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Published on December 5th, 2016 | by Thomas Lippman4
Saudi Arabia’s Glass: Half Empty or Half Full?
by Thomas W. Lippman
These are difficult times in Saudi Arabia.
The long slump in the price of oil is eviscerating the economy. Neighboring countries are plagued by violence and extremism. Saudi Arabia’s air force has been raining death and destruction on Yemen for 19 months, with no end in sight. The kingdom’s regional struggle with Iran shapes every decision in international affairs. Inside the country, the Islamic State has been recruiting so intently that the police have established a direct emergency phone number, 990, for families to call when they think one of their sons is about to go to Syria to join up. Social media outlets are alive with complaints, mostly anonymous, about the way the ruling family is managing the country.
This is not to say that Saudi Arabia is politically unstable or faces any immediate crisis. Saudis are generally patient people, and they abhor disorder. But in the aggregate, the government is facing stern tests of its ability to manage the country as power passes from one generation of the Al-Saud family to the next. The economic slump is the most pressing issue.
Signs of Distress
To a visitor, the signs of economic hard times are visible all across Saudi Arabia’s sprawling capital—empty buildings, deserted construction sites, idle equipment, shuttered shops. The sharp decline in oil prices and the contraction in government spending that followed have sucked the vibrancy out of the Saudi economy. Billions of dollars in purchasing power have dried up.
In the past, a drop in the price of oil was eventually followed by a turnaround, enabling the government to wait out the slump, insulate the population from hardship, and maintain the undisciplined spending that has been a fixture of Saudi life since the 1940s. This time, the government said it would be different: economic policy would not be driven by the price of oil. The people would do more to support themselves and the state would do less. The government has cut salaries and bonuses of the public-sector employees who dominate the work force, cancelled billions of dollars worth of construction and service contracts, and announced plans to levy a value-added tax next year on a population long accustomed to life without taxes. But Saudi Arabia’s decision at the recent meeting of the Organization of Petroleum Exporting Countries to drive up the price of oil by cutting production sent a strong signal that the cash crunch may force some revision of this new policy.
The kingdom has simultaneously embarked on an ambitious plan to restructure its economy from top to bottom, building a new foundation on private enterprise, foreign investment, capital accumulation, and greatly increased productivity in its labor force, including women. In theory, at least, the sinecure government job is out as the primary engine of employment; private enterprise, hard work and competence are in.
The program, known as Vision 2030, may be politically risky because it would change the fundamental relationship between the rulers and ruled. The people of Saudi Arabia have long accepted the national bargain imposed by the founding king, Abdul Aziz al-Saud, in which they are disenfranchised but acquiesce in political powerlessness because the state provides them with security and a comfortable life. Now they are being asked to do more for themselves while the government does less, regardless of the price of oil. In effect, Vision 2030 proclaims that Saudi Arabia will cease to be a classic “rentier state,” living off the wealth that comes out of the ground.
Vision 2030 was introduced in April by Deputy Crown Prince Muhammad bin Salman, the 31-year-old son of King Salman who has quickly become the most powerful man in Saudi Arabia other than his father. He is minister of defense, but more importantly he chairs an interagency committee that controls all economic planning and decision-making. If Vision 2030 fails, it will be his failure.
Interviews with a broad spectrum of business executives, academics, journalists, and government officials indicate that Vision 2030 was received with considerable public enthusiasm when first announced, but that enthusiasm has waned as reality set in. At best, the jury is still out on both Vision 2030 and on Prince Muhammad, its sponsor and chief implementer.
Vision 2030 “is an ambitious but achievable blueprint, which expresses our long-term goals and expectations and reflects our country’s strengths and capabilities,” the prince said when he presented it to the public. “The future of the Kingdom, my dear brothers and sisters, is one of huge promise and great potential, God willing. Our precious country deserves the best.”
In that future, the prince proclaimed, Saudi Aramco, the giant state-owned company, will be transformed
from an oil producing company into a global industrial conglomerate. We will transform the Public Investment Fund into the world’s largest sovereign wealth fund. We will encourage our major corporations to expand across borders and take their rightful place in global markets. As we continue to give our army the best possible machinery and equipment, we plan to manufacture half of our military needs within the Kingdom to create more job opportunities for citizens and keep more resources in our country.
Together we will continue building a better country, fulfilling our dream of prosperity and unlocking the talent, potential, and dedication of our young men and women. We will not allow our country ever to be at the mercy of commodity price volatility or external markets. We have all the means to achieve our dreams and ambitions. There are no excuses for us to stand still or move backwards.
Implementing the Vision
Outside the kingdom, those lofty aims inspired some cynicism among analysts of Saudi affairs, who have heard previous versions of such plans for decades. Inside the country, however, Prince Muhammad’s program was initially welcomed as necessary and long overdue, analysts in Riyadh said. Seven months later, they added, many people question what is actually being accomplished besides trimming the purchasing power of much of the population.
The principal tool for achieving Prince Muhammad’s “vision” is a 112-page “National Transformation Program.” Among its ambitious objectives are: generating 450,000 jobs in non-government sectors; reducing the wage bill of government workers from 45 to 40 percent of the state budget; increasing the state’s non-oil revenue from 163.5 billion Saudi riyals annually to 530 billion (at 3.75 riyals per dollar); boosting public assets from three trillion to five trillion riyals, a 67 percent rise; maintaining oil production capacity at 12.5 million barrels per day, while raising natural gas production from 11 billion cubic feet to 17.8 billion cubic feet daily; building an international complex for marine industries that will provide 80,000 jobs and cut imports by $12 billion a year; cutting more subsidies for goods and services, saving 200 billion riyals; raising the value of non-oil exports from 185 billion riyals annually to 330 billion; cutting the unemployment rate for Saudi men from 11.6 percent to nine percent; raising the proportion of women in the job market from 23 percent to 28 percent; and increasing foreign investment in the economy from 30 billion riyals to 70 billion.
The plan sets specific performance goals and timetables for each cabinet department and government agency. By all accounts Prince Muhammad has full authority from his father to enforce these benchmarks, dismissing senior officials if necessary.
“Before we did not live realistically,” said Ziad Aazam, an official of the Ministry of Planning. “Now there’s a new generation and new thinking.”
“It would have been better to do this when we had plenty of money,” said Fahad Alturki, chief economist of the Jadwa Investment Group. “Now there’s no choice.”
Assessing the Vision
In September, Alturki’s widely respected research department issued a comprehensive and generally optimistic assessment of the economic plans. “We believe that several fundamental factors will drive this new economic model, including human capital development, regulatory reform, and entrepreneurship,” the report said.
These reforms will contribute to a competitive and highly productive private sector, particularly Small and Medium Enterprises (SMEs), which will help attract foreign capital and contribute to further knowledge exchange, investment, and employment. This dynamic should result in higher disposable income, robust credit growth, and liquidity. The increasingly competitive tradable private sector would potentially export new goods and services, boosting both economic growth and net external wealth. Eventually, this would improve investor confidence toward the Kingdom, thereby creating a positive loop, as more capital inflows improve the non-reserve financial account and reduce the pressure off official foreign reserves.
The JADWA analysis said that “significant structural reform should boost investment in non-oil industries over the same period. Vision 2030 aims to make the Kingdom a logistical trading hub, catalyzing exports and re-exports of non-oil goods, and supporting national companies in the fields of banking, telecom, food, healthcare, and retail by promoting their products abroad.” It praised the government’s plan to create a $4 billion venture capital fund as a potential boost for small business and for entrepreurial ventures.
Less-enthusiastic analysts were understandably reluctant to be quoted by name in their criticism and doubt. In the aggregate, they raised multiple issues about the viability and implementation of the restructuring project:
- Vision 2030 is aimed at shifting the foundation of the national economy from the government to private enterprise, but the government has been by far the private sector’s biggest customer. As the government reduces spending and cancels projects, private businesses have less money to invest.
- Foreign investors will be expected to develop opportunities in the kingdom, but even after regulatory changes adopted when Saudi Arabia joined the World Trade Organization, the regulatory burden—and social restrictions such as gender segregation in the workplace—discourage foreign money from coming to the kingdom. Moreover, some potential foreign investors are spooked by uncertainty about what will happen when King Salman, 80, dies. If Crown Prince Muhammad bin Nayef, the king’s nephew, assumes the throne, will he continue on the economic course set by his young cousin, Muhammad bin Salman?
- Saudi Arabia lacks the electricity-generating capacity to fuel a major expansion of industry. The vast petrochemical sector consumes so much natural gas as feedstock that there is not enough to burn in electric power plants, and major international oil companies that had been exploring for gas in the Empty Quarter desert have abandoned the quest. In the summer, when air conditioning use is highest, the country consumes about a third of its crude oil production to generate electricity, mortgaging its export capacity. Long-term plans project major solar energy investment and as many as 16 nuclear power plants, but those are years in the future.
- Vision 2030 emerged from closed meetings between a few senior Saudi officials and a team of foreign consultants led by McKinsey & Co., a name spoken in Riyadh in the same tone as “CIA.” As usual in this monarchy, there was little public input, but it is the working public, ordinary Saudis, who are bearing the burden of its implementation. Several analysts said that cutting the wages and bonuses of ordinary working people while also raising prices for essentials and planning to impose a VAT threaten the “social contract” between the rulers and the ruled. The people are being subjected to “shock therapy,” a former foreign ministry official said.
- Saudi Arabia’s education system remains largely irrelevant to the workplace needs of a modern economy. The universities churn out too many graduates with PhD degrees in soft subjects such as mass communication and Islamic history and not enough graduates with the technical skills and management training to be productive workers and attractive job candidates.
Promoting the Vision
Prince Muhammad is also widely seen as having worked harder and done better at promoting Vision 2030 outside the country than inside it. He has given extensive interviews to business-oriented foreign publications such as The Economist and visited several foreign capitals, including Washington, to talk up his plan. What he has not done is travel around Saudi Arabia to promote the plan among ordinary people or explain to them why they are already paying the price for it, through salary cuts and reduced subsidies, while not yet reaping any benefit.
One attempt to reach the public backfired. Senior officials appeared on Saudi television to talk about Vision 2030 and succeeded mostly in angering viewers with comments that did not go down well. Civil Service Minister Khalid Al-Araj said that state workers were productive for no more than an hour a day but see their jobs as a right. Mohammad Al Tuwaijri, the deputy economy minister, said that without the austerity measures, the kingdom would have “gone bankrupt in three to four years.”
In reality, there is no prospect of “bankruptcy,” because even after the recent sale of $17.5 billion in bonds on the international market Saudi Arabia has very little debt. According to John Sfakianakis, who has lived in the kingdom and analyzed its economy for many years, Saudi Arabia’s ratio of debt to GDP “is among the lowest in the world at 12 per cent. In contrast, Italy and Portugal have surpassed 125 per cent and Greece is at 177 per cent.”
No one who was interviewed predicted that Vision 2030 or the National Transformation Program will be fully implemented. The uncertainty concerns how much will actually be done, whether that will be enough, and what the public response will be over the next few years.
“The ‘glass half full people’ and the ‘glass half empty people’ are both right,” one prominent businessman said.