Saudi Arabia’s road to 2030
Saudi Arabia is not the first emerging market country to dream up a 2030 economic blueprint and it certainly won’t be the last.
To be blunt, the macro-economic scorecard to date is not a good one. The Kingdom has not slipped into recession but the International Monetary Fund’s updated growth projections — at 0.4 percent in 2017 and 1.3 percent next year — will not win over the skeptics nor put a dent in the current jobless rate of over 12 percent.
The perception on the ground in Saudi Arabia, however, has clearly changed. A panel of local and international strategists at the annual Euromoney conference in Riyadh described the fourth quarter of 2016 as the “turning point.” Growth, they contend, bottomed out and both spending and subsidy cuts delivered the deficit reduction that Deputy Crown Prince Mohammed bin Salman and the Cabinet were looking for.
From the outside looking in, the government’s move to reverse salary perks for government workers looked like a giant policy U-turn, an indication that it did not have the resolve to push ahead with painful reforms. But whilst in the Saudi capital, there is a different narrative being projected by government officials; they wanted to insure the region’s largest economy did not tilt into recession.
As Finance Minister Mohammed Al-Jadaan told me in a brief meeting on the sidelines of the conference, he had eight policy options on the table to jump-start consumer spending. Instead of devising a new formula of direct subsidies or cash handouts, putting more money back into the pockets of government workers seemed the simplest and most logical choice, despite sending mixed signals when it comes to reducing the size of government.
But it is a clear case of living up to the spirit of never wasting a good crisis to deliver reforms, by overhauling the economy when oil remains under pressure. Even though crude is well off the lows of early 2016, at around $50 a barrel, the Saudi budget — like all other Gulf oil-producing states — remains in the red. Finance officials have said the Kingdom plans to go back to the domestic and international bond markets this year to plug their budget gap.
An extension of the agreement to cut oil output, which would lift crude prices and Saudi Aramco’s valuation, could be a vital next step in the Kingdom’s diversification drive.
This is a delicate balancing act, since the Kingdom must convince investors that both the short- and medium-term dynamics are in balance. Government reserves have gone from over $750 billion at the start of the oil crisis down to about a half a trillion dollars today. At the same time, those in global financial centers are calculating what impact this languishing price of crude means for Saudi Aramco’s planned initial public offering (IPO) next year. It is targeting a $2 trillion valuation for a company with the largest proven oil reserves of any energy company. For the past six months, there has been no wavering from the IPO timeline.
“We’re still looking at 2018 and (there has been) no change in our plan to deliver in that time,” Saudi Aramco CEO Amin H. Nasser told me at the World Economic Forum back in January. Last autumn, at a one-on-one session at the World Energy Congress, he said it will be a transparent process.
“We would be happy to share all our financials with investors when we go public,” he said, adding that it would make the Kingdom proud to share data that illustrate a low cost of production and efficiencies. After all, he said, that information is already being shared with their only shareholder, the government.
In a recent interview with Al Arabiya and state television, the deputy crown prince said that despite the public listing, the government will still call the shots on the amount of oil production and future targets.
It seems crystal clear to me how Prince Mohammed wants the different pieces of the puzzle for his 2030 plan to come together: To extend the OPEC/non-OPEC agreement at the May 25 meeting to 2018, with the goal of lifting prices to $60 a barrel, which would provide a better valuation for Saudi Aramco, and the proceeds from the IPO would then get re-invested back into the Kingdom to help drive diversification.
With the backing of the new US administration and the upcoming visit by President Donald Trump later this month, the young leader seems more confident than ever that he can make it happen and at the same time counterbalance Iran’s influence in the region. The expected military deal between the US and Saudi Arabia would underpin that stance.
At a conference of local and global non-governmental organizations hosted by the deputy crown prince’s MiSK Foundation, there was no wavering about the 2030 plan among the Kingdom’s youth. If anything, they told me they want the transformation to go forward at a faster pace.
This, as they see it, is the last chance to get it right and, as Prince Mohammed said a year ago, truly cut the addiction to crude.
• John Defterios is CNNMoney Emerging Markets Editor and presenter of CNN Marketplace Middle East.