Saudi Arabia’s cabinet reshuffle, occurring so soon after King Salman’s smooth succession to the throne in January, is credit positive amid the economic and security challenges facing the kingdom, a Moody’s report said.

Last week on April 28, King Salman bin Abdulaziz reshuffled the order of royal succession for the Government of Saudi Arabia (Aa3 stable), complementing other recent appointments that have highlighted merit over lineage, and bringing forward the succession to the next generation, added the report from Moody’s Investor Service.

The decision to hasten the transition to the next generation of Saudi rulers, and the background and youth of the new order, will likely enhance policymaking and the predictability of the kingdom’s political structure in the years ahead.

Prince Mohammed bin Nayef is the newly designated Crown Prince and heir apparent. He will ascend to the throne upon King Salman’s death. He is the son of one of the king’s half-brothers and was previously deputy crown prince: he replaces Prince Muqrin, the king’s last living half-brother, as Crown Prince and heir apparent. The king named his son, Mohammed bin Salman, who is currently the Defence Minister, as Deputy Crown Prince (the second in line to the throne).

The new order demonstrates the king’s desire to bring forward the line of succession for the next generation, moving away from the horizontal succession plan which persisted under the late King Abdullah.

Moody’s had previously identified uncertainties surrounding the succession between increasingly aged brothers as a potential concern which the smooth transition to King Salman deferred, but did not remove. The decision to move more quickly to the next generation is positive in that regard, the report said.

The reshuffle will also affect Saudi Arabia’s key credit drivers: newly emergent fiscal and security challenges. The reshuffle furthers the trend of appointments to positions of power being increasingly based on merit. Three key ministers, those of finance, foreign affairs and oil, are commoners, not princes.

In addition, King Salman named Khalid Al-Falih, another commoner, as the new health minister and chairman of Saudi Arabian Oil Company (Aramco), replacing Oil Minister Ali Al Naimi. Al-Falih was previously the CEO of Aramco.

The fiscal challenges are from the collapse in crude oil prices coupled with the kingdom’s counter-cyclical policy of heavy spending on major infrastructure projects.

“As a result, the government budget shifted to a small deficit last year, which we project will widen considerably this year to 12.9 per cent of GDP from 2.3 per cent in 2014 and a surplus of 6.5 per cent of GDP in 2013,” Moody’s said in the report.

“To finance the deficit, the government withdrew SR167 billion ($44.5 billion) in deposits from the Saudi Arabian Monetary Agency (Sama) in the first three months of 2015. This, alongside the emergence of a current account deficit which Moody’s expects to be around 6 per cent of GDP, adds downward pressure on Sama’s international reserves, which were $694 billion in March 2015, down from $732 billion in December 2014 (a level nearly equal to Saudi Arabia’s nominal GDP).”

Security challenges are from heightened regional geopolitical tensions, according to the report.

The spread of the Islamic State threatens the kingdom’s long northern border with Iraq, and the Houthi rebellion in Yemen threatens to establish an extremist regime hostile to Riyadh along the kingdom’s southern borders.

“We think that this helps to explain the elevation of the experienced and effective, decade-long Interior Minister Mohammed bin Nayef as Crown Prince and the Defence Minister Mohammed bin Salman, as the new Deputy Crown Prince,” Moody’s said.

Other longstanding pressures facing the kingdom are its growing and young population. Since King Salman came to power in January, authorities have introduced a number of reforms to the labour market to alleviate the kingdom’s high unemployment rate, which was more than 11 per cent in 2014.

The new, 30-year old deputy crown prince, as well as the decision to appoint someone from the younger generation to that post, may help better attune the government to respond effectively to such social pressures, according to Moody’s. – TradeArabia News Service