When major talks between oil-producing nations collapsed in Doha without an agreement to freeze production earlier in April, industry analysts immediately pointed to the role of Saudi Deputy Crown Prince Mohammed bin Salman. At just 30 years old, King Salman’s powerful son showed he is already capable of overruling the Kingdom’s energy establishment and its powerful oil minister, Ali al-Naimi. In a context of regional confrontation with Iran, Prince Mohammed was clear going into the talks that he (and by extension, his government) would oppose any agreement that did not include Tehran freezing its own production as well.
Beyond the short-term question of oil production rates, Prince Mohammed has used his newfound power over the Saudi economy to embark on one of the most ambitious economic diversification programs in the Kingdom’s history, the embodiment of which, Vision 2030 was unveiled on Monday. Since last December, a steady stream of international headlines and media appearances by the prince have helped publicize a slate of measures that include the partial floating of Aramco, the privatization of nationalized industries, and major subsidy cuts. Faced with the oil price collapse, Mohammed has placed himself squarely at the head of a drive to break the state’s reliance on petrol and diversify into a wider range of investments.
THE PRIVATIZATION AGENDA
For a state that has been almost entirely dependent on oil revenues since its foundation, a shift of this scale will mean a fundamental rewrite of how the Saudi state handles its finances. The most obvious example is the Aramco float. Even if only 5% of the company will initially be on offer, Aramco has been the backbone and the financier of Saudi’s development for decades. Opening up the national oil company, whose reserves and influence over the global energy market are so massive it has been valued at anywhere between $2.5 trillion and $10 trillion, means revealing information about assets, reserves, and cash flows that have until now been state secrets.
The range of measures that make up the “National Transformation Plan” (NTP) aims for an extra $100 billion per year in non-oil revenue by 2020. The Kingdom still won’t go so far as instituting an income tax, but it will cut gas and electricity subsidies and institute a value-added tax (VAT) that officials estimate will bring in $10 billion on its own. The energy subsidies, for their part, cost the government an estimated $61 billion in 2015. Public assets will also be divested to private firms: King Khaled International Airport in Riyadh is set to be privatized this year, with other components of Saudi aviation infrastructure to be privatized by 2020.
The urgency behind these moves is prompted by the growing hole in the state’s budget. Riyadh posted a 367 billion riyals ($98 billion) deficit for 2015 and expects to run a deficit of 326 billion riyals ($87 billion) this year, equivalent to 16% of GDP (even after spending cuts). There is also the issue of unemployment: the jobless rate for Saudis under 30 stood at 29% last year.
How efficiently changes can be implemented remains a major question. New taxes and reduced subsidies may create some resistance, especially when the social contract in Saudi Arabia is built upon government largesse making up for absolutist rule and severe social restrictions. How exactly Prince Mohammed and his economic advisors plan to cut back on public spending without altering this political calculus has yet to be made clear.
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FOREIGN INVESTMENT AMBITIONS
If Saudi Arabia is to successfully diversify its economy, foreign investment is indispensable. Without the boon of high oil prices to fund such restructuring themselves, outside capital will need to fund the infrastructure projects and expand the service, retail, and other sectors Saudi economic planners are counting on to stimulate non-oil growth and create jobs.
Even before the NTP reforms were announced, some steps had already been taken in this direction. In June of last year, the $585 billion Tadawul (Saud Arabia’s stock exchange) was opened to foreign investors for the first time. The Saudi market enjoys pride of place from the perspective of certain international partners as well: the United Kingdom, for one, counts Saudi Arabia as its largest trading partner in the Middle East and a key market for British consumer and automotive brands. Building on these trade and investment relationships is the surest way to secure sustainable financing for a post-oil company, the recent bluster over selling off assets in the U.S. notwithstanding.
John Kerry and Saudi Deputy Crown Prince Mohammad bin Salman Al Saud. Photo: US Department of State
SAUDI INVESTMENTS ABROAD
If the NTP is going to be a success, another lynchpin will be the establishment of a sovereign wealth fund that (by Mohammed’s estimation) will hold up to $2 trillion in assets and be insulated from the energy industry. Saudi’s existing investment vehicle, SAMA Foreign Holdings, is controlled by the central bank and presently manages $737.6 billion in assets. SAMA, however, is known for being secretive about its holdings and investment strategy. The Public Investment Fund, as presented in the framework of the economic program, will reduce dependence on petrodollars by concentrating on the purchase of foreign assets. The bulk of the expected value for this fund will come from Aramco, whose ownership (minus the percentage being sold publicly) will reportedly be transferred to it.
Changes of this magnitude are bound to be risky, and Prince Mohammed will undoubtedly be faced with a host of financial, political and social issues as he tinkers with the Saudi public sector and the ownership of the state’s most prized assets. Even so, the state of the oil market and the government’s deep deficits have forced Riyadh’s hand. Other Gulf monarchies (like the Emirates) have already launched their own diversification programs. For the Saudi state to remain solvent in a world of cheap oil, systematic change was always going to be inevitable.
Khaled Alaswad is a Jordanian-born risk management consultant who has been working out of Abu Dhabi for the past five years. Before that, he lived in the United States while completing a degree in public policy.