New Saudi CP to usher in an era of fast economic growth, reform
dubai — The appointment of the reform-driven Prince Mohammed bin Salman as new Saudi Crown Prince through a royal decree on Wednesday signals the beginning of an era of faster economic growth and bold reforms in the largest Arab economy, economists and analysts said.
The youthful Crown Prince Mohammed (31 years old), who replaced his elder cousin Mohammed bin Nayef, has already made his mark as the key catalyst for radical economic and social reforms in the Kingdom ever since his father King Salman bin Abdulaziz, acceded to the throne in January 2015.
Crown Prince Mohammed’s elevation signalled an affirmation of his policies as the blueprint for the future of the Saudi economy. On the economic front, he has announced sweeping changes labelled Vision 2030 aimed at ending the kingdom’s reliance on oil.
Apart from diversifying the economy, the plans include pushing for women to have a bigger economic role and the partial privatization of state oil firm Saudi Aramco — reforms that would have been unthinkable just a few years ago.
“This recent change will strengthen the mandate of Crown Prince Mohammed to implement the economic and social reforms as highlighted in Vision 2030. Private sentiment is encouraged by the change in succession as indicated by the jump in Saudi stock market index by 5.5 per cent on Wednesday,” said Garbis Iradian, Chief Economist, Middle East and North Africa, Institute of International Finance. The new Crown Prince is the main driver of the National Transformation Program (NTP), which identifies initiatives towards the attainment of objectives such as improving governance, balancing the budget, diversification, and increasing the role of the private sector in the economy.
“The likelihood of implementing some of the bold reforms is now much higher. But in the near term the impact on the economy come more from the persistent low prices and the need for further fiscal adjustment,” said Iradian.
“Government outlays have been cut by a cumulative of 16 per cent in the past two years, and we expect a small cut this year, largely in the form of lower capital expenditures. We expect only gradual improvement in nonoil real GDP growth,” IIF said.
The Washington-based institute said it was not expecting a change in the exchange rate regime despite the modest increase in pressures on the Saudi riyal in the forward market following the recent further decline in oil prices. The Saudi currency’s peg to the dollar is regarded as a critical anchor of economic stability. While a significant adjustment in the exchange rate would improve competitiveness and boost oil revenue in local currency, devaluation or a move to a flexible exchange rate regime would lead to a spike in inflation, and damage investor confidence and encourage larger capital flight,” said Iradian. In tandem with the boost given by the appointment of the new crown prince, Saudi Arabia’s equity market rally was spurred by MSCI’s decision to put the country on its “watch list” for an upgrade to Emerging Market status.
MSCI will now consult with investors and a final decision on inclusion is expected to be taken next year. The announcement had been largely expected after the Saudi Capital Markets Authority made a number of changes over the past year in a bid to accelerate the upgrade to EM status. Crown Prince Mohammed, who has accumulated substantial influence in a short period, particularly since 2015, when he was effectively put in charge of the kingdom’s economy and defence policy, could become one of the youngest kings in recent Saudi history. Oil futures showed little outright reaction to the announcement. That’s largely because Prince Mohammed had already consolidated his influence over the country’s oil policy.
The new crown prince seen as spearheading the planned 2018 initial public offering of the world’s largest oil-and-gas company. Economists see the impending Aramco IPO in 2018 as providing incentive to Saudi Arabia to take whatever action is necessary to support higher oil prices.
Analysts believe that the prince’s biggest ambitions lay on the home front, where he has previously laid out a program known as Vision 2030 that aims to wean the country’s economy off its dependence on oil revenues.
— issacjohn@khaleejtimes.com