Getting off the needle: how Saudi Arabia away from oil dependence

By 2020, Saudi Arabia “can live without oil”, announced the son of Saudi king Salman Mohammed bin Salman. On Monday, he presented to the government a reform plan up to 2030, called “Vision 2030”. The Cabinet without objection approved it and the document was signed by king Salman. In an interview with TV channel Al-Arabiya, Prince Mohammed said that his plan will be implemented in all oil prices — high costs of its implementation will not require. Saudi TASI stock index on Monday rose 2.5%.

The son of a king and Deputy crown Prince Mohammed bin Salman chairs the Council of economic Affairs and development — the key body for economic planning in the country, which oversees the work of the world’s largest oil company, Saudi Aramco the state. Media call Muhammad’s favorite and most influential son of king Salman, rising to the throne in early 2015. After the failure of negotiations to freeze prices in Doha Bloomberg and the FT wrote that now it was Prince Muhammad, and not the Ministers-technocrats, determines the policy of the Kingdom in the oil market.

Fund reforms

The main tool that should rid the country of oil dependence, will become a sovereign investment Fund Public Investment Fund, which is engaged in reformatting the Prince Mohammed. The main parameters of the Fund were known in advance, on Monday, the Prince only said them. Overall size of the Fund should amount to $2 trillion. The Fund’s assets will include large state-owned enterprises — not only in industry but also in real estate. They will be corporatized and partially privatized.

It is planned to incorporate and Saudi defense holding, whose establishment was recently announced. “How can we be the third country in the world by investing in arms and not to have their own military industry?” — asked rhetorical question bin Salman during the interview. On his initiative, Riyadh plans to create a holding company under full state control, which would unite all the military-industrial enterprises of the country. After that, the company plans to make public, with an IPO on the Saudi exchange.

Proceeds from the sale of state assets means that Riyadh plans to invest in foreign assets. As stated by the TV channel Al-Arabiya, Prince Mohammed, the Fund will account for approximately “10% of global investment.”

The Privatization Of Saudi Aramco

The main asset of the Fund shall be a share in the world’s largest in terms of reserves and export oil company Saudi Aramco. Now Saudi Aramco is fully owned by the state. On Monday, the Prince confirmed his intention to spend IPO the world’s largest oil company. To sell Riyadh plans only a 5% stake in Saudi Aramco. The company’s shares will be posted on the Saudi Tadawul exchange, and foreign stock exchanges, possibly in the U.S., said Mohammed. The remaining 95% will be available to the Public Investment Fund. Earlier media reports named as the probable date of incorporation Saudi Aramco 2017.

Prince Mohammed said that it would be “the largest IPO in history.” To assess non-Saudi Aramco difficult. The company’s revenue in 2014 was $378 billion Potential market value of Saudi Aramco estimate not less than $1 trillion, now so not much is none of the public companies on the world stock market. Saudi Aramco revenue in 2014, Bloomberg based on reserves (260 billion barrels.) and the negative Outlook of oil prices ($10 per barrel) estimates Saudi Aramco not less than $2.5 trillion. In FT is even the estimate of $10 trillion. The Prince Mohammed adheres to a conservative estimate of $2 trillion.

Green map of Islam

Another part of the program reforms will be the introduction within five years of the Green Card system. The system will allow the Arabs and Muslims from other countries to live and work in Saudi Arabia for a long time. “It will be a source of revenue for the authorities”, — said bin Salman. He did not specify how this plan will be combined with long ago adopted the programme for saudization of the local business. As low-paid physical labor in the Kingdom are mostly migrants from Pakistan and Bangladesh (their share in the population according to the 2010 census, was 31%), and high-skill jobs is invited with Western professionals, Riyadh, like other Gulf countries, has committed itself to filling managerial positions with local workers. Only last Friday, the Minister of labour, Mureg al-Akabani reported success in saudization of the telecommunications sector.

In the framework of the development plan of the country also planned to attract to Saudi Arabia tourists. In particular, the authorities plan to build the world’s largest Museum devoted to Islam.

Less subsidies, more taxes

The authorities will have to cut subsidies to the population. Prince Mohammed promised that Riyadh would try to minimize the damage to the country’s inhabitants — in particular, will provide cash transfers to families with average and low incomes. But Prince noted that the reduction of government subsidies will affect everyone — including Ministers, and himself. This should bring in the Kingdom’s budget of about $30 billion a year. Mohammed also commented on the growth of tariffs for gas and electricity, on which the Kingdom went after the collapse of oil prices. According to him, the new measures did not affect ordinary citizens, what can be said about the growth of tariffs for water supply. According to John Sfakianakis research Gulf Research Center in Riyadh, water bills have increased by 5-6 times.

According to IMF data, currently in the Kingdom of subsidies on gasoline, diesel fuel, electricity and natural gas make up 10% of GDP, or about $60 billion a year.

Abolishing subsidies, the Saudi authorities will impose new taxes — in particular VAT and luxury tax, and drinks with high sugar content. Due to this, the budget revenues are planned to increase by another $10 billion a year. This year’s budget in the Kingdom was made up with a deficit of $87 billion.

At the same time, the Prince stressed that Riyadh is not going to abandon the previously planned infrastructure projects. Confirmation of this looks like the announcement of the beginning of building “the Bridge of king Salman” — road bridge across the Red sea, 10 km long and cost about $4 billion In an interview with Al-Arabiya, Prince Mohammed said that the bridge “will connect Europe and Asia and will create huge opportunities for the construction business and investments”. At the same time, costs for the development of transport networks and infrastructure budget still decreased in 2016 63% (by 2015), to $6.4 billion.

In 2016 they plan to reduce budget deficit to 13% of GDP 16% of GDP in 2015. Moreover, Riyadh plans to reduce the unemployment rate from 11.6% to 7%. The budgetary cuts already yielded the fruits — if in 2015, according to the IMF, the Kingdom’s budget could be balanced when the price of Brent crude oil to $94 a barrel, in 2016 — at $66.

Reform at the expense of low growth

“Leaving the economy dependent on oil, is very complicated. Saudi Arabia says about the necessity of such a step for several decades, but so far has made great progress in this direction. The Prince will be a very difficult task,” says Bloomberg Professor of Texas A&M University Gregory Gauss.

Experts from the International monetary Fund warned that reducing government spending will lower economic growth. According to a 25th April report from the IMF, as a result of reduction of budget costs, the growth rate of the non-resource economy in oil-producing countries of the Persian Gulf in the years 2016-2021 will be only 3.25 per cent (in the previous 10 years — an average of 7.75% annually). According to the head of the IMF Department for the Middle East and Central Asia Masood Ahmed, it can lead to 2021 in the region would be about 3 million unemployed. Ahmed in an interview with Bloomberg notes that the slowdown is “a logical consequence of the reduction of the budget expenses”.

However, Ahmed noted that the IMF believes that Saudi Arabia is “on the right track.” “In the current economic environment, it is absolutely necessary to have a plan and goals for the medium term,” said the IMF representative.

Challenges for the implementation of Saudi reforms, according to experts, can create and traditional institutions of the Kingdom. In particular, according to James Dorsey from the Technological University of Nanyang, in the future, Prince Mohammed will have to bring about change in the relationship between the Saudi ruling house and the Orthodox Islamic clergy, whose conservatism is harming the international reputation of Saudi Arabia.