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Regional stability looks precarious as Saudi Arabia competes with Iran over Gulf dominance, following

events that saw regime change in Tunisia, Libya and Egypt, as well as uncertainty in Syria and Yemen.

The end of the Mubarak presidency in Cairo saw Riyadh lose a significant regional ally, despite the

Egyptian military’s continued authority. Saudi Arabia has reacted to unrest in the Middle East and North

Africa (MENA) region in 2011 by announcing greater government spending and promises of democratic

reform, particularly in the area of women’s rights. Those demonstrations that broke out in the country’s

predominantly Shi’a eastern region criticised the March 2011 military intervention in Bahrain, which

ended after three months when Saudi Arabia and the UAE withdrew their Peninsula Shield forces from

Bahrain in late June 2011.

Saudi Arabia’s military spending continues to grow, facilitated by massive oil revenues and justified by

both the regional rivalry with Iran and the on-going turbulence along its borders such as in Yemen and

continuing violence in Iraq. Saudi Arabia and the US agreed in principle in September 2010 on a

US$60bn procurement deal for fighter aircraft, missiles and helicopters. Discussions continue between

the two parties at the time of writing. The agreement, along with a separate US$30bn deal to upgrade the

Saudi Navy will modernise the country’s military, giving it a JDAM capacity currently only possessed by

Israel. The GCC nations are spending billions to establish a missile defence shield, with the Iranian threat

in mind. Tensions between Iran and the Saudis blame Iranian infiltrators for the unrest in Bahrain, as well

as for supporting alleged terrorist plots uncovered by Saudi Arabian security forces.

Saudi Arabia continues to play a role in many of the crises across the Middle East. The country defended

the Mubarak regime and made public its grievances about US support for demonstrators intending to oust

the authoritarian figure. Saudi Arabia has taken a proactive approach in dealing with events in

neighbouring countries. This included crafting a political ‘exit strategy’ for Yemen’s president Ali

Abdullah Saleh, who has nonetheless steadfastly held onto power.

Unlike its fellow GCC allies – Qatar, UAE and Kuwait – Saudi Arabia did not support the Transitional

National Council (TNC) in its fight to end the rule of Muammar al-Qadhafi in Libya, even at one point

denying TNC diplomats clearance to fly over Saudi Arabian airspace. This contrasted with Qatar’s

vigorous support for the TNC, which included rapid diplomatic recognition, financial assistance and

support with the provision of refined fuels. The country finally threw its weight behind the TNC at an

Arab League summit in August 2011.

In general, Saudi Arabia has overseen a successful crackdown on terrorism, under deputy interior minister

for counterterrorism, Prince Mohammed bin Nayef. Violent attacks have dropped precipitously since the

2003-06 crackdown, as anger over the Iraq War subsided, although the Saudi Arabian government

continues to announce arrests, weapons seizures and plot disruptions.

The government stimulus packages announced in 2011 will reinforce the already strong outlook for the

Saudi Arabian economy, in particular the non-hydrocarbon sector will benefit with various government

initiatives seeking to diversify the nation’s core revenue sources for better long-term economic security.

GDP growth forecasts have been revised up to 6.3% in 2011 and 4.0% in 2012. This spending drive is at

threat, however, if oil prices drop significantly; this would threaten Riyadh’s capacity to finance the

ambitious plans, and would pose a downside risk in our otherwise strong forecasts.