In November, Saudi Arabia’s crown prince, Mohammed bin Salman, has put himself and Saudi Arabia firmly into the spotlight with its high profile anti-corruption purge. Around 200 individuals, including members of the royal family and the son of the former King, have been arrested. This comes at a time that the crown prince is pushing for a more aggressive foreign policy as has already been visible with the intervention in Yemen, the blockade on Qatar, the increased tensions with Iran and now recently with the resignation announcement of the Lebanese prime minister.

Impact on country risk

The flamboyant crown prince is moving Saudi Arabia away from the low profile and consensus based politics that has governed the country in the past to a more centralised way of governing the country where he has been the driving factor behind some bold policy measures such as the current anti-corruption purge. The purge seems to serve three aims. First of all, it aims at ending the system of patronage in the country. In Saudi Arabia, state contracts and resources were often funnelled to members of the royal family and the business elite. This has resulted in a significant drain on government resources. Secondly, it helps to consolidate his power. By jailing for example the head of the National Guard and son of the former king he removed a potential rival. Lastly, the current corruption purge makes the fiscal consolidation that is currently implemented more easily to swallow for the Saudi population. People indeed had the feeling that the elite was always above the law, while they had to bear the consequences of the current fiscal consolidation. At the same time the crown prince continues pushing forward the economic reform programme he has ignited in Saudi Arabia. The Vision 2030 programme remains largely on schedule, but the results of the programme are expected to only show themselves in the country’s macroeconomic data over the coming years. Nevertheless, significant fiscal consolidation has already been introduced, and this is expected to lead to a reduction of the fiscal deficit from 17.2% of GDP in 2016 to 9.3% of GDP in 2017. While the reforms will have a positive impact on the Saudi’s economy in the long term, they are currently still having a negative short term effect on the economy. Economic growth is projected to be only 0.1% in 2017 and only 1.1% in 2018. Prince bin Salman’s foreign policy currently poses the largest risk for Lebanon. Riyadh is increasing the pressure on Lebanon for the presence of Hezbollah in the country. This can have strong implications for Lebanon depending on how far Saudi Arabia is willing to push it. For example because the Lebanese financial sector is strongly dependant on non-resident deposits from abroad and on remittance inflows into the country, the Lebanese banks then borrow these sums to the central bank were they consist of a large part of the Central Bank reserves. If the remittance flows (which mainly originate from the Gulf countries) would stop and the non-resident deposits are being withdrawn, this would have large consequences for the banking sector in Lebanon and the central bank’s reserves. However, it is far from certain that this will be the case and the Saudi measures could be limited to further diplomatic pressure.

Analyst: Jan-Pieter Laleman, jp.laleman@credendo.com