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Prince Mohammed (far right) at the 2019 G20 Osaka summit
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More bad signs for MbS

Sub-$60/bl Brent, a rising budget deficit, soft foreign direct investment and subdued growth in the non-oil sector all drag on Vision 2030

Saudi Arabia's crown prince Mohammad Bin Salman, or MbS, as he is known, has made his Vision 2030 programme to modernise the Saudi Arabian economy by reducing oil dependency a flagship policy. But recent developments suggest the headwinds it is facing are growing stronger, rather than the promised transformation growing any momentum.

Currently, oil and gas sales account for 30pc of Saudi GDP, government consumption and investment— including government stimulus and petrochemical investment—account for around 34pc, while just 36pc is contributed by the private sector.

Under Vision 2030, the aim is to raise the share of private non-oil revenues to 65pc by 2030. For that to happen, non-oil private sector GDP must grow by 5-6 pc pa, compared to overall growth in the economy of around 3pc pa beyond 2019, according to Garbis Iradian, chief MENA economist at the Washington-based Institute of International Finance.

"Such growth for the private sector is very ambitious. I expect the private sector share of the economy to increase to nearer 50pc by 2030, not 65pc," says Iradian.

From 2002 to 2014, Saudi growth was driven by the state, with central government expenditure, fuelled by oil revenues, growing by at least 11pc in real terms each year. Such growth simply is not realistic today in the context of lower oil prices, with forecasters expecting Brent to average between $60/bl and $64/bl over a period of several more years.

Vision 2030 targets FDI accounting for 5.7pc of total GDP

Weaker growth also means another key Vision 2030 goal— cutting the unemployment rate for Saudi nationals to 7pc from around 12pc today—could fall by the wayside.

Recent economic data for 2019, impacted by a Brent price that started the year hovering just above $50/bl and, while it rallied to briefly threaten $75/bl by mid-April, has now slipped back below $60/bl, shows the Saudi economy weakening. Fiscal policy going forward may need to tighten, i.e. less money available for subsidies to cushion the population from economic hardship.

It is therefore perhaps unsurprising that the Saudi authorities have again been hinting about the biggest IPO in history—a public offering of a minority stake in Saudi Aramco—which MbS hopes could $100-150bn for the Kingdom's Public Investment Fund (PIF) to invest outside the country; in non-oil, hi-tech enterprises that that could plug a potentially growing hole in the budget contributions from oil receipts in 10-20 years' time.

But there are two challenges. Firstly, Saudi Arabia may have to consider further production cuts to prop up the price, as many analysts agree an Aramco float is a non-starter if oil is trading below $60/bl even if it means further stimulating competing supply such as US shale. And lower output, even at higher prices, risk depressing Saudi oil receipts, thereby putting further strain on the domestic economy that could lead to austerity along the line.

Then there is the question of whether the PIF will really be able to ride to the rescue via lucrative non-oil investments. The Vision 2030 target is for the PIF to have $2tn under management in 11 years' time. But that looks like a bridge too far when you consider the number today is $400bn, and, even with potential Aramco IPO proceeds, a figure nearer $1tn looks more realistic.

Weaker growth also means another key Vision 2030 goal— cutting the unemployment rate —could fall by the wayside.

Lack of material structural reforms in the Saudi economy complicate making Vision 2030 a reality. Too little emphasis has been placed on promoting non-oil exports, which would expose domestic businesses to foreign competition and support efficiency gains, says William Jackson, senior emerging markets economist at consultancy Capital Economics. The government has also shied away from a wholesale revamp of education so there are skills shortages and a knowledge gap that further throttles the non-oil private sector.

One way to plug the gap would be to attract strong flows of foreign direct investment (FDI) to allow knowledge and skills transfer on a meaningful scale. But once again, this is not happening. Vision 2030 targets FDI accounting for 5.7pc of total GDP, but very few countries have achieved this. In 2006, Saudi Arabia got to 4pc but, even within that figure, much of the cash was directed at the oil sector. Current FDI is between 1pc and 2pc.

The authorities have, admittedly, begun to implement reforms to improve the business environment, but much more needs to be done if Vision 2030 is to meet the lofty goals set by MbS three years ago.

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