Why did Saudi Arabia Reshuffle its Government?
Last week’s wide-ranging restructuring of the Saudi cabinet, revealed on Saturday in a series of royal decrees, has prepared the ground for a radical package of economic reforms designed by Deputy Crown Prince Mohammad bin Salman to wean the Kingdom off its reliance on oil revenues. The shake-up saw King Salman ditch top ministers and establish a number of new government departments, in what was widely seen as the first concrete step towards implementing the measures proposed under Prince Mohammad’s so-called Vision 2030 program.
Like many other energy-rich nations – including Norway, Russia and Venezuela – Saudi Arabia has been hit hard by a 50% slump in oil prices over the past 18 months. Unemployment in the Kingdom has rocketed to 11.6%, while the country’s budget deficit is expected to reach 13.5% of GDP this year. Hundreds of young Saudis who once would have been able to walk into reasonably paid jobs in the Kingdom’s oil-dependent public sector will now need to acquire the necessary skills and education to compete with foreigners for private sector jobs.
Prince Mohammad’s Vision 2030 measures aim to realign the Saudi economy by selling off a slice of the state-owned oil monopoly Saudi Aramco to create the world’s largest sovereign wealth fund.
The move seeks to expand the size of the private sector from 45% to 60% of GDP through the promotion of enterprise and the privatization of some public services; encourage the diversification of the nation’s private sector to non-oil industries; and boost the number of women in employment. The program also includes plans to introduce a “green card”-style system for Muslim and Arab foreigners so they can work in Saudi Arabia long term. “Overall, if the vision delivers 10% of what has been promised, it will be a huge success,” one banker told the Financial Times.
However, if Prince Mohammad’s Vision 2030 manifesto is going to succeed, the Saudi government must attract considerable foreign investment into the country. The Kingdom needs to bring in businesses that are willing to fund infrastructure projects and set up operations in the country, creating jobs and growth in industries outside of energy. Bilateral relations based primarily on oil exports – like the one with the United States or China – or on arms imports – with the United Kingdom – will have to expand to include the services and manufacturing sector.
In pursuit of such changes, last year Saudi Arabia opened up its stock exchange to select foreign investors, and at the beginning of this month said it would allow foreign businesses to own larger stakes in listed companies. Continued reform of the Kingdom’s stock market is key to determining whether or not Prince Mohammad’s ambitious plans can rebalance the country’s economy.
Indeed, the Kingdom is home to many successful businesses outside of the energy sector that could blossom with large injections of foreign capital, including companies operating in financial services, construction, technology, and retail. More than 200 UK-Saudi joint ventures valued at $17.5 billion currently operate and British companies are one of the biggest foreign employers in the country.
Further liberalization of foreign ownership rules could greatly improve the chances of Vision 2030 fulfilling its lofty goals and boost the level of foreign investment. Divesting a small slice of Aramco will serve as the centerpiece of a new strategy that sees Saudi privatize state industries and invite foreign investment. The resulting $100-200 billion from IPOs would then be combined with the $500 billion held in U.S Treasury bonds to create the basis of the sovereign wealth fund. Massive public investments would then create hundreds of thousands of jobs and lucrative opportunities for foreign investors.
The initial rebalancing of the economy is only half the story though. If the Kingdom is to thrive once it has started to cut its dependence on oil, it will need a modern, well-educated workforce that possesses the skills required by the vibrant new businesses that will become its new economic backbone. While Prince Mohammad’s Vision 2030 roadmap includes measures to reform the country’s education system and widen access to work for women, conservative clerics are likely to rail against the modernization needed to make his plan work. In its current form, the system places much of the weight on religious education instead of training pupils for the job market.
Oil prices don’t look as though they’ll be heading in the right direction anytime soon, making the Kingdom’s newly announced reforms a welcome development. Even if oil prices do head north again, Saudi Arabia will be in a much stronger position to tackle likely future fluctuations. If it continues to loosen foreign investment regulation, there will be a good chance Saudi will be able to create the beginnings of a diverse economy that is not reliant on oil income. There are already signs that a relaxation of foreign investment rules is paying off, with a number of British firms cashing in on the resultant infrastructure bonanza.
The government shake up was therefore just a first step towards implementing Vision 2030, one that will surely be followed by other reforms. Time is running out.