Saudi succession   preparing for a tougher future - october 28 2011
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    Saudi succession   preparing for a tougher future - october 28 2011 Saudi succession preparing for a tougher future - october 28 2011 Document Transcript

    • ECONOMIC  RESEARCH   1  October  28,  2011   Saudi  Succession:  Preparing  for  a  Tougher  Future     Page  |  1   By  John  Prosser  and  Rachel  Ziemba   The  anointment  of  Crown  Prince  Nayef,  who  has  effectively  been  acting  in  this  capacity  for  a  number   of  years,  will  focus  attention  on  those  next  in  line  and  on  the  medium-­‐term  challenges  faced  by  the   economy.     Nayef,  and  other  immediate  successors,  are  likely  to  be  more  conservative  and  security-­‐focused  than   the  current  king  and  there  is  a  risk  that  King  Abdullah’s  gradual  reforms  could  be  deferred.     Politically,   Saudi   Arabia   has   to   adapt   to   a   much   more   uncertain   regional   political   environment   and   weaker  global  growth—both  of  which  will  challenge  its  socio-­‐economic  model.  The  massive  increase   in  spending  has  reduced  the  national  fiscal  cushion,  which  could  heighten  the  risk  of  volatile  oil  prices   and  then  force  economic  reforms  as  an  era  of  deficits  lie  ahead.     Few  Surprises  for  Now   The   death   of   Saudi   Arabias   Crown   Prince   Sultan   on   October   20   is   a   reminder   of   the   nebulous   power   structures   upholding  the  kingdom’s  ruling  family.  The  issue  of  Saudi  succession  is  never  far  from  discussion,  but  the  manner   in  which  the  new  Crown  Prince  has  been  anointed  has  set  a  precedent—it  is  the  first  time  an  heir  has  been  chosen   when  his  immediate  predecessor  has  not  become  ruler.     As  expected,  King  Abdullah’s  half  brother,  Prince  Nayef,  was  announced  as  the  new  Crown  Prince  on  October  27.   Nayef’s   overall   policy   stance   is   not   thought   to   be   very   different   from   that   of   the   current   king,   who   is   again   recovering   from   surgery,   but   his   overall   approach   and   focus   is   thought   to   be   different.   And   he   has   much   less   popular  support  (like  others  in  the  line  of  succession).   We  do  not  expect  any  immediate  changes,  both  because  the  King  himself  has  an  extensive  power  base,  but  also   because  there  is  general  agreement  within  the  ruling  family  about  the  broad  tilt  of  policy.  Changes  may  emerge  on   the  margins,  though.     The  anointment  of  Nayef,  however,  only  came  after  the  King  had  consulted  with  the  Allegiance  Council,  a  group  of   33   direct   descendants   of   King   Abdulaziz—the   founder   of   the   modern   kingdom—charged   with   overseeing   the   selection  of  the  Crown  Prince.  Created  by  King  Abdullah  in  2006,  it  is  the  first  time  the  council  has  been  called  into   action.  Assuming  the  House  of  Saud  survives  beyond  its  geriatric  rulers,  any  young(er)  pretender  to  the  throne  can   be  expected  to  emerge  through  a  similar  institutional  process.     Although  the  kingdom  has  largely  evaded  the  pressure  for  political  change  seen  elsewhere  in  the  Arab  world  this   year,   this   has   come   at   the   expense   of   massive   government   largesse—much   of   which   involves   hefty   future   commitments  and  has  narrowed  policy  space.  Ultimately,  Saudi  Arabia  will  have  to  reform—economically  at  least.   Diversifying   revenues   (and   broadening   the   tax   base)   could   well   force   an   increase   in   transparency.   Such   transformations  may  well  coincide  with  the  House  of  Saud’s  long-­‐anticipated  generational  shift.   Whoever  ultimately  emerges  will  have  a  crucial  role  to  play  as  they  will  be  at  the  helm  of  a  country  in  dire  need  of   reform,   and   under   international   pressure   to   take   a   leading   role   in   an   unstable   region.   Demographic   challenges,   particularly  finding  employment  for  the  vast  number  of  youth  and  rising  inequality,  will  push  from  within  at  a  time   when  the  global  environment  is  less  forgiving.  Given  these  challenges,  a  smooth  transition  of  power  is  paramount.    NEW  YORK  -­‐  95  Morton  Street,  6th  Floor,  New  York,  NY  10014  |  TEL:  212  645  0010  |  FAX:  212  645  0023  |    LONDON  -­‐  174-­‐177  High  Holborn,  7th  Floor,  London  WC1V  7AA  |  TEL:  44  207  420  2800  |  FAX:  44  207  836  5362  |  |  ©  Roubini  Global  Economics  2011  –  All  Rights  Reserved.  No  duplication  or  redistribution  of  this  document  is  permitted  without  written  consent.    
    • ECONOMIC  RESEARCH   2   Saudi   tradition   has   seen   most   family   disputes   resolved   quietly   behind   closed   doors,   and   many   elders   within   the   family  will  be  keen  to  keep  it  that  way.  Saudi  Arabia’s  de  facto  control  of  much  of  the  Arabic-­‐speaking  media  also   Page  |  2   ensures  most  spats  are  kept  out  of  the  headlines.  Despite  any  illusion  of  calm,  the  future  direction  of  the  kingdom   is  likely  to  be  a  contentious  issue.     Degenerating  Octogenarians   At  87,  King  Abdullah  is  already  two  years  older  than  his  late  brother  Prince  Sultan,  who  died  October  21.  Abdullah   is  largely  recognized  as  a  gradual  reformer—encouraging  the  growth  of  private-­‐sector  industry  and  weakening  the   influence   of   the   religious   establishment   on   the   judiciary   and   within   education.   The   King,   however,   is   ailing,   and   many  of  the  country’s  liberals  are  concerned  that  the   gains  (limited  though  they  are)  made  under  his  reign  may   disappear  when  he  does.  In  particular,  Crown  Prince  Nayef,  77,  has  close  allegiances  to  the  country’s  powerful  and   conservative   clerics,   as   well   as   the   security   establishment,   and   is   viewed   warily   by   those   seeking   greater   public   accountability  and  women’s  rights.  Having  served  as  interior  minister  since  1975,  he  has  been  responsible  both  for   crackdowns  on  Islamic  extremists  in  the  wake  of  the  September  11  attacks  (and,  more  actively,  threats  to  Saudi  oil   installations   and   members   of   the   royal   family),   as   well   as   persistent   suppression   of   political   protests—most   recently  smothering  disquiet  in  the  country’s  Eastern  Province.  In  this  security  capacity,  he  has  close  ties  with  the   U.S.  security  establishment,  which  would,  no  doubt,  be  heartened  by  the  solidification  of  the  line  of  succession.     Already  a  powerhouse  in  the  Saudi  establishment,  Nayef  was  promoted  to  second  deputy  prime  minister  in  2009   as  the  Sultan’s  health  deteriorated—a  role  considered  tantamount  to  a  crown  prince  in  waiting.  In  that  capacity,   he  has  headed  the  country  in  brief  interludes  when  both  King  Abdullah  and  Crown  Prince  Sultan  were  concurrently   undergoing  medical  treatment  or  taking  part  in  foreign  diplomatic  events.     Nayef  is  also  one  of  the  so-­‐called  “Sudairi  Seven,”  seven  brothers  born  to  King  Abdulaziz’s  favourite  wife  Princess   Hassa  bint  Ahmed  Al  Sudairi,  and  famed  for  their  influence  within  the  House  of  Saud.  Crown  Prince  Sultan  was  the   second  of  the  seven  to  die,  following  the  death  of  King  Fahd  in  2005.  Prince  Salman,  Governor  of  Riyadh  since  1962,   is  the  only  other  brother  considered   suitable  for  the  throne.  In  fact,  shortly  after  Sultan’s  death,  rumors  swirled   that  Salman  might  be  chosen  ahead  of  his  brother.  This  would  be  counter  to  the  highly  seniority-­‐based  system.     King  Abdullah  is  not  a  member  of  the  Sudairi  line,  and  his  nomination  as  Crown  Prince  by  King  Fahd  was  seen  as  an   attempt  to  maintain  the  balance  of  power  within  the  family.  As  Abdullah  took  on  increasing  responsibilities  from   an   ailing   King   Fahd   in   the   mid-­‐nineties,   many   of   his   attempts   at   reform   were   thwarted   by   Nayef   and   Salman.   Regardless,  any  immediate  successor  would  likely  come  from  the  Sudairi  line.     King  Abudullah  has  taken  several  actions  to  counter  the  voting  bloc  of  the  Sudairis,  including  the  creation  of  the   Allegiance  Council.  The  council  has  the  power  to  accept  or  reject  the  King’s  nomination  for  crown  prince,  as  well  as   to   judge   when   a   current   ruler   is   incapacitated.   As   such,   the   council   is   intended   to   formalize   and   add   a   modest   amount  of  transparency,  at  least  within  the  ruling  family,  so  that  the  choice  of  heir  is   unlikely  to  cause  division.     The  council  is  headed  by  Prince  Mashaal,  a  close  confidant  of  the  King  and  another  non-­‐Sudairi  considered  to  be   out  of  the  line  of  succession.  Sudairi  influence  within  the  council  is  considered  to  be  less  than  within  the  House  of   Saud   more   generally,   and   may   have   been   a   deliberate   attempt   to   create   an   institution   to   prevent   Sudairi   dominance.   The   King’s   decision   to   turn   to   the   council,   in   the   appointment   of   Nayef,   suggests   that   a   degree   of   institutional  power  sharing  will  be  involved  in  future  decisions.  The  increasing  pressure  for  reforms—which  could   escalate   should   the   likes   of   Tunisia,   Libya   or   Egypt   evolve   into   functioning   democracies—will   test   the   balance   between  conservatives  and  reformers  within  the  family.    NEW  YORK  -­‐  95  Morton  Street,  6th  Floor,  New  York,  NY  10014  |  TEL:  212  645  0010  |  FAX:  212  645  0023  |    LONDON  -­‐  174-­‐177  High  Holborn,  7th  Floor,  London  WC1V  7AA  |  TEL:  44  207  420  2800  |  FAX:  44  207  836  5362  |  |  ©  Roubini  Global  Economics  2011  –  All  Rights  Reserved.  No  duplication  or  redistribution  of  this  document  is  permitted  without  written  consent.    
    • ECONOMIC  RESEARCH   3   House  of  Saud  Prepares  for  3G   Health   permitting,   the   most   likely   line   of   succession   will   run   from   Abdullah   to   Nayef   to   Salman—the   latter   of   Page  |  3   whom  could  well  nominate  the  first  crown  prince  from  the  third  generation.  The  shuffling  of  positions  within  the   family,   brought   about   by   Sultan’s   death,   may   highlight   the   frontrunners.   Among   them   will   be   the   son   of   Prince   Nayef,  Prince  Mohammed,  the  sons  of  Crown  Prince  Sultan,  Prince  Bandar  and  Prince  Khaled,  and  the  sons  of  the   late  King  Faisal,  Prince  Saudi,  Prince  Turki  and  Prince  Khaled  (see  Figure  1).   Figure  1:  Saudi  Family  Tree       Source:  RGE     With  the  King  serving  as  prime  minister  and  the  Crown  Prince  as  deputy  prime  minister,  the  role  of  second  deputy   prime  minister  is  a  natural  third  in  line  to  the  throne,  and  the  title  is  expected  to  transfer  from  Nayef  to  Salman.   The  appointment  of  one  of  the  younger  generation  to  this  position  would  be  a  strong  indicator  of  a  crown  prince  in   waiting  (even  if  Salman  doesn’t  lose  his  opportunity).  However,  the  King  could  chose  to  leave  it  unfilled.     Key   ministries   are   a   more   likely   place   to   signal   future   leaders.   Nayef   or   Salman   are   likely   to   replace   Sultan   as   defence  minister;  the  pertinent  question  is  then  who  replaces  either  of  them  as  interior   minister  or  governor  of   Riyadh,  respectively.  As  assistant  interior  minister,  Prince  Mohammed  may  be  in  the  running,  although  there  may   be  some  pressure  to  move  away  from  the  Sudairi  dominance.  The  three  sons  of  the  late  King  Faisal  are  among  the   most  influential  non-­‐Sudairi  members  of  the  third  generation,  yet  long-­‐time  foreign  minister  Prince  Saud  is  ailing   and  Prince  Turki  caused  controversy   in  2006  by  abruptly  resigning  his  position  as  U.S.   ambassador,  as  he  felt  he   was  being  undermined  by  King  Abdullah  and  Prince  Bandar.     Royal  Family  Has  a  Weaker  Hand   The   potential   impact   on   oil   production   increases   global   interest   in   the   succession.   With   output   of   around   nine   million  barrels  per  day,  Saudi  Arabia  is  the  world’s  second-­‐largest  producer  of  crude  oil,  but  holder  of  the  largest   reserves.  Moreover,  it  controls  the  bulk  of  spare  capacity  within  OPEC,  and  thus  among  oil  producers.  However,   the  price  required  to  balance  Saudi  budgets  (US$90  per  barrel  of  Brent)  is  fast  approaching  a  level  that  could  add    NEW  YORK  -­‐  95  Morton  Street,  6th  Floor,  New  York,  NY  10014  |  TEL:  212  645  0010  |  FAX:  212  645  0023  |    LONDON  -­‐  174-­‐177  High  Holborn,  7th  Floor,  London  WC1V  7AA  |  TEL:  44  207  420  2800  |  FAX:  44  207  836  5362  |  |  ©  Roubini  Global  Economics  2011  –  All  Rights  Reserved.  No  duplication  or  redistribution  of  this  document  is  permitted  without  written  consent.    
    • ECONOMIC  RESEARCH   4   to  global  stagnation.  Energy  policy  has  thus  become  more  complicated  in  Saudi  Arabia.  We  believe  the  kingdom   will  try  to  target  a  higher  and  narrower  band  for  oil,  but  doing  so  could  add  to  volatility.     Page  |  4   RGE  has  long  emphasized  the  fiscal  constraints  that  will  bind  Saudi  Arabia  in  the  coming  years,  and  tough  decisions   will   follow   on   spending   patterns,   subsidies   and   the   balance   between   infrastructure,   defense/security   and   other   aspects  of  the  public  sector.   In  2011,  Saudi  Arabia  passed  a  raft  of   measures  aimed  at  preventing  the   spread  of   revolutionary   sentiment   prevalent   in   other   Arab   states.   Budget   amendments   for   government   employee   salary   increases  and  bonuses,  unemployment  benefits  and  housing  and  infrastructure  investment  came  to  US$37  billion,   on  top  of  the  planned  spending  of  over  US$160  billion.  This  largesse  exacerbated  the  already  aggressive  spending   trajectory   since   2006.   While   some   of   these   measures   are   temporary,   at   least   theoretically,   many   will   increase   spending   expectations   for   future   years.   In   addition   to   its   government   spending,   Saudi   Arabia   has   increased   its   implicit   and   explicit   support   for   some   of   its   neighbors,   especially   Bahrain.   These   pledges—seen   as   necessary   for   political  stability—will  come  with  an  economic  price.  Going  forward,  Saudi  officials  will  remain  more  parsimonious   with  outright  investment  abroad  compared  with  their  smaller,  richer  (on  a  per  capita  basis)  neighbors,  the  UAE  and   Qatar.   Figure  2:  Government  Spending  Breaching  Comfort  Zone  (US$/barrel  oil  price  needed  to  cover  govt  spending)   120   100   80   60   40   20   0   2000   2001   2002   2003   2004   2005   2006   2007   2008   2009   2010   2011f   2012f   Budget  Break  even  price   average  oil  price       Source:  RGE     If  spending  continues  at  a  similar  tilt,  RGE  expects  that  the  government  could  be  running  a  budget  deficit  as  early   as  2013.  If,  as  RGE  anticipates,  Europe’s  sovereign  debt  crisis  induces  a  prolonged  recession  in  developed  markets   and   a   fall   in   global   oil   demand,   it   could   occur   even   earlier.   Even   if   oil   demand   remains   resilient,   should   OPEC   output   trimming   fail   to   stabilize   the   oil   price   or   political   necessities   prompt   even   more   government   spending,   deficit  territory  is  around  the  corner.   Saudi  Arabia  does  have  ample  reserves,  and  tends  to  hold  more  liquid  assets  than  other  GCC  states,  who  rely  more   heavily  on  investment  funds  to  safeguard  national  wealth,  but  it  could  begin  tapping  these  reserves  sooner  than  it   would  like.  Elevated  oil  prices  prior  to  2008  allowed  Saudi  Arabia’s  central  bank  (SAMA)  to  accumulate  vast  foreign   assets.   Despite   dipping   into   these   reserves   in   2009   and   2010,   RGE   expects   net   foreign   assets   will   rise   to   almost    NEW  YORK  -­‐  95  Morton  Street,  6th  Floor,  New  York,  NY  10014  |  TEL:  212  645  0010  |  FAX:  212  645  0023  |    LONDON  -­‐  174-­‐177  High  Holborn,  7th  Floor,  London  WC1V  7AA  |  TEL:  44  207  420  2800  |  FAX:  44  207  836  5362  |  |  ©  Roubini  Global  Economics  2011  –  All  Rights  Reserved.  No  duplication  or  redistribution  of  this  document  is  permitted  without  written  consent.    
    • ECONOMIC  RESEARCH   5   US$550   billion   in   2011.   Similarly   the   government   has   little   debt   and   direct   external   debt,   meaning   it   does   have   space  to  borrow.  However,  we  imagine  that  Saudi  Arabia  will  be  wary  of  building  up  too  much  debt,  particularly  as   Page  |  5   it  struggled  with  (albeit  domestic)  debt  burdens  in  the  1990s.     Figure  3:  Saudi  Arabia’s  Official  Foreign  Assets  Still  Climbing  (US$,  billions)   Source:  SAMA,  RGE     Figure  4:  But  Not  So  High  on  a  Per-­‐Capita  Basis...     300%   600   250%   500   200%   400   150%   300   100%   200   50%   100   0%   0   Bahrain   Kuwait   Oman   Qatar   Saudi  Arabia   UAE   Sovereign  Wealth  per  capita  (US$  1000)   Sovereign  Wealth/GDP  (left  axis)     Source:  Moodys,  Central  Banks,  RGE   Population  and  GDP  from  2010,  Sovereign  Wealth  and  reserves  data   In  the  medium  term,  the  government  will  have  to  pursue  greater  reforms  and  find  new  sources  of  revenues  or  cut   spending.  One  particularly  thorny  area  concerns  subsidies.  Domestic  energy  subsidies  eat  away  at  other  spending   and,  by  fuelling  demand,  undermine   export  prospects.  Saudi  Arabian  oil  demand  per  capita  has  skyrocketed,  far    NEW  YORK  -­‐  95  Morton  Street,  6th  Floor,  New  York,  NY  10014  |  TEL:  212  645  0010  |  FAX:  212  645  0023  |    LONDON  -­‐  174-­‐177  High  Holborn,  7th  Floor,  London  WC1V  7AA  |  TEL:  44  207  420  2800  |  FAX:  44  207  836  5362  |  |  ©  Roubini  Global  Economics  2011  –  All  Rights  Reserved.  No  duplication  or  redistribution  of  this  document  is  permitted  without  written  consent.    
    • ECONOMIC  RESEARCH   6   outpacing   demand   growth   in   fast-­‐growing   EM   oil   importers   like   China   and   India.   That   oil   used—not   only   for   transportation,  but  also  for  power  (an  inefficient  use)—adds  to  demand.  This  implies  that  even  more  efforts  will  go   Page  |  6   into   the   search   for   natural   gas   to   power   the   economy,   but   also   that   higher   domestic   prices   may   be   needed   to   encourage  investment  in  alternatives  as  well  as  change  consumption  patterns.  Food  subsidies  are  a  related  issue.     Figure  5:  Per-­‐Capita  Oil  Consumption  Spiking  (barrels  a  day  per  capita)     Source:  BP,  World  Bank,  RGE   The   willingness   to   enact   reforms   may   well   depend   on   how   rapidly   Saudi   Arabia’s   fiscal   health   deteriorates.   Cushioned  by  sustained  oil  revenues,  the  current  generation  of  leaders  is  likely  to  be  more  comfortable  passing  the   buck   of   reform   on   to   the   next   generation.   Next   year’s   budget,   to   be   released   in   December,   is   the   earliest   opportunity  that  any  change  in  sentiment  could  be  translated  into  policy.  We  expect  that  the  government  will  try   to   hold   the   line   on   spending,   as   in   fact   they   did   with   last   year’s   plans.   However,   we   expect   they   will   again   overshoot  the  target.     RGE  doesn’t  expect  the  reshuffling  of  the  royal  pack  to  have  a  dramatic  impact  on  spending  patterns  in  the  near   term.  Despite  all  the  talk  of  Prince  Nayef’s  conservative  streak,  Abdullah  is  still  the  man  at  the  top  and  is  likely  to   continue   his   glacial   reforms.   In   the   event   that   Nayef   comes   to   power   in   the   next   couple   of   years—a   window   in   which  the  government  may  still  have  a  modicum  of  fiscal  leeway—it  is  questionable  whether  he  has  broad  enough   support  within  the  House  of  Saud  to  do  anything  other  than  rule  by  consensus,  much  as  Abdullah  has  done.  At  the   margin,   he   may   be   able   to   protect   spending   on   areas   considered   vital   for   national   security   (defense,   which   has   historically  absorbed  over  36%  of  spending)  or  support  for  the  religious  establishment.  Nayef—or  any  future  King,   for  that  matter—will  likely  exert  greatest  influence  by  steering  the  line  of  succession.  Those  successors  will  likely   be  the  ones  to  have  to  navigate  the  toughest  conditions,  without  the  luxury  of  a  bottomless  fiscal  account.       The  above  content  is  offered  for  the  exclusive  use  of  RGEs  clients.  No  forwarding,  reprinting,  republication  or  any  other  redistribution  of  this  content  is  permissible   without  expressed  consent  of  Roubini  Global  Economics,  LLC.  All  rights  reserved.  If  you  have  received  access  to  this  content  in  error,  RGE  reserves  the  right  to  enforce   its   copyright   and   pursue   other   redress.   RGE   is   not   a   certified   investment   advisory   service   and   aims   to   create   an   intellectual   framework   for   informed   financial   decisions  by  its  clients.  This  content  is  for  informational  purposes  only  and  does  not  constitute,  and  may  not  be  relied  on  as,  investment  advice  or  a  recommendation   of   any   investment   or   trading   strategy.   This   information   is   intended   for   sophisticated   professional   investors   who   will   exercise   their   own   judgment   and   will   independently  evaluate  factors  bearing  on  the  suitability  of  any  investment  or  trading  strategy.  Information  and  views,  including  any  changes  or  updates,  may  be   made  available  first  to  certain  RGE  clients  and  others  at  RGEs  discretion.  Roubini  Global  Economics,  LLC  is  not  an  investment  adviser.  For  questions  about  reprints  or   permission  to  excerpt  or  redistribute  RGE  content,  or  for  a  PDF  version,  clients  should  contact  their  RGE  account  representative.    NEW  YORK  -­‐  95  Morton  Street,  6th  Floor,  New  York,  NY  10014  |  TEL:  212  645  0010  |  FAX:  212  645  0023  |    LONDON  -­‐  174-­‐177  High  Holborn,  7th  Floor,  London  WC1V  7AA  |  TEL:  44  207  420  2800  |  FAX:  44  207  836  5362  |  |  ©  Roubini  Global  Economics  2011  –  All  Rights  Reserved.  No  duplication  or  redistribution  of  this  document  is  permitted  without  written  consent.