November 8, 2017 / 4:31 PM / 11 days ago

Fitch: Saudi Arrests Increase Political Uncertainty

(The following statement was released by the rating agency) HONG KONG/LONDON, November 08 (Fitch) The arrests of members of the Saudi royal family, current and former ministers and prominent businessmen increase political uncertainty in Saudi Arabia (A+/Stable), Fitch Ratings says. We believe that concentrating power in the hands of Crown Prince Mohammed bin Salman should bolster economic and social reform efforts, but heightens key man risk, and a backlash is possible. It is likely to take some time for the implications for the domestic political and policy environment to become clear. The detention of senior members of the Saudi elite following the creation of an anti-corruption commission under Mohammed bin Salman seems likely to immediately strengthen his position. The son of King Salman, Mohammed bin Salman was named as crown prince in June and is also defence minister. The appointment of a new interior minister in June strengthened his oversight of the powerful interior ministry and the replacement of the head of the National Guard last weekend is likely to give him greater control over this branch of the armed forces. The strengthening of his position should benefit near-term reform momentum given that the crown prince has been the dominant driving force behind Saudi Arabia's Vision 2030 reform agenda. However, we think it increases key man risk. As well as political rivals, those reportedly detained include some officials associated with the reform programme, such as Adel Fakeih, previously labour and then economy and planning minister. At this stage, it is not clear if the arrests may affect investor sentiment to an extent that significantly affects economic growth. In a statement on Tuesday, the crown prince said that the country's Economic Affairs Council recognised "the importance of ensuring that investors could operate with confidence in Saudi Arabia", and that anti-corruption measures were a key part of Vision 2030. But we think there is a risk that domestic political challenges could lead to a shift away from fiscal consolidation towards growth-boosting measures in the form of investments in the non-oil economy. Potential domestic challenges to reforms could emerge from three groups. The parts of the governing elite that are seeing their influence declining could try to fight back. Efforts to liberalise social policies, including promoting a less conservative version of Islam, could anger social conservatives. And reforms to reduce public deficits could lead to greater discontent among those most affected, despite significant efforts to cushion the economic impact through a citizen account system of allowances to low- and middle-income families. It remains to be seen if the events of recent days reduce the risk of such challenges or whether they embolden dissent regarding the crown prince's rapid rise and his policy agenda. International tensions have also risen in the wake of a missile attack on Riyadh's airport by Yemeni Houthis. Saudi Arabia has described this as an act of war by Iran. It has used similar language regarding Iran's role in Lebanon, whose prime minister resigned on Saturday. Following the boycott of Qatar (partly due to a dispute over relations with Iran), this highlights increased risks of a sudden escalation in tensions with Iran, as we noted when we affirmed Saudi Arabia's sovereign rating on 2 November. A degree of political risk is reflected in Saudi Arabia's rating. The country scores poorly on World Bank governance indicators (sustained anti-corruption measures can help improve governance indicators, but this typically takes time). Geopolitical risks are a long-standing constraint on many sovereign ratings in the Middle East. Nevertheless, spillovers from regional conflicts or a domestic political shock that threatens stability or affects economic policies or activity are rating sensitivities for Saudi Arabia. Contact: Jan Friederich Senior Director, Sovereigns +852 2263 9910 Fitch (Hong Kong) Ltd 19/F Man Yee Building 68 Des Voeux Road Central Hong Kong Ed Parker Managing Director, Sovereigns +44 20 3520 1176 Mark Brown Senior Analyst, Fitch Wire +44 20 3530 1588 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. 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