the US, but more self-reliant, one that benefits from oil wealth but does not rely solely on it, are popular aspirations.
But the first test facing the monarchy lies in implementation, whether on the economic front or on security. Saudi businessmen remember bitterly earlier periods of low oil prices and promises of diversification that were abandoned when the outlook for crude improved. The Yemen war, meanwhile, has not inspired greater confidence in Saudi military capabilities among its allies.
The monarchy must also manage the impact of change on the relationship between rulers and ruled. Saudis are subjected to restrictions on free speech but they are active users of social media and public opinion cannot be ignored. There is growing awareness of corruption and the excessive spending of the royal elite, which could derail attempts to impose more austerity.
Saudi Arabia is in desperate need of reform but the sweeping changes envisaged take the kingdom into uncharted territory, creating demands for popular representation, which has no place in the monarchy's vision of the future.