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An oil-free Saudi Arabia?

Deputy crown prince Mohammed bin Salman has caused a stir by saying he wants Saudi Arabia to end its “addiction” to oil. Can the Kingdom really do this?

FORGET freezing crude output to bolster prices and prop up ailing economies. Saudi Arabia wants to try something much bolder: weaning its economy off oil revenue altogether.

On 25 April Saudi Arabia’s Council of Ministers approved the crown prince, Mohammed bin Salman’s plan to revolutionise the economy over the next 15 years.

Vision 2030 outlines a sharp economic shift and is full of eye-catching ideas and worthy aspirations (“transparent”, “vibrant society”, “preservation of the environment”, “investing for the long term”, and so on). Above all, it is aimed at diversifying its economy away from oil-revenue dependency and harnessing the kingdom’s abundant renewable energy potential.

It wants non-oil government revenue to increase from SR163bn ($43.5bn) to SR1 trillion, and “to raise the share of non-oil exports in non-oil GDP from 16% to 50%”.

As for Aramco, the Vision confirms the already-much-talked-about plan to list 5% of the state firm – offering the prospect of the world’s largest IPO, says Mohammed bin Salman, to create the world’s largest sovereign wealth fund, the value of which would reach around $2 trillion.

"We have an addiction to oil,” was how the deputy crown prince explained his thinking in an interview with Al-Arabiya. “This is dangerous. It has delayed the development of other sectors.”

Saudi Arabia's success in ending the oil-revenue addiction might depend on how it defines dependence

But his plans – supposedly owing much to consultants – would change all this. By 2020, Saudi Arabia would be able to survive “without any dependence on oil”.

That’s four years away. Is it feasible? Probably not.

Saudi Arabia holds around 18% of the world’s crude reserves and is the largest oil exporter in the world. Last year oil comprised around 73% of total government revenue and around 88% of its export income. In March, Saudi Arabia produced about 10.2m b/d, or more than twice the volume of its nearest Opec rival, another oil-dependent nation, Iraq.

The kingdom certainly seems to have pushed oil income down its priority list in the past 18 months. Along with its Gulf allies, Saudi Arabia’s strategy to regain market share from higher-cost producers has seen its earnings from crude exports decline from $278bn in 2013 to just $118bn last year. Between 2014 and 2015 alone, Saudi Arabia’s oil revenue dropped by almost a quarter.

Its financial outlay, though, has continued apace – at home and abroad, where the kingdom has thrown money at conflicts in Yemen and Syria and on propping up weaker friendly countries. In recent weeks, it offered about $55bn in generous loans to Egypt.

Saudi Arabia’s latest budget said it would cut domestic spending by around 14% this year following a record deficit of nearly $98bn, or around 15% of GDP in 2015.

To afford all this it has drawn down some foreign currency reserves – $150bn worth since 2014. (Then, they were $743bn. Now, still a whopping $593bn.) The kingdom also just issued its first international debt in years and taken out around $10bn in bank loans.

Its success in ending the oil-revenue addiction might depend on how Saudi Arabia defines dependence. Would reducing oil’s share of government income from 73% to 50% constitute a break? Or 20%?

Even to reach the first figure – and to use the most recent budget as a benchmark – that implies generating non-oil economic activity equivalent to over $37bn a year, for the next 15 years.

The Aramco IPO – if that can be included as non-oil activity – would bring in some of that, depending on how much it raised. But the Vision, while rife with aspirations, is still a little light on detail as to how the non-oil economy will flourish.

While the oil price crash over the past 18 months may have been the catalyst for this shift in Saudi economic policy, the plan itself is about much more than saving the nation’s finances.

From agreeing to list one of the world’s most secretive oil companies, to increasing the number of Saudi women in the paid workforce, this plan is about maintaining Saudi Arabia’s influence in a world where its economic power is under threat – from oil prices and emerging post-oil technology.

King Salman says he wants “to make our country a model for the world” and to become “a global investment powerhouse”.  The kingdom’s “real wealth lies in the ambition of our people and the potential of our younger generation. They are our nation’s pride and the architects of our future."

Stirring stuff. But beneath the rhetoric, other worries about the kingdom’s plan will linger. Some kind of recovery in oil prices would certainly improve valuations for Aramco ahead of the partial IPO – but the kingdom is in no real mood, or maybe just unable, to help much with that. Also, its oil ministry, already diminished in authority since Mohammed bin Salman took control of the Council of Economic and Development Affairs, is now in charge of an asset its boss thinks is a problem for the Saudi economy.

Politics poses the other risk to the Vision. For now, the radical transformation is an idea closely associated with the king’s son, and second-in-line to the throne, Mohammed bin Salman. His interview with Al-Arabiya shows a thoughtful man in command of his brief. But Saudi policy 18 months ago, during the reign of Abdullah – considered a reformer – offered little prospect of the kind of things being discussed today. Policy has always been a product of the balance of power in Riyadh. The deputy crown prince and his plan will need a lot of staying power to last the next 15 years unscathed.


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