Saudi Prince Puts His Stamp on Major Government Overhaul

Saudi Oil Minister Replaced: What It Means for Markets
  • Kingdom's top central banker, long-time oil minister replaced
  • Saudi Arabia's Deputy Crown Prince intent on making his mark

Saudi Arabia replaced its central bank chief and long-time oil minister as part of sweeping economic changes led by Deputy Crown Prince Mohammed bin Salman to reduce the nation’s reliance on hydrocarbons.

King Salman appointed Ahmed Alkholifey to head the Saudi Arabian Monetary Agency, as the central bank is known, succeeding Fahad Al Mubarak, who had been in the role since 2011. Also out is Oil Minister Ali Al-Naimi, the architect of the 2014 switch in OPEC policy that’s since roiled crude markets, replaced by Saudi Aramco Chairman Khalid Al-Falih.

Saudi Arabia is undergoing its biggest ever economic shakeup, led by the the deputy crown prince and second-in-line to the throne, as it prepares for the post-oil era following the plunge in crude prices that started in 2014. The kingdom’s energy industry, as well as its central bank, will play a “critical role in the economic transformation” plans, said Simon Kitchen, head of macro-strategy at Cairo-based investment bank EFG-Hermes.

“The deputy crown prince has now put his stamp on both institutions,” he said.

Princely Stamp

Al-Naimi, 80, retired after heading the oil ministry for almost 21 years. His departure is another sign of Prince Mohammed’s growing influence.

At the April 17 meeting in Doha where producers discussed a possible output freeze to curb the global glut, al-Naimi lacked the authority to complete any deal, according to his Russian and Venezuelan counterparts. The view of Prince Mohammed, who had insisted that no accord was possible without Iran, eventually prevailed and the talks collapsed.

As part of Saturday’s royal decrees, the name of the oil ministry becomes the Ministry of Energy, Industry and Mineral Resources, and will undertake tasks and responsibilities related to electricity.

Vision 2030

Prince Mohammed’s plans, outlined in the so-called “Vision 2030” blueprint announced on April 25, include setting up the world’s biggest sovereign wealth fund, transforming Aramco into an energy and industrial conglomerate, and generating an additional $100 billion in non-oil revenue by 2020.

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One of the government’s biggest challenges, though, will be navigating the worst economic slowdown since the global financial crisis as authorities cut spending to plug a budget deficit that reached about 15 percent of gross domestic product in 2015.

The benchmark Tadawul All Share Index rose 0.2 percent at the close in Riyadh. The measure has dropped 32 percent over the past year, compared with a 23 percent decline for the MSCI Emerging Markets Index.

The economy will expand 1.5 percent this year, according to the median estimate of a Bloomberg survey, the slowest since 2009, complicating efforts to reduce what is already among the region’s highest levels of youth unemployment. The International Institute of Finance said in a report published May 3 that it expects “sharply slower growth in the next few years due to the serious fiscal consolidation.”

Central Bank

While Saudi banks are “well placed to weather the slump in oil prices,” they will come under pressure as borrowing costs climb because of increased government borrowing and the decline in private-sector deposits, IIF economists Giyas Gökkent and Garbis Iradian wrote in the report.

Alkholifey, deputy governor before the king promoted him to central bank chief,
takes office as the government prepares to borrow more through local and global debt markets. The central bank is also considering reducing the reserves banks are required to hold against customer deposits to release more funds for lending, the IIF said.

The central bank’s net foreign assets fell by $115 billion in 2015, fueling speculation that the kingdom will abandon the dollar peg. Along with Al Mubarak, a former Morgan Stanley banker, Alkholifey reiterated Saudi Arabia’s commitment to the policy.

“The peg will stay. A strong nominal anchor is important during a time of major economic change,” said Kitchen of EFG-Hermes.

Third Reorganization

The king’s government reorganization on Saturday is the third major change since he took power in January 2015. The previous two reshuffles helped propel a younger generation of the Al Saud ruling family, mainly his son Prince Mohammed, closer to the throne of the world’s top oil exporter.

The prince was named defense minister, leading the kingdom’s war effort in Yemen against rebels it says are backed by its rival Iran. He also oversees the economy and oil through the Council for Economic and Development Affairs.

The prince’s rapid rise to power and fast-paced policy changes have stunned diplomats and analysts alike. His economic plans, which include selling shares in Aramco as well as cutting subsidies, were received with skepticism by some foreign analysts who predict he may face domestic resistance.

“Vision 2030 represents a Saudi plan for economic leadership in a world where oil is no longer dominant,” Simon Henderson, the Baker Fellow and director of the Gulf and Energy Policy Program at The Washington Institute, wrote in a report. “If it succeeds, it will also bring about much broader changes within the kingdom.”

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