Saudi Arabia’s Strains
For Saudis, economic life is changing. Daily life? Not so much. Saudi Arabia remains the only country that bans women from driving. Also outlawed: movie theaters, concerts and Valentine’s Day. Lashings and beheadings still take place in public squares. For the most part, the country’s 21 million citizens are religiously conservative Muslims, and many are suspicious of outside cultures. At the same time, the biggest economy in the Middle East needs to urgently reduce its reliance on oil, which provides three-quarters of government revenue. That means fitting in better with the modern world and tampering with the cash-for-loyalty contract that Saudi kings have had with their people for decades. As part of a plan for the biggest economic shakeup since the country's founding, Saudi Arabia intends to sell shares in its massive state-run oil company and create the world's biggest sovereign wealth fund. Economic realities are forcing change. The question is how much.
Deputy Crown Prince Mohammed bin Salman is spearheading a campaign to offset the financial strain of lower oil prices. Continued spending on public-sector wages and foreign aid ballooned the budget deficit to 15 percent of gross domestic product in 2015 as the kingdom burned through currency reserves at a record pace. At the same time, the country is footing the bill for taking a bigger political role in the region, funding rebels in Syria’s civil war and leading airstrikes against insurgents in Yemen. The government is cutting subsidies for citizens on basics like electricity while trying to increase tax revenue and create jobs. In September it cancelled bonuses for state employees that had long been taken for granted. It has also secured a $10 billion loan — its first in at least 15 years. As part of a goal to earn more from investment income than oil within 20 years, the country intends to sell shares in the parent of oil giant Saudi Aramco and create a sovereign wealth fund that will eventually control more than $2 trillion. The initial public offering — potentially the world's biggest — is part of a drive to double the size of the $400 billion stock market. Another goal is to make the citizenry more productive. Youth unemployment is about 30 percent, and expatriates fill half the country's jobs. Even women have been encouraged to work outside the home, despite traditional disapproval of face-to-face contact with men.
The throne of Saudi Arabia, one of the world’s last remaining absolute monarchies, passed to King Salman in 2015 after the death of his half-brother King Abdullah. Salman has set up a new generation of princes to take charge. His son, 30-year-old Prince Mohammed, has amassed unprecedented power since his father became king. The kingdom was founded in 1932 and became the biggest oil exporter by the 1970s, with the Al Saud family ruling under a compact with Wahhabi clerics who maintain control over social and religious laws. When the Arab Spring began to stir democracy movements in the Middle East in 2011, the government unleashed a $130 billion spending drive to head off potential unrest and create jobs for the post-hydrocarbon age by investing in education and health care.
With the world’s biggest petroleum fields and more than $500 billion in foreign reserves, Saudi Arabia can continue to rely on its oil money for some time. The question is whether it can restructure the economy before the clock runs out. While the tradition-bound country is becoming less isolated, its puritanical religious life will create a challenge to reforms. A decade-long push to force the "Saudization" of the workforce has had limited success so far because Saudis lack technical skills and many continue to view occupations such as barber, butcher or painter as beneath them. But with half of Saudis under the age of 25 and the size of the workforce expected to double by 2030, Saudi Arabia can no longer afford its unproductive population. At the same time, if more Saudis earn their own living and are asked to pay taxes, they could begin to demand a greater say in how their country is run. That could require the Saudi royals to develop a new kind of plan altogether.
The Reference Shelf
- Bloomberg's interview with Deputy Crown Prince Mohammed bin Salman and a Businessweek cover story on how he is preparing Saudi Arabia for the end of oil.
- “Frontier: Exploring the Top Ten Emerging Markets of Tomorrow,” a book by Gavin Serkin, makes the case for Saudi Arabia as a hot investment destination.
- Bloomberg Markets examined how Saudi Arabia was prolonging the world’s reliance on oil in its May 2015 issue.
- The International Monetary Fund studied Saudi Arabia’s push to diversify the economy and boost employment.
- QuickTake on the world's remaining absolute monarchies.
First published June 10, 2015
To contact the editor responsible for this QuickTake:
Leah Harrison at email@example.com