Confidence is back as GCC plots future without oil

Saudi Arabia’s Vision 2030 encompasses reforms needed to transform the kingdom

There are two reasons the GCC must celebrate the joint commitment made by energy ministers from Saudi Arabia and Russia to “do whatever it takes” to strengthen oil prices. The first, and most obvious, is that this move is likely to increase government revenues. The second reason is slightly obscure. Along with oil prices, the decision will drive up another critical but often undervalued resource for the region: confidence.

Confidence, or as economists formally call it, expectations, is going to play a critical role in the post-oil future, particularly in the context of the specific goals outlined in Saudi Arabia’s Vision 2030. The blueprint was met with widespread approval last year, although there also was a healthy dose of hesitancy and restraint. Vision 2030 encompasses the most integral reforms needed to transform the kingdom into an advanced nation in the post-oil future. Recent developments, however, have given rise to some scepticism.

In particular, recent decisions to restore bonuses and allowances for state employees have led some international critics to allege it was a u-turn. Some critics doubt the readiness of Saudi Arabia to continue with the implementation of further, and possibly, more painful reforms set out in Vision 2030. It is clear that confidence is particularly critical to the success of Vision 2030 for a number of reasons.

Essentially, a significant share of Vision 2030 relies on foreign direct investment, which is excessively vulnerable to sentiment and expectations. In fact, this is true of the national plans of other GCC states, too. Over the past few years, FDI into Saudi Arabia has been notably subdued, largely due to regional tensions, Saudisation policies, and reduced access to credit. Vision 2030 has set out to mitigate these challenges, and increase investment from 3.8% of economic output to 5.7 % by 2030.

Additionally, the blueprint highlights that Saudi Arabia will need “an advanced financial and capital market open to the world” that will facilitate access to investment. For instance, the initial public offering (IPO) of the kingdom’s national oil company, Saudi Aramco, is set to follow the listing of other state-owned enterprises and private Saudi companies. International confidence will be critical to achieving these goals.

The experience of the US, Japan and other East Asian countries over the past few years has focused attention on the question of confidence. It was noted that positive ‘sentiment’ about the future helped drive economic booms, and that subsequent weakness in sentiment and pessimism resulted in weak growth. An interesting example came in 2012, when European Central Bank chief Mario Draghi committed to “do whatever it takes” to preserve the euro at the height of the eurozone crisis. The euro is presently celebrating its highest growth in six years, and July 26 is likely to be celebrated as ‘Happy Mario Draghi Day’, like it was last year.

Although the past few years have undoubtedly been tumultuous for Europe, it can be argued that confidence building measures employed by EU leaders played a key role in the precarious but steady recovery of the bloc. Within countries, confidence can be seen to directly impact a number of sectors. Tourism, hospitality, and retail, for instance, depend on confidence and sentiment to a great extent.

Essentially, the recent royal decrees have strong support from economists.

Essentially, the recent royal decrees have strong support from economists. Restoring bonuses and allowances for government employees has the potential to fuel consumer spending, which is critical for the region’s economic outlook

Restoring bonuses and allowances for government employees has the potential to fuel consumer spending, which is critical for the region’s economic outlook, particularly for the UAE. Moreover, the decrees also enjoyed strong domestic support, which is an important ingredient for the success of Vision 2030, as emphasised by Deputy Crown Prince Mohamed bin Salman. Signaling that the leadership will continue with reforms — and also continue to seek domestic support to strengthen international and regional sentiment — will be as critical as the actual implementation of the reforms.

The commitment from Saudi Arabia and Russia to restore oil prices, therefore, may likely lead to improved sentiment in the region about the oil and gas sector, which is undoubtedly the short term fix for the Kingdom and the region. Nevertheless, continuing to maintain and strengthen expectations around Vision 2030 will be critical to improving its longer term success. Signaling to international and regional investors that not only are reforms underway but are also already working their magic by improving current conditions will be critical. — Aruba Khalid is a senior analyst at The Delma Institute, a foreign affairs

research house located in Abu Dhabi.