“Some people without brains do an awful lot of talking.”
–The Wizard of Oz
Conventional political risk wisdom is falsely sanguine about yet another looming crisis. The House of Saud, bullish proponents blithely declaim without giving the matter too much thought beyond simplistic headlines, has proven surprisingly supple and enduring. Yet in reality, Saudi Arabia is so much less than meets the eye.
Investors would seem to follow the commentariat lemmings over the analytical cliff. Just a week ago, Riyadh managed a successful bond offering of $17.5 billion, a record issue for an emerging market country. With its ambitious Vision 2030 plan for a diversified economy, a new dynamic de facto ruler in King Salman’s favoured son, Deputy Crown Prince Mohammed bin Salman, and even OPEC showing signs of life, Saudi Arabia is currently a ‘buy’ in terms of conventional political risk analysis.
Continuing their almost unbroken record for getting everything of significance wrong lately (Iraq, Lehman, Brexit, Columbia), look for the global chattering classes to be off base about this as well. For once we look beneath the analytical hood in terms of the economic and political fundamentals, in every case Saudi Arabia is in worse shape than recent headlines lead us to believe.
Riyadh’s disastrous effort to drive shale from the global energy market has boomeranged, inflicting maximum damage on its own one-crop economy (90% of government revenue comes from oil). The Saudi deficit has exploded from an average of around three percent to a gargantuan 16% in 2015, hardly a symptom of health.
While still not in the danger zone, Saudi reserves have plummeted from $740 billion as recently as mid-2014 to around $550 billion in October 2016. Even a government as flush as the House of Saud can’t continue burning through its abundant reserves at the present pace forever.
Nor are the political fundamentals of the regime anywhere near as secure as they look. Prince Mohammed has no obvious credentials to be my intern, let alone the de facto ruler of one of the Great Powers of the Middle East. He is only in that position for the precarious reason that he is the favoured son of the aging, ailing present king.
Prince Mohammed has overseen the disastrous war with Yemen. He has put himself in charge of Vision 2030, the most recent plan to economically modernise the country (store rooms are littered with previous failed attempts to do so). He is running the state-controlled oil industry. A man of prodigious genius—say Alexander Hamilton—could not manage to stay on top of all these demanding positions. A man with absolutely no background in running anything is going to be in for a rough ride.
Even barring these policy realities, Prince Mohammed’s position is far from secure. Given the challenges the opacity of Saudi internal political decision-making present for analysts, my political risk firm had long believed the best way to study Saudi politics is to look at the ruling family’s decisions through the prism of Ottoman Empire harem politics. The jockeying for power between the many family factions is the best indicator of Saudi outputs. By this yardstick, Prince Mohammed would do well to perpetually look over his shoulder.
For Mohammed’s father, King Salman, has overturned ruling family precedent by leapfrogging his son over literally dozens of claimants for the throne, a shocking departure in a system that has traditionally prized stability, harmony between the family factions, and venerated age as prerequisite for ruling. Because of all this, there are a lot of people within the House of Saud who would not shed a tear should Prince Mohammed fail.
Also, given King Salman’s unsure health, and the Delphic silence of experienced, canny Crown Prince Mohammed bin Nayef, there is absolutely no guarantee that the Deputy Crown Prince will not be thrown out on his ear when his father—his sole credential for holding power—departs the scene.
Even the recent ‘success’ of Saudi-dominated OPEC is more mirage than reality. The September 28th agreement in Algiers to finally limit cartel production is underwhelming. Specific cuts from individual members have yet to be agreed on, which means the current agreement is no agreement at all. Even for this exercise in public relations, Saudi Oil Minister Khalid al-Falih had to exempt Iran, Libya, and Nigeria from participation, making the deal not worth the paper it is printed on.
So beneath the cheerleading, Saudi Arabia remains a one-crop economy in economic difficulties, with an untested and politically vulnerable Deputy Crown Prince temporarily at the helm, manifestly unable to resurrect a corpse-like OPEC. I think we can hold off on the champagne for now.
Published in City AM London, October 24, 2016