Photographer: Waseem Obaidi/Bloomberg

Economic Pain on Saudi Post-Oil Path to Test Rulers' Resolve

  • Government shake-up Saturday latest step in Saudi Vision 2030
  • Economic growth set to slow as reforms weigh on private sector

The investors who flocked to one of Saudi Arabia’s biggest business events last week heard ambitious plans for the kingdom’s future and little on how to manage the painful transition to the post-oil era.

Among the changes that officials discussed at the annual Euromoney conference were a plan to loosen restrictions on foreign investment in stocks, a new corporate law that would ease doing business and a bankruptcy law finally on track for approval. While the measures aim to energize private businesses to offset the drop in government spending, they are unlikely to reverse an economic slowdown that will test the leadership’s resolve in pushing for crucial reforms that could trigger public resentment.

“The destination appears attractive but the journey is not likely to be smooth,” said Abdul Kadir Hussain, who helps oversee $1.5 billion as the chief executive officer of Mashreq Capital DIFC Ltd. in Dubai.

After years of rapid expansion propelled by high oil prices, the economy is set to miss the G-20 growth average for the first time since at least 2011, according to International Monetary Fund estimates, as the drop in commodity prices hurts consumer and business confidence.

Four days after the investment conference, held in a five-star hotel where an ice sculpture of Riyadh skyscrapers was melting in the May heat at the entrance, only one of the three ministers who addressed investors would hold the same job. More than 50 royal orders on Saturday evening reorganized most of the government.

Vision 2030

The shake-up, in which both the oil minister and central bank chief were replaced, was the latest ripple of Saudi Vision 2030, a blueprint for the post-oil era championed by Deputy Crown Prince Mohammed bin Salman after the plunge in crude prices.

Strains on the Saudi Economy: QuickTake

The prince -- the king’s son and second-in-line to the throne -- began announcing details of his plans in interviews with Bloomberg at the end of March. They include selling shares in Saudi Aramco, creating the world’s biggest sovereign wealth fund and generating more than $100 billion in additional non-oil revenue by 2020.

The benchmark Tadawul All Share has gained about 7 percent since April 1, but took its cue from oil prices, underscoring the difficulty in shaking off the kingdom’s reliance on crude exports. The correlation between the index and Brent crude on a daily basis has remained at about 0.9, near the level where it was at the end of March.

Saudi Arabia’s main stocks index is still moving in lockstep with oil.

Social Tensions

Some Saudi officials, including Prince Mohammed, have acknowledged the short-term problems.

The prince, addressing a press conference to announce Vision 2030 on April 25, said there may be “difficulties in breaking some barriers in the first years,” urging citizens to endure before the economy takes off.

The challenge would be managing the pace of the changes to “avoid inflaming social tensions,” the International Institute of Finance wrote in a May 3 report after a visit to the kingdom.

While decisions to raise fuel and electricity prices were met with little resentment, Saudis turned to social media to complain about a sharp surge in water costs, prompting authorities to dismiss the water and electricity minister. The fiscal restraint would also complicate efforts to create jobs in a country struggling with youth unemployment.

Not an Option

The cost of inaction, however, could be higher.

In a research report this month, the Riyadh-based Jadwa Investment said that even assuming a recovery in Brent crude prices to $102 a barrel by 2030, the scenario would still result in “a rapid depletion to the kingdom’s fiscal buffers.”

Budget deficits would remain high and foreign exchange reserves could plummet to as low as 375 billion rials ($100 billion), from more than 2 trillion riyals now. The vision “comes at a critical juncture for the kingdom,” it said.

The government will still struggle to meet its medium-term targets under the plan. While spending cuts would narrow the budget deficit, the IIF predicted that the government won’t be able to balance the budget by 2020. Growth, meanwhile, will slow to between 1 and 2 percent, compared with an average of 5.2 percent in the past decade, economists Giyas Gökkent and Garbis Iradian wrote.

There are also doubts that the government changes would be enough to reform the Saudi bureaucracy.

Following Saturday’s reshuffle, Saudi cartoonist Abdullah bin Jaber, who has 479,000 followers on Twitter, compared appointing new ministers to covering an old car’s broken parts with a shiny new body.

“The implementation of Vision 2030 will be challenging, if not heroic based on their time lines,” said Mohieddine Kronfol, the Dubai-based chief investment officer for global sukuk and MENA fixed-income at Franklin Templeton Investments Ltd. “However, what matters most from a market or economic-growth perspective is that the reform process continues and maintains momentum.”

Before it's here, it's on the Bloomberg Terminal.