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Saudi Arabia focuses on picking up the pieces

Saudi Arabia needs to restore its image and keeping its economic reforms on track

Crown Prince Mohammed bin Salman has taken on his own shoulders the task of convincing the world that the kingdom has ridden the storm that blew up after the killing of columnist Jamal Khashoggi in the Saudi consulate in Istanbul. His decision to represent his country at the G-20 summit in Argentina sets the pattern for what are likely to be many months of global fence-building.

His task is as critical for the future stability of the kingdom as it will be difficult to achieve. Ian Black, visiting fellow at the London School of Economics' Middle East Centre, says the stakes are high, given the global impact of the Khashoggi murder. Writing in Petroleum Economist's Outlook 2019, he adds that "the repercussions of that shocking episode are set to continue with the potential to undermine the crown prince and his ambitious economic and social reforms".

The main aim of Crown Prince Mohammed's reform strategy, Vision 2030, unveiled in 2016, is to gradually decrease Saudi Arabia's reliance on oil. This will be achieved by encouraging large-scale investment in the private sector and developing industries that are not dependent on hydrocarbon revenue. To achieve this, Saudi Arabia needs a healthy financial climate that is attractive to would-be investors from abroad. It also needs Saudis themselves to show confidence in their own country by investing there.

In recent months—even before the Khashoggi incident—the signs have not looked good on either front. Over the past two decades, capital flight from the kingdom was stable at around $100bn/yr, rising briefly during the global financial crisis. In 2009-11 it averaged $107bn-yr, rising to $126bn/yr in 2012-14 and $230bn/yr in 2015-17. In the first half of 2018, capital flight was running at an annualised rate of $236bn.

The mass arrests of dozens of prominent Saudis accused of corruption and their incarceration in the Ritz Carlton Hotel in Riyadh in November 2017 led to an overnight spike in the rate of money leaving the country. A Saudi economist, who declined to be named, says a similar pattern was detectable in the immediate aftermath of the Khashoggi killing.

Saudi Arabia's central bank, the Saudi Arabian Monetary Autority (Sama), has sought to prevent uncontrolled capital flight, but is unable to track the final destination of all the departing money. When presented with what appears to be a bona fide request for finance, Sama has no grounds on which to turn it down and no resources to investigate the end use of the dollars.

To make matters worse, the factors that are prompting Saudis to move their cash out of the kingdom are also deterring direct foreign investment (FDI). The Ritz Carlton arrests and the Khashoggi affair are making some potential investors nervous. This was obvious in the relatively poor attendance at Riyadh's much-trumpeted international investment conference in October.

The decline in FDI, and the decision to postpone indefinitely plans to sell off 5pc of state energy giant Saudi Aramco, mean that the kingdom will have no choice but to continue borrowing dollars to top up foreign currency reserves. The problem, the economist says, is that the kingdom appears to be "borrowing dollars that then leave the country as capital flight".

Above all, the international financial community wants assurances that Saudi Arabia remains a stable and secure target for investment. Without such proof, the kingdom will be hard pressed to fund the ambitious schemes that are designed to expand the private sector and create tens of thousands of jobs for young Saudis. With some of the targets in the interim 2020 National Transformation Programme already slipping, the crown prince's global charm offensive has no time to waste.

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