Saudi Arabia Politics November 2017

Saudi Arabia

Saudi Arabia: Political instability rises as Crown Prince tightens his grip on power

November 27, 2017

Political unrest intensified on 4 November after Saudi Arabia’s Crown Prince Mohammed bin Salman ordered a large-scale operation against corruption that affected more than 200 people, including ministers, princes and businessmen. The corruption crackdown is helping cement the 32-year-old crown prince’s political power, which will likely boost his reformist agenda geared at modernizing the Saudi economy and reducing its dependence on oil. While Crown Prince Mohammed could represent good news for social and economic reforms, his aggressive stance in foreign policy and rapid consolidation of power, amid what some perceive as a shakedown of political rivals, could also threaten broader regional stability.

The unexpected move fanned volatility in the Saudi financial sector. Interbank rates hit their highest levels in nearly 10 months, and the Saudi Stock Exchange declined in the aftermath of the operation. Although some international media outlets reported that several Saudi tycoons were moving assets out of the region, Central Bank Governor Ahmed al-Kholifey stated on 16 November that there had not been big capital outflows as a result of the anti-corruption campaign. In the same vein, he ruled out the possibility of imposing capital controls. Oil prices spiked to an over two-year high in the same period, but the corruption crackdown was only a temporary shock, and oil prices largely reflected strong fundamentals.

While the political crisis weakened investor confidence in the days following the spat, this unprecedented move could have positive effects on the economy. The crown prince, who is officially next in line to the throne, unveiled the Saudi Vision 2030 economic development plan in April 2016, a series of measures to diversify the Kingdom’s economy away from oil. These measures include the partial privatization of the world’s largest oil company, Aramco, and plans to boost other economic sectors such as tourism. Saudi Arabia recently announced that it plans to start issuing tourist visas as early as next year.

Prince Mohammed’s campaign began the night of 4 November, just a few hours after the government establishment of an anti-corruption committee. It swept up some of the most powerful figures in the country, including Prince Alwaleed bin Talal, the richest man in the Middle East. According to the Central Bank governor, over 2,000 domestic bank accounts had been frozen. Authorities expect that the country will recover some of the USD 100 billion that have been siphoned off through decades of corruption and embezzlement, according to Saudi attorney general.

The crown prince has also shown he will be a strong presence in regional politics. He was a driving force behind the Kingdom’s decision to attack the Houthis in Yemen in March 2015 and impose an economic blockade on Qatar in June 2017. While his approach has so far been in line with the ambitions of U.S. President Donald Trump in the region, his rapid emergence as the most powerful person in the Kingdom could in particular lead to an escalation in tensions against Saudi Arabia’s regional rival Iran.

While the recent political shock will have negative spillovers for the economy due to lower business and consumer sentiment, the long-term impact could be slightly more positive, as the move will likely consolidate the crown prince's economic policies aimed at modernizing the economy.


Author: Ricard Torné, Head of Economic Research

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