Saudi Arabia in uncharted waters

Saudi economic officials have issued a slew of statements aimed at reassuring investors — particularly from abroad — following the unveiling of King Salman bin Abdel-Aziz’s anti-corruption committee — headed by his son, crown prince Mohammad bin Salman — and the near simultaneous arrest of 11 princes, tens of past and present ministers, and senior officials and businessmen for investigation by the committee.

Finance minister Mohammed al-Jadaan says the establishment of the committee will “protect the investment climate in the kingdom, and strengthen trust in the application of order in the kingdom on everyone”.

And a statement issued by Ibrahim al-Omar, governor of the Saudi Arabian General Investment Authority, describes the establishment of the committee as “a vital step in creating a fair and level playing field for all potential investors”.

“This is a clear sign that the kingdom is ready to protect companies’ and individuals’ investments from legally reprehensible actions,” al-Omar adds.

But the creation of an anti-corruption committee that has such wide, unchecked powers, the swiftness of the detentions that followed and their political implications may have the opposite effect.

In a sign that the arrests have frightened the domestic business community, the Saudi stock exchange fell by 1.1pc in early trade today, and stocks in Kingdom Holding, the company of internationally-known businessman prince al-Waleed bin Talal, dropped by 5pc today after falling by almost 8pc yesterday. The Saudi stock market fell by up to 2.2pc yesterday, but recovered as government funds intervened to prop up the market.

The government has not officially released the names of those being held — mainly at the Riyadh Ritz Carlton, which has been emptied of other guests — but prince al-Waleed’s name is widely circulating as one of those under arrest.

The swift manner in which the arrests occurred, within hours of the committee’s establishment, is the largest cause of alarm and uncertainty. Had the committee merely been investigating suspected corruption without having pre-decided whom it would target, the arrests would have taken more time. The committee’s powers are daunting. It is banning certain individuals from travel and restricting private jets from taking off. It is empowered to freeze assets and implement whatever measures it deems necessary, bypassing what would be considered due process and legal procedure in other parts of the world, which investors rely on to operate securely.

The fact that a good number of those who have been detained are high-net worth individuals has prompted speculation on some Saudi social media sites that one of the purposes of the anti-corruption drive is to confiscate billions, if not trillions, of amassed Saudi private wealth at a time when the government’s finances are under strain and it continues to run down its net foreign assets to plug budgetary deficits, as oil prices stubbornly persist below the level it needs for a balanced budget.  The IMF recently estimated that Saudi Arabia’s breakeven oil price — the level at which it can balance its budget — is $73.10/bl this year and $70/bl in 2018. That is well down on a breakeven price for 2016 that was estimated at $96.60/bl, but it also well above the $60/bl that Brent has only recently returned to after two years.

If such a shakedown were to occur, business and investment confidence in Saudi Arabia would evaporate. It might prejudice a successful planned listing of up to 5pc of Saudi Aramco’s value for private domestic and foreign investment.

Some fear that the campaign could turn into a witch hunt. The official sacking of prince Mit’eb bin Abdullah as commander of the National Guard and widespread reports of his subsequent arrest, have raised suspicions in some quarters that the anti-corruption campaign has also provided Mohammad bin Salman with a means of consolidating his near-total control of the monarchy by getting rid of the last vestiges of any objections to his role as successor. The elite, tribal-based National Guard under Mit’eb was the last bastion that had resisted falling under the crown prince’s control. And Mit’eb, the son of the late king Abdullah, had been perceived during his father’s lifetime by some as a possible eventual successor to the throne.

The reported removal of figures such as Ibrahim al-Assaf — a current state minister and board member of Saudi Aramco, who served as a well-regarded finance minister for 20 years until the end of October 2016 — is also likely to diminish confidence in the country’s investment climate. Likewise, the ousting of Adel Faqih from his post as economy minister on 4 November could shake investment confidence.

The concentration of power in the hands of crown prince Mohammad bin Salman means that the rule by consensus within the House of Saud — which depended on the sharing of power among various direct descendants of the founding king Abdel-Aziz — is at an end. The crown prince is cutting down to size the rest of his large clan, and very likely intends to deprive its members of the wealth they can use to build and maintain influence and power. This will smooth his own assumption of the throne when his elderly father abdicates or passes away.

So the country is in uncharted waters. Since its creation, Saudi Arabia has been a rentier state dependent on political patronage. The boundaries between private and public wealth have long been blurred, and what might have seemed like corruption to those outside the country may well have been seen as a way of life and of distribution of wealth in a highly tribalised country. Stamping out financial corruption selectively without a programme of radical political reform that establishes transparency and accountability at all levels will not enhance investor confidence.

Crown prince Mohammad has made attracting private foreign investment one of the main planks of his blueprint — known as Vision 2030 — to transform the country’s economy. But his moves over the past few days may have set back the achievement of that goal.

The crown prince says no-one, including ministers and princes, will be exempt from answering to corruption charges if evidence that they have engaged in it exists. But how widely will this logic be applied in a society that has relied on political and financial patronage virtually since its foundation in 1932?

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