Business as usual for the Saudi economy
Whatever Mohammed bin Salman says, oil will remain central to the Saudi economy for the coming years
LISTENING to discussions about Saudi Vision 2030, it’s easy to think the kingdom’s role as an oil producer is coming to an end. Of all the elements in the al-Arabiya TV interview with deputy crown prince Mohammed bin Salman the one that has caught the imagination of Saudis is that focussing on the country’s relationship with oil. “We have an addiction to oil in the kingdom of Saudi Arabia,” he said, adding that it was a serious issue which needed tackling.
The deputy crown prince also rashly predicted that by 2020, if the steps outlined in the strategic plan were taken, “we can live without oil”. The prediction, most Saudi commentators agree, is not realistic and was probably a slip of the tongue. Saudi Arabia relies on oil revenue to drive every single sector in its economy. True, when 5% of Aramco is put to IPO, the Public Investment Fund will have some income to invest – though no one knows how much the listing will raise. But weaning the world’s largest oil producer out of the comfort zone that it has enjoyed for decades will not be easy.
“Oil represents 90% of our income and it’s not feasible or realistic just to stop looking at it,” Ahmed Alhatti, chairman of the Cayan Group, a local real estate firm, said at a conference in Riyadh in early May. “We must consider oil prices as a factor and we must continue to do so for some time.” An economist at the Saudi Arabian Monetary Authority (Sama), the kingdom’s central bank, agrees: “For at least the next decade the kingdom will be an oil state. Perhaps not so totally reliant on oil as now, but an oil state nevertheless.”
This means that while Saudi Arabia seems set to stick with its policy of pursuing oil-market share, rather than higher prices, its policies in the short term will be influenced by how much revenue it receives. The prospects in this respect may not be so rosy. “Our view,” says Fahad Alturki, chief economist at Jadwa Investment, a Saudi investment firm, “is that the current support for oil prices is weak. We think they will be in the mid-$30-a-barrel range this year and mid-$40/b next year.”
So, to keep funding its budget, the likelihood is that Saudi Arabia will resort to more loans on top of the $10bn raised from a consortium of international banks in April, with local institutions as well as global ones being tapped. Given the kingdom’s huge financial commitments in the region – the wars in Yemen and Syria, aid for Egypt – a further call on its reserves (now standing at $635bn) also seems inevitable, adding to the $150bn withdrawn since late 2014.
“For at least the next decade the kingdom will be an oil state. Perhaps not so totally reliant on oil as now, but an oil state nevertheless”
To claw back expenditure, the government will persist with its campaign of cutting waste and expand the programme of lifting subsidies on water, electricity and fuel – a key element of Vison 2030. During his TV interview, MbS insisted, under sustained questioning, that the government’s commitment to make these changes was solid – but the policy would target only the 70% of Saudis who earn more than the average income. Increasing domestic prices, it is hoped, will cut down domestic oil consumption, which stands at around 3.2m b/d out of total production of about 10.2m b/d. Oil consumption is growing at about 4-5% a year and total demand will double by 2030 unless steps are taken to curb it, deputy petroleum minister prince Abdel Aziz bin Salman said earlier this year.
Other questions surround the Saudi currency. In outlining Vision 2030, the deputy crown prince didn’t refer to the kingdom’s three-decades-long peg to the dollar. But the oil slump has caused the riyal to encounter volatility in the forward market, raising suggestions that the peg might be dropped. Sama Governor Fahad Almubarak in April categorically denied that this was on the cards: “I would like to reiterate our official position” that the central bank will “uphold its mandate of maintaining the peg”. A Sama economist says now that the statement still holds. “We can see no advantage in de-pegging because all our exports today are oil or petrochemicals, and all trade is in dollars,” he says. “If in five or 10 years’ time diversification of exports is achieved, then it might be worth seeing if there is any advantage in floating the riyal or tying it to a basket of currencies.” For now, maintaining the peg “is less complicated and creates a more secure environment for investors”.
So, business as usual will be the theme for most of the Saudi economy in the immediate years ahead. That will only change when the challenges thrown down in Vision 2030 have been overcome and oil becomes less of an addiction than it is today.
This article is part of an in-depth series on upstream in the Gulf. Next article: The kingdom's new oil chief.