When Saudi Arabia unveiled tough austerity measures last month few areas of government spending were expected to be untouched. But in one sector — defence — the message to industry executives was business as usual.
“I was fully expecting there to be a cut, but the information from very senior levels and princes is ‘no, we’re not going to do it. In fact, don’t come and ask me if your programme is going to slip, keep working hard at it, because we are just carrying ahead,’” said one western arms industry executive based in the Gulf. “We’ve got a large number of requirements popping in through the door.”
Two days after Riyadh announced the austerity measures, the defence wing of Boeing was awarded contracts worth $2.6bn to supply the kingdom with more than 1,000 surface-to-air and anti-ship missiles. Experts say while that was part of long-term agreements, the fact that it is proceeding is a sign that one of the world’s biggest arms importers is still spending on defence.
Lockheed Martin, the US arms manufacturer which supplies THAAD missile defence systems to the Saudi government said it had “not seen a backing off of expenditures on defence” by any of its main Middle Eastern customers.
Robert Harward, chief executive of Lockheed’s Middle East unit, said it was too early to know if budget pressures would filter through to defence, but said he expected that customers, including Saudi Arabia, “will continue with their procurement”.
“Regional threats are not receding and are more unpredictable than ever,” Mr Harward said. “Countries will have to make choices on budgets, as countries always have to do.”
Another Gulf-based defence executive said his company had not witnessed “any shift in attitudes from the customers” but suggested that could still change. “I think that’s because the implications of what’s going on has not quite filtered down to that level.”
If cuts have to be made, analysts predict that new big-ticket arms sales, which have helped Crown Prince Mohammed bin Salman ingratiate himself with US president Donald Trump, will be most vulnerable to belt-tightening. When Mr Trump hosted Prince Mohammed at the White House in 2018 he held up a board displaying $12.5bn in “finalised” arms sales to Saudi Arabia, including aircraft, tanks and naval ships.
“It seems inevitable that the [government spending] cuts will start to feed through to defence, and to the discretionary part of spending — investment in new programmes and procurement activity,” said Fenella McGerty, senior fellow for defence economics at the International Institute for Strategic Studies. “Anything that is beyond a critical requirement, including those that relate to mitigating specific threats like Iran, is at risk.”
The Saudi finance ministry told the Financial Times that the kingdom would “continue to support our military needs and spare no resources to defend our people and our territory”.
The ministry said it had been working to rationalise spending to ensure the kingdom got defence equipment “for the right cost for the right quantity with the right specification”. Last year’s estimated military expenditure was SR198bn ($52.8bn), a decrease of 18.3 per cent from 2018, but it said the drop reflected “improved procurement and planning” and not a reduction in funding. Independent analysts estimate that 2019 spending was actually far higher.
Defence spending across the Middle East is opaque, but most states in the region have a penchant for US weaponry. Since March, the US state department has approved potential arms sales to the United Arab Emirates, Egypt, Kuwait and Morocco, from missiles to the refurbishment of Apache helicopters and transport planes.
But Saudi Arabia stands out as by far the region’s biggest arms importer, mostly from US and UK companies.
Defence accounts for about 17 per cent of the government’s budget, and for five years Saudi Arabia has been spending tens of billions of dollars pursuing a war against Iran-aligned Houthi rebels in Yemen.
The kingdom’s defence spending peaked at an all-time high of $87bn in 2015, according to the Stockholm International Peace Research Institute, when Riyadh entered the conflict, just as the previous oil slump was beginning to bite. It fell by 28 per cent in 2016, Sipri says, before picking up again as the Yemen war continued and tensions with Iran increased.
“It appears likely that the leadership in Saudi Arabia concluded that the need for military capacity to win the war in Yemen and to deter and push back Iran was so urgent that military spending had to increase despite the [2015] recession,” said Pieter Wezeman, a senior researcher at Sipri.
The conflict has triggered what the UN describes as the world’s worst man-made humanitarian crisis and put intense scrutiny on US and UK arms sales to the kingdom.
Saudi Arabia has imposed a unilateral ceasefire since April and diplomats say the kingdom has been keen to extricate itself from the conflict for some time — a move that could lead to significant defence savings. But Riyadh does not want to be seen to be doing it from a position of weakness, one western diplomat said. The Houthis, meanwhile, have continued to sporadically fire drones and missiles at Saudi targets.
This crisis, however, is far deeper than that caused by the most recent oil slump. Craig Caffrey, aerospace and defence analyst at Aviation Week, said discretionary purchases, such as Saudi’s planned expansion of its naval capabilities, would most likely be delayed.
Riyadh has been considering the purchase of Boeing P-8 maritime patrol aircraft, but this could cost up to $3bn in military infrastructure, including new squadrons and training programmes, as well as the cost of the planes themselves. Boeing declined to comment.
“Normally [the military budget] is ringfenced, mainly down to its international prestige and connection,” one of the defence executives said. “But I’m not betting that things won’t change. I think there’s a little bit of head in the sand . . . Reality might be something different.”
