Saudi Vision 2030: Ambitious reforms spread optimisim
Saudi Vision 2030: Ambitious reforms spread optimisim
It is the source of 75 percent to 80 percent of its government revenues and 85 percent-90 percent of its export revenues.
Petrochemicals, based on oil and a much more recent component of the Kingdom’s economy than hydrocarbon fuels, are Saudi Arabia’s next largest export.
At times in the past Saudi Arabia’s economy has been like a roller coaster.
There was an economic boom due to the October 1973 Israeli-Arab war-induced oil embargo and the 1979 Iranian Revolution’s boost to the price for hydrocarbon fuels.
This was followed by the collapse of oil prices and the resultant damage to the Saudi economy, which began in the early 1980s and continued until the late 1990s.
As international oil prices remained stagnate throughout the better part of these two decades until the turn of the present century, so too, in many ways, did the Kingdom’s economy.
As prices began to ramp up in the 2000s, Saudi economy moved up with them until the Great Recession hit in 2008 when they collapsed for a brief period as the 2008 recession took its toll on markets.
Soon after, however, prices rose to more than $100 per barrel in 2011, where they would remain until May 2014. The most recent price collapse – from May-June 2014 until about Jan. 2016-Feb. 2016 — was precipitous.
The price since then, however, has risen, albeit in an unstable, bouncy, and slow manner.
In short, Saudi Arabia has ridden the good times of oil price booms. It has also ridden the bad times when the price has collapsed.
The average Saudi income and wealth increased dramatically from 2002 to 2014.
This was mostly due to the elevated level of oil revenues.
The result was an increase in government spending and massive capital expenditures together with public sector investments.
Past Saudi economic improvements have started with a significant and sustained increase in the price of oil with concomitant increases in government and export revenues.
These have been followed by large expenditures and investments in public sector ventures, with corresponding increases in imported labor, in Saudi employment, in massive building programs, and in contributions to the Public Investment Fund as well as, to a much greater extent, the Kingdom’s foreign reserves.
What will the price of oil be in 2017, 2020, 2025, and 2030? Who knows? It is very hard to predict.
With the general slowdown in the world economy, including in Asia and especially in China, the international demand for oil is expected to be much flatter than in the recent past.
In addition, the European Union and the US are also expected to have slower growth patterns.
India’s future expected economic expansion could give a boost to oil markets, but, if so, it will likely be muted compared to China’s boom years.
What is more, at the global level environmental and political interests are increasingly pressuring governments and people to move away from their reliance on oil for transportation.
One is therefore likely to see greater use of natural gas-, electric-, and battery-powered automobiles, and, in time, buses and trucks, too.
To the extent that these trends continue, one can anticipate corresponding improvements in vehicular efficiencies all around.
For example, China will have far more automobiles than it has now, but the cars its people will be driving are likely to be more efficient and, eventually, use less oil.
Coupled to the implications of these factors is the revolution in the oil markets caused by fracking and the development of other unconventional energy sources, with the corresponding change in the geographic centers of oil production.
A result of all these trends and indications is that Saudi Arabia and its fellow OPEC member countries have nowhere near the capacity they once had to influence the level of oil prices.
Without any serious political events or physical attacks on major energy infrastructure facilities in various countries and especially in Saudi Arabia, which holds most of the world’s excess oil capacity, oil prices could creep up to $60 a barrel and then bump along between $60 and $80 for quite some time.
Insightful in this regard is that Saudi Arabia needs an oil price of only about $10 to break even on the costs of producing a barrel of its oil.
It needs the price to be over $100 per barrel, however, to break even on its government budget given its subsidies programs, the high costs of public sector wage bills, the social contract between the country’s leadership and its citizenry to maintain domestic security and stability — a de facto contract that exists in one form or another between every government and its citizens — and the lack of any income or valued-added tax (VAT), although there is a zakat tax and a tax on foreign corporate profits.
Another consideration is that the country’s foreign assets, foreign currency reserves, and government budget have all been in free fall over the last couple of years as oil prices have tumbled.
As a result, the Kingdom has recently reached out to world, regional, and domestic debt markets to help pay its public sector bills.
To this end, a multi-billion dollar bond issue in the coming days, if and when concluded, will surpass that of Qatar’s as the GCC member-states’ highest in history.
In addition, public sector expenditures are being cut back and government employment opportunities for the country’s most recently minted university graduates look less promising than in years.
There is even talk of some of the public sector bills being paid with IOUs and admission by government ministers of there being a discussion, but no agreed decision or agreed upon plan of action, to introduce taxation for expatriates.
In almost the same breath, however, ministerial-level officials were quick to indicate in the strongest possible terms two things.
One was that expatriates, who number roughly a third of the country’s 30 million population, remain an extraordinarily valuable component of the Kingdom’s populace and work force. The other was that there is as yet no intention whatsoever to levy an income tax on nationals.
Yet despite these challenges it would be a mistake to conclude or even consider that the Kingdom is or will soon become an overly problematic proposition insofar as matters pertaining to trade, investment, the establishment of profitable joint commercial ventures, and business opportunities in general are concerned — certainly in comparison with the 130 other developing economies and emerging markets, or many among the world’s so-called mature industrialized and market economies either.
Further, the government and the public sector in general, including the still young stock market and stated plans to privatize. Indicative of the latter inclination is the officially declared intention to sell a piece of Saudi Aramco, whose value is estimated to be in the neighborhood of $2 trillion to $12 trillion.
All in all, the country therefore still has numerous extraordinarily lucrative assets, hundreds of billions of dollars in foreign reserves, and perhaps 800-plus billion barrels of conventional oil in the ground.
In addition, the Kingdom possesses massive mineral assets such as gold, bauxite, and iron, and vast numbers of beaches, islands, and diving areas in the Red Sea that are acknowledged as among the best to be found anywhere. Add to these riches Saudi Arabia’s innumerable cultural, historical, and religious sites, an increasing collection of world-class museums, and an array of yet-to-be explored, drilled, or mined areas of bountiful deposits of material riches that surpass what is known to exist anywhere else in the Arab countries, the Middle East, and the Islamic world.
What is more, on the alternative energy economic driver front, Saudi Arabia has substantial opportunities in solar, wind, geothermal, and other kinds of renewable energy resources. In sum, the country has massive potential for economic diversification and growth as well as tourism and a yet-to-be-fully developed reservoir of first-rate and well-educated human resources.
So what can make for a better future? One answer being developed is “Saudi Vision 2030.” It is a breathtakingly ambitious plan.
Many question its chances for success. Yet even if it reaches 60 percent of its goals by 2030, this would put the Kingdom on a much more solid economic, social, and political footing than otherwise.
Given the circumstances, the country has little choice but to work for such changes. Its leadership understands that continuing to ride the oil-economy roller coaster is not the best path forward.
So what is being planned?
Saudi Arabia Vision 2030 is a complex program.
Among the most important changes intended are to move the Kingdom’s economy from the worlds’ 18th largest to 15th, reforms to enhance economic competitiveness, increasing the private sector from 40 percent to 60 percent of the economy, and growing non-oil government revenues by over 10 times.
The program seeks to improve the workings of the government and cities, to dramatically diversify the economy, to increase the importance of small to medium-sized businesses from 20 percent to 25 percent of the economy, and to vastly increase foreign direct investment. It wants women to grow from 22 percent of the workforce to 30 percent and to increase the capacity for Umrah and Haj visitors as well as other religious and non-religious tourism.
It wants to increase the savings of Saudi citizens, to make the country less consumption-oriented and more investment- and production-oriented.
The program seeks to raise life expectancy by 6 years and reduce unemployment by over 4 percent.
The goal is also to increase the development of non-governmental organizations and promote volunteerism.
Broadly, the objective is to better connect the economy to education and training.
The program plans to partly pay for this from a public offering of about 5 percent of Saudi Aramco, depositing the proceeds from the sale into the Kingdom’s Public Investment Fund.
It also intends to place Saudi Aramco and numerous other public assets into a holding company that would promote development and transformation.
Selling additional and possibly quite substantial public assets could also be in the works.
If so, the goal would be to create a massive investment fund that would help introduce to the Kingdom effectively the nature and extent of the changes that the program envisions.
People want to see these ambitious programs attempted and to succeed, even if only on a 50 percent-60 percent scale, because the alternative to no change could be quite difficult for the country and the region.
And as is inevitably the case and seemingly unavoidable whenever and wherever the goal and challenge is one of profound transformation, the hardest part will be the plan’s implementation.
Writing up plans is relatively easy. Making them succeed requires smart and hard work as well as creativity in leadership and thinking.
In this regard, expectations management and strategic communications will be key.
It is also vital that the changes occur in the context of and with all due consideration for Saudi Arabia’s society and norms.
Another, no less significant, concern is that for one reason or another it could prevent curbing or rationalyzing, let alone eliminating, the extensive and wasteful range of subsidies that preclude recovering anywhere near the actual costs of electricity, fuel, water, and a range of other of public services.
A Saudi national recently spoke to me of how the Kingdom’s mosques could be helpful in promoting steps toward change and successful reform of the economy, government, and more. Change that helps people, he emphasized, could be seen as Islamic change.
Change to use resources more efficiently and with less waste could also be seen as Islamic.
Change in Saudi Arabia needs to be a truly national project with buy-in from significant segments of the population as well as leaders from across the political spectrum.
This is a momentous inflection point for Saudi Arabia’s future. It needs to be done right, and it needs to be done with consideration to Saudi Arabian culture and Saudi society.
— Paul Sullivan is senior international affairs fellow, National Council on US-Arab Relations. The opinions are those of the author.
Maalem Financing raises $26m in debut sukuk
- The sukuk from Maalem, a shariah-compliant commercial and consumer financing firm, is a small but novel deal
- The three-year unsubordinated deal was sold through a private placement and Maalem could tap the market again
LONDON: Saudi Arabia’s Maalem Financing has raised SR100 million ($26.6 million) from a debut sale of Islamic bonds, or sukuk, as the firm seeks to develop a crowdfunding product and expand its operations, a senior executive said on Tuesday.
The sukuk from Maalem, a shariah-compliant commercial and consumer financing firm, is a small but novel deal in a market that is dominated by issuance from sovereign institutions and Islamic banks.
The three-year unsubordinated deal was sold through a private placement and Maalem could tap the market again as early as January next year, said John Sandwick, a member of Maalem’s board of directors.
“The program is for SR500 million and with 3.6 times oversubscription, there seems to be a lot of demand,” he said.
Additional sales of sukuk aimed to raise between SR100 million and SR200 million, depending on market conditions, he said, adding that Maalem may consider a dollar-denominated sukuk issuance at a later stage.
The debut transaction used a structure known as murabaha, a cost-plus-profit arrangement commonly used in Saudi Arabia. The firm hoped to use an asset-backed structure for future deals, Sandwick said.
Established in 2009, Maalem received regulatory approval to operate as a non-real estate finance company in 2016 and increased its capital in 2017 to SR150 million.
The company plans to open several regional offices by the end of 2018 and is awaiting regulatory approval for a crowdfunding license, Sandwick said.
Crowdfunding enables startup firms to collect small sums of money from many individuals as an alternative to bank loans.
Albilad Capital, the investment banking unit of Bank Albilad, served as sole lead manager and arranger of the sukuk.