THE REMAKING OF SAUDI ARABIA
Riyadh must overcome early hiccups to ensure survival in post-oil 21st century
VISITORS to Saudi Arabia could be forgiven for thinking the country just got a dynamic young new king. Images of him holding babies, drinking coffee with soldiers or meeting the world’s most powerful rulers are all over television.
On National Day last month, a giant picture of him was projected onto a skyscraper, here.
Crown Prince Mohammed bin Salman, 32, has emerged as the unrivalled leader of the kingdom, now better placed to steer it through a transition no nation in history has managed to pull off: converting a major economy reliant on petrodollars into one that can survive in a post-oil 21st century.
The grand remake involves investing in new industries and creating jobs for the young Saudi population. It will all be underpinned by the sale of a stake in oil giant Aramco, which is now facing possible delay, and the creation of the world’s biggest sovereign wealth fund.
But almost two years since the start of the reform drive, officials are grappling with crucial questions of how to save money and speed up social change without crippling the economy and clashing with one of the world’s most conservative religious establishments.
“This is a huge challenge for the country, and it has great implications for the world,” said Goldman Sachs Inc chief executive officer Lloyd Blankfein at the Bloomberg Global Business Forum in New York last month.
While there should be urgency, there’s also a case for caution so the change needed for “stability in the long run doesn’t produce instability in the short run,” he said.
Failure to find the right answers risks leaving the kingdom in limbo: an absolute monarchy with diminishing resources to fund an unsustainable version of state capitalism. Saudis will get more restless and the economy, already ground to a halt, could get worse.
Finance Minister Mohammed Al-Jadaan told Bloomberg last week cuts to energy subsidies might be more gradual and the government might take longer to balance its budget, softening the impact on society.
Interviews with more than two dozen investors, analysts, executives, diplomats and government advisers in Saudi Arabia and abroad show businesses are still reeling from government spending cuts following the collapse in the oil price.
Some regard the war in Yemen and the showdown with neighbouring Qatar as costly sideshows.
“All of the regional problems — Qatar, Yemen, Syria, Iraq — all are a distraction,” said Turki Al Rasheed, a Saudi businessman, at his sprawling home in an upscale neighbourhood, here, as he leafed through notes on the kingdom’s continued dependency on oil.
Failing to achieve sustainable development was “the real threat”, he said.
Al Rasheed hasn’t given up hope that the plan, called Vision 2030, could work. Yet he can’t help but remember past attempts that ended in failure.
Among the most recent was “The Future Vision for the Saudi Economy: 2020” from about 15 years ago. “We had 400 workshops”, he recalled.
The latest attempt at an overhaul was triggered by a sharp drop in oil revenue in 2014 and prices have halved since then. To avoid what the prince and his advisers saw as a catastrophic rundown on savings, they cancelled projects deemed unnecessary, cut costly subsidies, and halted payments to contractors.
While austerity was seen as necessary to reduce a ballooning budget deficit, the impact on the economy was unmistakable: nonoil growth stagnated, consumer spending dropped and unemployment increased among the 20 million Saudis, three-quarters of whom are under 40.
At Helmi Natto’s company, sales started dropping rapidly three years ago, he said.
The Saudi entrepreneur won awards for starting a successful fashion eyewear business at the age of 26 and even hosted his own television show.
“We’re bleeding,” said Natto, who supports the Vision 2030, in an interview in the Red Sea city of Jeddah, Saudi Arabia’s commercial hub.
The slowdown in the economy had turned him from “a celebrity rock star” into feeling like a “peasant who knows nothing”, he said.
Thaer al-Oteibi, 36, owner of three coffee shops and two restaurants, here, is struggling to save his company.
Sales had tumbled 35 per cent, he said, despite offering free desserts with every meal. “We’d like the government to help us,” he said. “But I have no idea how.”
Several businessmen complained in private that the move to halt payments had undermined business and investor confidence in Saudi Arabia.
Others said that while Vision 2030 was necessary, it was rushed and reliant too much on quick fixes instead of gradual change. Quietly, some Saudis have dismissed the entire plan as an ill-fated project overly reliant on foreign consultants with little knowledge of the kingdom’s social and political context.
Official data show non-oil gross domestic product, the engine of job creation, barely expanded in the first two quarters this year. The construction industry, squeezed by public spending cuts, has contracted for six quarters in a row since the start of last year. And for all the talk of diversifying revenue, the narrowing of this year’s budget deficit so far has been driven by higher income from oil exports.
If history is anything to go by, the non-oil Saudi economy could be staring at years of stagnation. The rise in non-oil gross domestic product struggled to keep up with population growth during the 1980s and 1990s.
Unlike the past, however, the possibility of an oil price rescue appeared to be slim, so Prince Mohammed needed businesses to expand and take on more Saudi workers away from the bloated public sector, said Emily Hawthorne, Middle East and North Africa analyst at Texasbased advisory firm Stratfor.
“It’s such a critical moment for them that they have to make something work for the private sector.”
Saudi authorities also told the International Monetary Fund they planned to introduce a support programme to help selected industries adjust to higher energy and water prices.
And there’s the Public Investment Fund (PIF), the sovereign wealth fund that will spearhead a drive to invest in industries from manufacturing to entertainment to mining and defence.
In a televised interview in May, Prince Mohammed said the PIF would spend at least half of the money from Aramco’s initial public offering on domestic investments. How much money that raises and when is in question, with the Saudis considering delaying the international portion of the sale until at least 2019, said people familiar with the situation last week.
The PIF said on October 9 it would set aside US$1.1 billion (RM4.64 billion) to support small and medium enterprises. It’s also announced a string of domestic mega projects, such as a US$2.7 billion company to invest in local entertainment — a plan that is seen both as a way to open up society and retain some of the money spent on trips by Saudis to Dubai and elsewhere.
When King Salman visited Russia earlier this month, part of the programme was a rare screening of three Saudi films, including winner of Best Film at the Dubai
International Film Festival.
For Ayman Jamal, a 45-yearold filmmaker and former banker, Vision 2030 is a “golden era” for the nascent movie industry. “The vision has created opportunities, new models and sectors but it has also created challenges for the old schoolers, either in their business model or large margins,” he said.
That sort of optimism showed how after initial resistance to the prince’s ideas, Vision 2030 was “getting more and more believers”, said Yasir Al-Rumayyan, the investment fund’s managing director and a key member of Prince Mohammed’s inner policy-making circle.
The plan included 543 initiatives and about 376 key performance indicators, he said.
Others point to the fact that the government appears willing to learn from mistakes instead of papering over them.
Ali Alireza, the managing director of Haji Husein Alireza & Co Ltd, which sells vehicles from dump trucks to Aston Martin cars, said there had been meetings between businessmen and government officials to “formulate a proper plan”.
“What the private sector has seen is that the government doesn’t know everything, that some decisions that were made have had to be retracted,” he said.
In April, King Salman restored bonuses and allowances for state employees seven months after a decision to cut the public-sector wage bill. The measure had hurt consumer spending and exacerbated the pain in the economy.
The government at the same time is trying to push Saudis towards private-sector jobs.
More industries are being restricted to citizens and a fee on expatriates and their dependents went into effect in July, making it costlier for companies to hire foreigners.
Mohammed, 40, a sub-contractor, said having failed to find Saudis to do welding and other manual jobs, he faked contracts, paying a couple about 1,500 riyals (RM1,689) a month while they stay at home so he can meet his quota.
Natto, the Jeddah-based businessman, said he shut four of his stores and has learned to live on a budget. Eating out has become a treat rather than routine, and so are expensive hair treatments, spas and massages for his wife. A planned one-month trip to Disney this summer was replaced by one week in Egypt.
“We had a good ride,” said Natto over breakfast. “For the first time I feel the government is not your daddy, it’s not your parent, it’s not supposed to breastfeed you. It should help you and encourage, but it should not give you money.”
It’s the kind of belief that Prince Mohammed wants more Saudis to share. But like other changes he’s driving, it’s one that will take time.
“We’re trying to implement solutions in a much tighter time frame than is possible,” said Alireza. “That causes all kinds of disruptions, all kinds of problems.”