In Saudi Arabia, new king Salman seeks stability

In Saudi Arabia, new king Salman seeks stability

The formal succession of power in Saudi Arabia brings former Crown Prince Salman to the throne of the Arab world’s largest economy.

When news broke of the death of King Abdullah, Saudi Arabia’s de facto and official ruler since 1995, appointment of his successor came almost simultaneously. The new King, Salman Bin Abdulaziz Al Saud, quickly appointed his youngest half-brother as Crown Prince and his nephew as Deputy Crown Prince, quelling any speculation over succession of power in the now 80-year-old Kingdom.

Such is the challenge of King Salman, 79, as he seeks to maintain strength and stability in an Arab world facing its worst crisis in decades.

During his twenty-year rule, Abdullah oversaw a fivefold increase in the size of the Saudi economy, using the county’s vast oil wealth to transform Riyadh into a bustling metropolis. As revolts and protests began to shake much of the region in 2011, the monarch poured $130 billion into domestic projects and welfare programs designed to appease a growing population.

As the new King moves into the spotlight, he is likely to continue the economic and military strategy of his predecessor. Salman declared no changes to his Ministries, leaving Oil Minister Ali Al-Naimi at the helm of OPEC’s top exporter.

Although oil markets rallied following news of Abdullah’s death, they quickly erased any gains in Friday trading as King Salman doubled-down on Saudi’s strategy to maintain production and push down the price of oil.

Low oil prices have weighed on Saudi finances, increasing the country’s budget deficit from $15 billion in 2014 to a projected $54 billion over the coming year. Deutsche Bank estimates that oil prices would have to rebound to $104 a barrel in order for the Saudis to balance their budgets this year.

And, with the price of oil at less than $50 a barrel, King Salman will continue to tap into the Kingdom’s vast financial reserves to continue investments in massive infrastructure projects and costly social welfare programs.

Investments in education, infrastructure, and industrial projects have helped Saudi Arabia create an estimated 700,000 jobs since 2011. This is a welcome lift for the roughly 40 percent of Saudis under the age of 25, desperate for stable work and livable incomes.

For King Salman, however, appealing to the economic desires of the young Saudi population betters his chances of avoiding the revolts, protests, and insurgencies that have brought turmoil to his neighbors in Syria, Iraq, and Yemen.

The quest for domestic stability amid regional uncertainty will underpin King Salman’s military strategy throughout his reign. Salman previously served as Defense Minister, where he bolstered the military with American-made weapons systems, making the Saudi military the fourth largest in the world.

As Islamic State furthers its stronghold on Iraq and Syria, King Salman will benefit from the military and intelligence relationship he built with the United States during his time as Defense Minister. Salman’s first major crisis, brewing just over the southern border in Yemen, will help to reinforce the strategic importance of a stable Saudi Arabia vis-à-vis Western interests.

The more urgent crisis, however, is the one brewing at home. Falling oil prices have hurt Saudi finances, but, more importantly, they have exposed the Kingdom’s vulnerability as a single-industry economy. Despite major investments in alternative industries, youth unemployment still stands at a staggering 29 percent.

Although the Kingdom has been able to maintain relative stability through generous subsidy programs, housing assistance, and unemployment benefits, short-term fixes through heightened welfare spending will not last forever. King Salman will have to reform economic guidelines to convince foreign investors to enter the Saudi marketplace and open up shop in new Saudi cities.

Such reforms are desperately needed. The government, for example, sets quotas for foreign firms requiring them to hire Saudi locals. These stringent requirements place an undue burden on firms looking to enter the Saudi marketplace but unable to bear the cost of training locals. And, with wages from the public sector much higher than from private firms, young Saudi locals have little reason to seek employment outside the state’s many nationalized industries.

Should King Salman continue the economic strategy of his predecessor, limited reform will move slowly as he seeks to appease the more conservative forces at work in Saudi Arabia. There are signs, however, that economic liberalism is afoot: The Saudi stock market is on track to open to foreigners, and guidelines for market entry are being revised and simplified. These moves will greatly stabilize the Saudi economy.

More importantly, reform will help to rebrand King Salman’s quest for stability from short-term crisis aversion to a longer-term, transformation of the Saudi economy and civil scene. Such is the challenge of the new Saudi King.

About Author

Rami Ayyub

Rami is an analyst with a US Defense and Space firm, where he works in strategic planning and finance for Civil and Defense programs. He holds Bachelor degrees in Finance and Classical Music from the University of Maryland, College Park.