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Saudi Arabia heading towards a post-oil era…

It has taken a long time to Saudi Arabia to embark on a reform wave, but it seems that after eight decades of oil dependency, and under the current context of sustained low crude oil prices that pushed Saudi Arabia into a budget deficit of nearly $100bn last year (15% of GDP), the time has come for the kingdom to think of a post-oil era.

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Monday 25Apr, Saudi Deputy Crown Prince Mohammed bin Salman (2nd in line for the throne) presented the much awaited national transformation plan “Saudi Vision 2030”, an ambitious plan that aims at reducing the kingdom reliance on oil exports revenues. The sustained decline in oil prices over the past 18 months may have helped in setting the ideal conditions for the 30-year old prince to push forward his ambitious economic and social reform plan, a first step towards the Kingdom transition to a post-oil era. A new chapter is to be written, but is left to see if the ultraconservative Kingdom will manage to embrace the changes and challenges ahead.

It has taken a long time to Saudi Arabia to embark on a reform wave, but it seems that after eight decades of oil dependency, and under the current context of sustained low crude oil prices that pushed Saudi Arabia into a budget deficit of nearly $100bn last year (15% of GDP), the time has come for the kingdom to think of a post-oil era. And it was on the state TV, and following the approval of King Salman bin Abdulaziz, that the 30-year old Deputy Prince Mohammed bin Salman (MbS) unveiled the «Saudi Vision 2030» plan on Monday 25Apr.

A wide range of reforms…

Although the full National Transformation Programme will be revealed late May, major lines concerning a vast range of matters were announced: from the stimulation of the private sector, the reduction of government subsidies and spending (defense and military expenses) to the creation of new jobs in the private sector (openly supportive of higher participation of woman in the labour market, better condition for foreign workers), this ambitious plan aims to diversify the economy and allow the country to reduce its reliance on oil exports revenues from more than 80% actually to 50% by 2030. Hydrocarbons revenues do actually represent 90% of the kingdom budget. Following the announcement, Saudi Arabia’s Tawadul index put on 2.53% to 6,858 on Monday, its highest level since January.

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« Saudi Vision 2030 » plan main goals
? To rise from the current position of 25 to the top 10 countries on the Global Competitiveness Index
? To increase foreign direct investment from 3.8% to the international level of 5.7% of GDP
? To increase the private sector’s contribution from 40% to 65% of GDP
? To raise the share of non-oil exports in non-oil GDP from 16% to 50%
? To increase non-oil government revenue from SR163 billion to SR1 Trillion
? Slashing unemployment from 11.6% to 7%, increasing women’s participation in the labour force from 22% to 30%

Mohammed bin Salman, evoking a very dangerous “addiction to oil”, announced amongst the main features of the plan the IPO of the national oil company Saudi Aramco and the creation of a Public Investment Fund. With the objective to convert the company into a holding, in attempt to build a more transparent environment and bring independence from the central government as financial and information will be disclosed, up to 5% of the company whose value is estimated at some $2tn will be offered. Also, a sovereign fund – the largest in the world, estimated at $2tn to $3tn - will be created from the restructuration of the existing Pubic Investment Fund ($600bn), the ownership of the Aramco expected to be transferred to the fund.

He also stated the kingdom will try to meet its military needs domestically by localizing over 50% of the military equipment spending. Initially focused on small parts and basic ammunition making, and on maintenance and support services, this decision may have an impact on international industries in the mid-term. SA has one of the most important military budgets in the world, with $46bn allocated to defense in 2015 and a 2016 budget of $57bn.

The plan was built under the assumption of oil prices of $30/bbl, which means the country has somewhat priced-in a sustained low-oil price scenario – in line with their recent policy that focus on keeping the market share, in detriment of high crude oil prices (may that be sign for fellow OPEC member countries?...). On the low oil price impact on the Saudi finances, the spending cuts that have been set in place to curb the low oil prices impact have started to show its effects: according to the IMF, Saudi Arabia’s break-even oil price will drop by 30%, from $94.8/bbl to $66.7/bbl as a result of the spending curbs that have been set in place following the recent oil price rout, the highest drop amongst MENA and OPEC countries.

…likely to shake the foundations of an ultraconservative society

Prince MbS, the 2nd in line for the throne, is the power behind the King and the brain behind this ambitious plan. He has cumulated unprecedented powers since his father ascended to the throne early 2015, acting as the Defense Minister and concentrating power over all economic matters as the chairman of the Council of Economic and Development Affairs. His meteoric ascension and sound influence was set on display over the recent Doha talks (on oil production freezing), where he emerged as the voice of the world’s top oil exporter country, putting aside the long term Saudi Minister of Petroleum Ali Al-Naimi.

Despite the costly and criticized action in Yemen he’s driven, and beside his efforts to push Iran’s influence in the region away, MbS popularity amongst the Saudi youth is high. With 50% of its population under 25 and 70% of the population under 30, that support could prove a major asset, a capital one, for the mise-en-oeuvre and success of the Vision 2030 plan.

But the path ahead may not be an easy one as the wide range of social reforms that implicitly derive from the economic objectives of Vision 2030 may find some resistance in a highly bureaucratized society, within the ultra-conservative clericals and even within the royal family as they may come to toggle a long-dated scheme of favoritism-for-loyalty. Indeed, the plan states a higher participation of woman in the labour market and makes reference to the need of «more entertainment» in the kingdom, both proposals that may come to test very quickly the Saudi social status-quo.

Lysu Paez Cortez May 2016

Article also available in : English EN | français FR



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