A shifting geopolitical environment in the Middle East and continued low oil prices will present a significant challenge for Saudi Arabia’s leadership.
Saudi Arabia is facing financial challenges which, over the next few years, will likely also translate into an economic evolution.
The Kingdom’s oil industry accounts for about 80% of government revenues. With crude oil prices falling below $50 per barrel, Saudi Arabia is experiencing a budget deficit. Foreign currency reserves plunged $59.8 billion from the end of 2014 until June 2015, when reserves stood at a total of to $664.5 billion.
In order to raise funds, in July 2015, Saudi Arabia sold bonds for the first time in eight years, a move that was followed by the sale of the equivalent of $5.3 billion in bonds on August 10.
Growing expenditures are exacerbating Saudi Arabia’s financial troubles. The Saudi regime maintains its hold on power in part due to its generous social spending. Despite low oil prices, when he came to power in January, King Salman granted salary bonuses to public sector employees.
At the same time, Saudi Arabia’s increasing involvement in military conflicts in its neighborhood is proving costly. The conflicts in Yemen and Syria and other regional tensions have contributed to a 17% growth in defense spending in 2014. Over the next five years, Saudi Arabia is expected to boost defense spending by another 27%.
As oil prices remain low and expenditures grow, Saudi Arabia will dip into its reserves and work to raise funds on international bond markets. Nevertheless, in the long term, Saudi Arabia’s finances are not sustainable. Without investing in non-oil sectors of the economy, prioritizing the education of young Saudis, and building a tax system, the Kingdom’s economy will decline and experience significant disruptions in the long run.
While Saudi Arabia works to address the challenges of low oil prices, the Kingdom is also striving to mitigate the impact of regional geopolitical shifts on its internal security. Extremist attacks are not unprecedented in the Kingdom: in 1979 militants temporarily took over the Grand Mosque in Mecca, while between 2001 and 2006 al-Qaeda militants clashed with Saudi security forces and attacked Western targets inside the country.
However, over the past months a new threat to Saudi Arabia’s internal security and stability — Islamic State — has emerged. In May, attacks on Shiite mosques in Saudi Arabia killed 25, threatening to heighten sectarian tensions within the Kingdom, where the Shiites are a minority.
Islamic State has also claimed responsibility for shootings of policemen in Riyadh, a car bomb outside a prison, and a suicide attack on August 6 that targeted a mosque frequented by security forces. Notably, the perpetrator of the August 6 attack was a Saudi citizen, likely further raising concerns among Saudi decision-makers regarding homegrown terrorism and support for the Islamic State, especially among Saudi youth.
The Saudi leadership is also now attempting to navigate a new reality in the region. Saudi Arabia’s decision-makers have watched with unease as the US administration and European leaders negotiated with Tehran, and as the US military and Iranian militias pursued similar goals in Iraq in their fight against Islamic State.
The Saudi-led effort to roll back the advance of the Houthis in Yemen is in part a reaction to these changing dynamics, with the Saudis taking a more direct approach in fulfilling their strategic goals and asserting their position in the region. When it comes to Syria, Saudi Arabia is also using both diplomatic avenues and its support for certain rebel groups to try to influence the country’s future.
Saudi Arabia is a kingdom at a crossroads: low oil prices are undermining the country’s decades-long ability to finance vast expenditures using mostly energy revenues, while geopolitical shifts are contributing to both internal security threats and changes to the Kingdom’s foreign policy strategy.
Saudi Arabia, at its core, is a fragile state. The house of Saud rules the peninsula, relying on the religious establishment — the ulema — for projecting a sense of regime legitimacy to the public. But it is oil wealth, above all, that has allowed the regime to prevent social unrest over the years and quash dissent. Moreover, US security guarantees allowed the Kingdom both to purchase Western military equipment and receive direct defense assistance.
While Saudi Arabia still maintains close cooperation with the US, and while the Kingdom does have significant financial reserves, geopolitical and economic shifts will pose a significant challenge for the Kingdom in the years to come.
