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COVID-19 adds to Saudi Arabia’s Economic Woes, Undermining the Investment Environment and Threatening Long-Term Political Stability

by Aaron Rampone

In late February 2020, for the first time in history, Saudi Arabia suspended the Umrah Islamic pilgrimage over concerns that Islam’s holiest sites would become a Middle Eastern epicenter for the spread of Covid-19.  Muslims around the world are questioning whether the annual Hajj pilgrimage, scheduled for July, will also be suspended.  Together, the pilgrimages attract 21 million tourists to the Kingdom each year, and their suspension could deprive the Saudi economy of up to USD 17 bn in revenue.

Drop in oil prices and foreign investment spell trouble for Saudi Arabia

The price of oil surged Friday Jan. 3, 2020, as global investors were gripped with uncertainty over the potential repercussions and any retaliation, after the United States killed Iran’s top general Qassem Soleimani. A number of economic setbacks for the Kingdom, carrying implications for the investment environment.  In early March 2020, despite Saudi-led efforts to secure deeper OPEC+ supply cuts to offset falling demand amid the global pandemic, the ensuing oil price war between Saudi and Russia has led to a price crash of over 30%. In recent years, oil has accounted for roughly 87% of Saudi’s government budget revenue, 90% of its export earnings and over 40% of its GDP. Collapsing prices are also likely to frustrate plans to list additional Aramco shares, the state-owned oil company.

Dwindling oil revenues have accelerated a run on foreign reserves and significantly undermined the Kingdom’s ability to fund Crown Prince Mohamed bin Salman’s (MBS) ambitious Vision 2030 economic plan. Vision 2030 is a blueprint for the diversification of the economy away from a reliance on petrochemicals and is intended to stimulate mass employment. This has been compounded by a steady fall in foreign direct investment (FDI), triggered by the 2017 detention of prominent local businessmen including some royals in the Ritz Carlton, Riyadh, and MBS’ alleged involvement in the 2018 murder of opposition journalist Jamal Khashoggi.  Between 2016 and 2019, Saudi Arabia saw a 50% decline in foreign investment, from USD 7.45 billion down to USD 3.8 billion.

MBS’ political credibility is put into question

Crown Prince Mohammed bin Salman at the Future Investment Initiative conference in 2017.

MBS’ political credibility is closely tied to the success of Vision 2030. Diminishing funds for its associated megaprojects as a result of a collapse in the oil price and a crisis in investor confidence risk undermining this credibility and affording momentum to MBS critics, many of whom sit among influential but disenfranchised factions of the al-Saud ruling family. Moreover, enhanced austerity measures required to offset falling revenues risk fuelling popular discontent.  These factors in combination may pose a threat to the Kingdom’s overall political stability in the longer term.

For more information on Gryphon’s MENA team and Global Strategic Advisory Practice, please contact Victoria Mackay at [email protected].


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