Vision 2030, Saudi Arabia’s ambitious plan to diversify its economy away from its dependence on oil, is one of the cornerstones of Deputy Crown Prince Mohammed bin Salman bin Abdel-Aziz Al Saud’s (often referred to as ‘MBS’) political agenda. Notably, Vision 2030 envisages increasing the private sector’s share of economic output to 65%, developing alternative sources of government revenue, and reducing dependence on public spending. The Saudi government bets on these new policies to move the country from being the 19th largest economy in the world into the top 15. Although the overall strategy entails a number of risks, it will open much of Saudi Arabia’s economy to foreign investors for the first time. International companies looking to enter the market will be directly exposed to the complex dynamics of Saudi politics, as well as a volatile regional context.
A Bold but Uncertain Plan
One of the first factors to consider for firms looking to expand their operations in Saudi Arabia is the uncertain nature of Vision 2030, especially given that Saudi Arabia lacks a track record of delivering reforms to diversify its economy from the oil manna. For more than 40 years, Saudi rulers have successively tried their hands at economic planning, without much result. In 1970, under the leadership of King Faisal bin Abd Al-Aziz, the country’s first economic development plan already emphasized on the necessity of economic diversification for the time when oil reserves would become depleted.
Despite several attempts – from a series of five-year development plans in the 1970s to the Kingdom’s more recent program of developing six economic cities – government spending remains the engine of economic growth. As a result, between 2002 and 2015, the government ran on average a budget surplus of 24 percent. The country’s economy is still overwhelmingly oil-based, as hydrocarbons account for 85 percent of export earnings as well as the vast majority of government revenue.
A New Context
However, there are substantial grounds to believe that the long-due reforms might actually be carried out this time. The first reason is the drop in global crude prices since 2015, which has significantly affected the Saudi economy. This was evident in 2016, when weak oil prices lowered the Kingdom’s real GDP growth to an estimated 1.4%, whereas the budget deficit reached $79 billion. To finance its deficit, Saudi Arabia was forced to use its foreign currency reserves, which have dropped over $200 billion since August 2014 (although the Saudi Arabian central bank’s foreign reserves did post a slight increase in October 2017). As a consequence, the government has implemented reductions in subsidies and capital spending, enacted a public-sector salary freeze and introduced revenue-raising measures. On January 1st, in line with the Gulf Cooperation Council, the Kingdom also introduced a value-added tax (VAT) of 5%. These measures will foster the confidence over the likelihood of the implementation of Vision 2030.
The second reason is directly connected to MBS’ strong personality and his willingness to break traditional policy taboos, as shown by the Saudi Aramco initial public offering (IPO), which will make a five percent portion of the world’s largest oil conglomerate accessible to private investors. As Saudi Aramco is the product of the 1970s Arab-American Oil Co. nationalization, MBS’ desire to sell shares in the Kingdom’s national champion comes as a true paradigm shift. The powerful young prince relies on the IPO to transform the Public Investment Fund (PIF) into a $2trn sovereign wealth fund, one of the most important changes of the Vision 2030 reform process. MBS has criticised the country’s ‘addiction’ to oil and likes to present himself as a modernising leader who seeks to shake Saudi Arabia out of its economic largesse, as well as its reputation for rigid bureaucracy. He also shows interest in the public role of women, as highlighted by his landmark decision in September 2017 to lift the ban on women driving in the Kingdom, which was seen as a small revolution.
To that must be added that Saudi Arabia is a demographically young country: the number of people in the Kingdom under the age of 25 is 70% higher than in 1985. As 4.5 million young Saudis are expected to the enter the labour market by 2030 (nearly twice the total number of Saudis in work today), the need to reform the economy has never been more urgent.
Risks to Watch
One of the major risks associated with Vision 2030 is that it could break the social contract in place between the government and the population, which historically relies on heavily subsidised public utilities, state employment, and free education and healthcare. For decades, Saudi Arabia has functioned as a rentier state, depending on oil revenues to ensure its paternal-distributional model toward its constituencies. Often described as a series of informal pacts between the Al Saud and the society, including the wider royal family, business elites and the influential clerics, the social contract is at the core of political equilibrium within Saudi Arabia. The Vision 2030 economic diversification plan could potentially undermine the social contract as an incentive to political behaviour, which might provoke some discontent among the wider population.
The last time the Kingdom had to face a similar dilemma was during the 2011 Arab uprisings when the country’s marginalized Shi’a community took to the streets to demand the release of Shi’a prisoners. At the time, fearing a revolutionary contagion, the Saudi government used economic handouts to squelch the demonstrations. Shortly after the beginning of the protests, former King Abdullah announced the implementation of an extensive economic package, including around $130bn of social spending, as well as raises in subsidies. In this way, MBS’ willingness to put an end to Saudi Arabia’s rentier political economy as a regime survival strategy will likely be one of the risks arising from Vision 2030.
Another threat concerns the growing antagonism between the Saudi clerics and the Crown Prince, which could generate a conservative backlash. The speed of social and economic change is likely to exacerbate existing fears about preserving Islamic norms within the society, especially since the Kingdom unveiled plans for an entertainment city on the edge of Riyadh, which will be fifty times the size of Gibraltar once complete. This Las Vegas-style entertainment park project might deepen tensions with the Ulama, the clerical leadership that remains a significant political force. Although clerics have not expressed any criticism toward MBS’ ambitious reforms plan (as it could be seen as an insult to the king), they constitute a central pillar of the regime’s authority. They have also been crucial allies in Saudi Arabia’s ideological fight against Al-Qaeda and the Islamic State (IS). Losing their support could prove dangerous.
The personal rise to power of MBS and the speed at which he is consolidating his authority also pose moderate risks to the success of Vision 2030, as the plan is closely associated with the Crown Prince. The unprecedented purge of top princes and businessmen in the November 2017 anti-corruption sweep signalled his disregard for winning support from the elderly members of the Al Saud. Among the detained were Prince Alwaleed bin Talal and two sons of the late King Abdullah, including Prince Miteb, the former head of the National Guard. As MBS sidelines potential rivals and dismantles alliances built with other branches of the royal family, some senior members of the Al Saud are likely to oppose his rise to power, which could consequently spell trouble for Vision 2030.
Finally, the Saudi-led intervention in Yemen could have negative implications for MBS’ standing. Since March 2015, Riyadh has been leading an Arab coalition to fight the Iranian-backed Houthi rebels and their allies, with the goal of restoring the ousted president, Abd Rabbu Mansour Hadi. The Saudi government originally thought that the intervention would only last a few weeks. However, the conflict has become stalemated and is increasingly unpopular in Saudi Arabia. The Yemen war is closely associated with the Deputy Crown Prince (MBS was appointed defence minister just before the military campaign began) and is taking a toll on his reputation. While estimates of the cost of the wary vary, it can be said with confidence that it runs into the tens of billions of dollars in direct expenditure on munitions and military operations. As Saudi Arabia’s exit strategy remains unclear, the campaign could lead to considerable economic losses in the long term, which would in turn negatively impact Vision 2030.
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