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Conclusion: Though once unthinkable, the fall of the Saudi kingdom now seems at least in the realm of reality.  That is, popular unrest in Saudi Arabia and the Middle East could lead to a shift away from the autocratic rule in Saudi Arabia.  Keep March 11th on your calendars as Saudi youths have organized a day of protests against the monarchy called the Day of Rage.

 

Conventional wisdom suggests that Saudi Arabia will be immune from the popular upheaval that is occurring more broadly in the Middle East. The key factor supporting this view is simply that the standard of living is quite high in Saudi Arabia.  In fact, Saudi Arabia’s GDP per capita was $23.7K in 2010 based on the most recent data from the International Monetary Fund, which ranks it 39th in the world and just below such stable democracies as New Zealand. 

 

We often use market prices as a leading indicator for fundamentals in our model, and the Saudi stock market has been flashing some amber lights.  In the chart below, we’ve attached a 3-week chart of the Saudi primary equity index and 5Y CDS quotes.  As you can see, there has been a severe correction in the Saudi stock market of more than 10% and an expansion by more than 20% in CDS spreads.

Could the Kingdom Fall? - 1

While this correction is not surprising given the geo-political uncertainty in the Middle East (Tunisia, Egypt, Libya, and so on), on the other hand, the price of oil has gone up dramatically in that period, which, on a fundamental basis, improves the financial position of Saudi Arabia.  Specifically, almost 90% of Saudi Arabia’s export revenues are petroleum based.  Moreover, Saudi Arabia has 260 billion barrels in oil reserves, which is about 1/5 of the world’s total, and is the world’s largest exporter of oil.

Despite this and higher relative GDP per capita, all is not well in the Kingdom of Saudi Arabia.  In fact, both inflation and unemployment are pervasive in Saudi Arabia.  While data from the Saudi government is questionable at best, some reports reasonably put inflation at north of 5%, which is clearly squeezing those near the bottom of the income pyramid.  In the same vein, while unemployment measures are also difficult to come by, most estimates put the national rate at close to 11%.  The International Labor Organization (ILO), considered more credible, has put the unemployment rate for those between the ages of 20 – 25 at closer to 30%.  This is particularly important given then demographics of Saudi Arabia, where the population is young with median age of 23.4 years old.  (This is compared to 36.9 in the United States.)

Directly below, we’ve highlighted a chart from ILO, which compares unemployment, youth unemployment, and GDP globally.  The slow growth and high unemployment issues are quite clear in MENA.

Could the Kingdom Fall? - 2

In signal that the Saudi royal family is taking the risk of social upheaval  very seriously, last week Saudi King Abdullah bin Abdul-Aziz’s announced a $37 billion benefits package to create 1,200 new jobs, raise cost-of-living allowances, grant interest-free home loans, and more.   This was underscored by Prince Alwaleed bin Talal from Saudi Arabia, said to be the world's eighth-richest man, who wrote an op-ed in the New York Times, calling for "unwavering, enduring and sincere" reform.

The stock market, despite this package, the strong price of oil, and positive rhetoric, continues to signal danger.  In fact, the Tadawul, the largest stock market in the Arab world by capitalization, plunged (-6.78%) to 5,538.72 overnight, bringing its decline for the year to date to (-16.34%).

So, could the Kingdom of Saudi Arabia fall? While the Royal family has much in the way of wealth to appease it citizens, sharing power and democratic rights could be the real lynchpin to satisfy popular protests.  To that end, it is not clear the royal family is there yet.  The Day of Rage on March 11th could be a key catalyst in the future of Saudi Arabia, and its royal family.

Daryl G. Jones

Managing Director