2016 could be 'the year of living dangerously for Saudi Arabia'

On Sunday, Saudi officials announced that the Kingdom will sever all diplomatic ties with Iran, and told all Iranian diplomats to leave within 48 hours.

The decision came after Iranian protesters attacked the Saudi embassy in Tehran, ransacking and setting fire to the building in retaliation for Saudi Arabia's execution of a prominent Shiite cleric and 46 others the day before.

But this fiery start to the year could be just the beginning.

"2016 could prove to be the year of living dangerously for Saudi Arabia with the Kingdom facing substantial economic and security headwinds," argues RBC Capital Markets' global head of commodity strategy Helima Croft in a note to clients.

On the economic front

The Saudis' Ministry of Finance recently unveiled the 2016 budget, which promises "sweeping reforms" that will ostensibly patch up its fiscal problems.

The government also hiked petrol prices by nearly 50% right after the budget was released, which is a "sign that the leadership is committed to carrying out these changes," Croft writes.

At first, this all sounds pretty good given that Saudi finances have been crippled over the last year by both the lower oil prices and the Kingdom's involvement in regional conflicts.

However, "the proposed austerity measures could still prompt a public backlash as they imperil the social contract ... between the monarchy and the Saudi citizenry, which has helped to underpin stability in the Kingdom for decades," argues Croft.

Notably, people already seem somewhat vexed by the belt-tightening. As Croft pointed out, some Saudi commentators denounced the petrol price increase on Twitter, and there were long lines at gas stations ahead of the hike.

The Shiite cleric's execution could be a catalyst for increased tension

On the security front, Saudi Arabia's decision to execute the Shiite cleric could lead to additional tensions both at home and in the Middle East, notes Croft. In other words, Iran may not be the only one to react.

In fact, protests have already broke out in Qatif, a city in Saudi Arabia's oil-rich, eastern provinces, which prompted Saudis to deploy additional security units to the region.

Protests also broke out in Bahrain, which is significant because back in 2011, protests by the Shiite majority in Bahrain were "violently" suppressed by the ruling Sunni monarchy with the aid of the Saudis, Croft points out.

And lest we forget the family squabbles

As a sort of end note, Croft suggests that all of this stands to upset the delicate balance of Saudi Arabia's political situation.

Right now, the Deputy Crown Prince Mohammad bin Salman is more or less the country's de facto political leader, but many have already rebelled against his decisions to pursue the military campaign in Yemen and to sideline his older cousins and uncles.

Consequently, writes Croft, his "political fortunes in 2016 are now seemingly leveraged to both the outcome of his economic reform effort and his provocative foreign policy initiatives."

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