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Saudi Arabia is changing and so is the region

Saudi Arabia has recently seen major transformations that will change the role it is playing in the region and will have repercussions on Egypt

Omar El-Shenety , Saturday 21 May 2016
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Despite being a relatively young country, Saudi Arabia is a key player in the region as the largest member of the Gulf Cooperation Council (GCC) and is home to Mecca, the holiest site in Islam, where people go for pilgrimage every year.

Economically, Saudi Arabia is one of the largest oil producers in the world at a rate of nearly 10 million barrels a day, which is more than 10 percent of world production. This high oil production gave Saudi Arabia a pivotal role in the world economy, and Saudi oil is considered a main factor in deciding the price of oil worldwide.

In past decades, Saudi Arabia’s oil revenues have surpassed billions of dollars, but this world heavyweight has remained a conservative country domestically and one that largely does not accept change.

Last year, however, there were key changes in the kingdom. Politically, King Salman rose to the throne and the face of the monarchy was altered overnight, ushering in a new generation in terms of age and ideology. This soon manifested in the kingdom’s positions, which shifted towards a firmer stand on Iran and its allies in the region.

Saudi Arabia intervened militarily in Yemen and is hinting at doing the same in Syria if that country’s civil conflict is not soon resolved. Riyadh also recently cut off aid to Lebanon as a political response to actions it viewed as against its interests.

Saudi Arabia, which has never been a direct military actor in the region, last year announced the creation of an Arab military force and an Islamic coalition against terrorism as well as the expansion of its military capabilities.

The country accrued a huge budget deficit of nearly $100 billion last year, which required strict economic measures, including raising the cost of energy, reducing the budgets of various institutions, expanding the hiring of Saudi nationals, cutting down parts of Saudi investments in global markets, and issuing government bonds for borrowing as foreign reserves dropped.

Along with these quick steps, the government began implementing a transformational economic plan to prepare the economy for a post-oil era by relying on the private sector as an engine of growth, expanding financial markets and selling a portion of Aramco shares, the largest oil producing company in the world, valued at a staggering several trillion. This should allow the kingdom to establish a sovereign fund with a capital of nearly $2 trillion.

There is no doubt there are great transformations taking place in Saudi Arabia that go beyond the expectations of analysts, which indicates the role the country has been playing in the region.

There are two main factors behind this transformation, the first of which is a shift in US policies in the region.

After decades of taking charge of key political issues, the US’s regional role recently retreated, and it is also clear that the US wants to altogether change its strategy in the region as seen in the nuclear deal signed with Iran – despite Saudi objections.

Under Obama, the US is not interested in intervening militarily in raging regional conflicts.

The second factor is the sharp drop in oil prices following a long period of high prices, with costs at one-third of what they were two years ago.

These changes make today’s Saudi Arabia different from the one we were accustomed to for decades, and there will be repercussions of these changes on Egypt in several ways.

First, Saudi Arabia will lead the region, or at the very least will co-lead with Egypt, and will no long accept a back seat in regional affairs.

Second, the kingdom’s priority of cutting off Iran’s expanding influence in the region takes precedence over anything else, including domestic political issues.

Third, Saudi Arabia will no longer give generous donations to Egypt, but its support will take the form of investments in financially viable projects or loans with guaranteed returns after the price of oil dropped and a decline in financial surplus.

Fourth, the Egyptian government must forge ahead by implementing strict austerity measures, similar to Saudi Arabia, to reduce the budget deficit, which means higher inflation and deterioration of social conditions.

King Salman’s recent visit to Egypt may be indicative of this transformation. The historic visit, in terms of length, agenda and the number of agreements signed between the two sides, clearly showcases the extent of Saudi influence.

Border disputes usually take decades to settle, however, the dispute over the islands of Tiran and Sanafir was settled in a non-traditional fashion.

The rhetoric has also turned to the Iranian threat to the region and the importance of an alliance between Egypt and Saudi Arabia at a time when Cairo is facing political, security and economic problems and does not need a confrontation with Iran directly or through a proxy.

Economically, it was expected that there would be an announcement of direct assistance to boost reserves and defend the pound, but this did not happen.

Despite signing several deals that would help the flow of foreign currency in the future, such as creating a joint investment fund and an agreement for importing oil products with delayed payments, the parallel currency market was not responsive to this at all.

This reflects the conviction of market analysts that these agreements will not produce a fast flow of cash, and that the era of generous Gulf assistance is over.

Relations between Egypt and Saudi Arabia are strong and extensive, but Riyadh is quickly changing politically and economically while its regional influence grows to counter Iran’s growing influence.

Saudi assistance to Egypt is very important and is undoubtedly a cornerstone preventing the collapse of the failing Egyptian economy, however, such support has its political cost.

Thus, it would be prudent to revise the vision of managing the economy and resorting to root solutions to jumpstart it, instead of relying on foreign assistance, which is a short-term sedative but has a long term political, and possibly military, cost.

The writer is the Managing Director of Multiples Investment Group.

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