Saudi Arabia, Jamal Khashoggi: Death may hurt economy

A
Saudi man walks past the logo of Vision 2030 after a news
conference, in Jeddah, Saudi Arabia June 7,
2016.
REUTERS/Faisal Al
Nasser

• There is mounting evidence suggesting Saudi Arabia was
  complicit in the death of a Washington Post journalist.
• It isn’t clear whether the US would impose sanctions if an
  investigation reaches that conclusion.
• But the affair may have already damaged the reputation
  of the kingdom, according to experts.

As evidence suggesting Saudi
Arabia was involved in the death of Washington Post journalist

Jamal Khashoggi mounts, investors are pulling out of a major

investment conference in Riyadh left and right.
And experts say that may be just
the start of economic troubles for the kingdom.

Jason Tuvey, senior emerging
markets economist at Capital Economics, said the Khashoggi case
and the manner in which Saudi Arabia has handled it “will damage
the country’s long-term economic prospects, and another political
shock will remain a key risk to the outlook.”

Earlier this week, Saudi Arabia’s
stock market, which had just recently been recognized as an
emerging market on the MSCI, suffered its steepest drop since
December 2014. Meanwhile, the riyal temporarily breached its 3.75
peg to the dollar and fell to

a two-year
low

.

“We’ve seen a lot of volatility,”
Karen E. Young, a resident scholar at the American Enterprise
Institute, said Thursday. “We can see now that markets are trying
to figure out how to price-in this risk in Saudi Arabia.”

While it isn’t clear how the US
would respond if it is determined that the Crown Prince Mohammed
bin Salman is guilty of involvement in
Khashoggi’s death, sanctions are an option. In a
bipartisan

letter

sent to President Donald Trump last week, top
senators demanded an investigation into whether “the highest
ranking officials in the Government of Saudi Arabia” were
complicit in the case.

The Trump administration, which
did not respond to an email requesting comment, has 120 days to
decide if it will impose sanctions under a human-rights

statute

invoked in the letter. Gregory J. Wawro, a
political science professor at Columbia University, said he isn’t
betting on any formal penalties at the moment.

“If some sort of diplomatic
reaction is going to happen — whether it’s sanctions or some sort
of formal statement condemning Saudi Arabia or top leaders there
— I think the story is going to have to last through the
election,” he said. “And that is a tall order.”

But sanctions or not, analysts
say the economy could suffer as companies continue to delay or
even cancel investment plans in the country. Foreign direct
investment inflows fell to just 0.2% of gross domestic product
last year, according to Capital Economics, down from about 9% in
2009.

That could be especially bad news
for Vision 2030, a social and economic reform program championed
by the crown prince. A major focus of the initiative is bringing
in foreign investment to boost productivity growth and reduce
dependence on oil.

Helima Croft, head of commodities
research at RBC and a former CIA analyst, said the allegations
could be especially troubling for technology companies that tend
to place high value on corporate social responsibility.

“It raises a lot of questions
about whether they want to carry through with [investment
plans],” she added. “Like somebody said to me, ‘Does the young
HBI Brad now want to go work in

Neom

?’”

Losing investments outside of the
oil sector means risking employment opportunities at the heart of
Vision 2030. With about 70% of the population under 30 years old,
teens and young adults in the kingdom have struggled to find
jobs. The state-run oil giant Aramco is booming, but its
positions are limited in number and type.

“This is where the allegations
are just terribly damaging,” Croft said. “If you’ve awakened
aspirations in young people and that opportunity doesn’t
materialize on the employment front, you’re going to potentially
have a lot of restless youth.”