Saudi Arabia is one of the most important countries on the planet. It is an economic and political force, not only in the Middle East, but the entire world. It is the place where millions of Muslims come in pilgrimage to Mecca and Medina. It is the source of much of the oil for the Asian and European economies. It is the most important player in the Gulf Cooperation Council (GCC). It is a center of Sunni power, but also a source of great tensions with Iran, a predominantly Shia country that has been trying to develop its power within a mostly Sunni part of the world. Saudi Arabia is one of the largest importers of weapons. It is also involved in major conflicts in its region. Saudi Arabia has been a major source of support to Egypt, hence keeping that fragile country from collapsing into yet another revolution. Saudi Arabia is surrounded by turmoil and threats in many directions and even internally. The "Arab Spring" makes the Saudi leadership quite anxious. These are but a few of the many reasons why Saudi Arabia is so important. Saudi Arabia has very high unemployment and even much higher underemployment. It has a lot of idle, and often educated, youth. About 60% of its population is under 30. Its education system churns out many graduates that do not have the skills that the economy needs. A very large percentage of the private sector, and even public sector, jobs are done by imported labor from all over the world. There is a great deal of inequality in the country. It is also quickly using up its water reserves and is, oddly, using much of that water for agriculture and agribusiness. Huge amounts of water are desalinated daily by using oil. Oil demand in the country is growing very quickly for residential, industrial and commercial uses. Saudi Arabia has been focusing on oil-intensive industrial development in petrochemicals, aluminum and the like. The combination of the increased uses of oil in industry, electricity and in desalination could lead to a severe lowering of Saudi Arabia’s capacity to export its oil in the coming decades. Oil brings in about 70-80% of the country’s government revenues. Crude oil and oil products exports are well over 90% of the country’s export revenues. Saudi Arabia is facing harsh budgetary times with the low oil prices. Its foreign reserves are being quickly drained. It is facing an increasingly economically frustrated youth. It is facing down the draining of its natural fresh water resources and a potential severe decline in its ability to export oil. Saudi Arabia could be looking at very difficult economic and political times if it does not reform its economy and change its ways of doing things. The time for change was really far in the past, but this is now. The leadership of Saudi Arabia is looking to reform because likely they know there is little choice but to do that.
The ARAMCO IPO, the PIF and other Sources of Funding
Saudi Arabia has been in the process of developing ideas for an IPO for Aramaco. In the past data on reserves and the detailed inner workings of Aramaco were far from transparent. Saudi Arabia will have to make public a lot of data on this massive company, its subsidiaries and more. Also, it seems there is no real, audited valuation of the company. Many seem to be guessing at its valuation. The most common number used is about $2.5 trillion. Data and analyses supporting this are not public and may not actually exist in a cogent form. Aramaco could be much more valuable than even that massive number. It would also be worth less depending on how its in-the-ground assets, pipelines, refineries, patents, expertise, technologies and more are to be evaluated. Figuring out the value of the company, and particularly the new present value of its massive and complex assets could take considerable time and effort. This is not going to happen tomorrow or even in the next few months if it is done properly. The planned Aramaco IPO as publicly stated seems to be of only 5% (which may increase later) of the company. Which 5% of Aramaco will be sold off and to whom is not clear at all. What the value of that 5% may be is also not clear. The numbers most commonly used for the 5% are between $135 billion and $150 billion. The Saudi government has publicly stated that the income from the IPO will be put into its Public Investment Fund (PIF) and that Aramaco would be transitioned into a holding company with an independent board and maybe other changes in leadership structures and strategies. Other assets, such as the financial center of Riyadh, would also be folded into the PIF. The Saudi government is looking to sell off a part of Aramaco and creatively move its assets around to have massive amounts of money to invest in the very ambitious transition of its economy. Funds will also come from a reduction in some subsidies, a change in the economic social contract of the country, and some tax changes - all of which do not seem set in stone just yet.
Saudi Arabia Vision 2030
The challenges that Saudi Arabia is taking on with its Vision 2030 are breath taking. One cannot help but wish them well, but also be concerned that maybe it is too ambitious. If expectations are built up that it will work out and it does not then there could be real problems inside the country, especially with the youth. Expectations management will be key to the future stability and prosperity of the country. They want to reduce official unemployment from over 11% to about 7%. This is possible. They want to increase women’s participation in the economy from about 20% to 30%. This is technically and economically possible, but socially this may create some strains and be cause for pushback from some ultra-conservatives and others. They want to increase non-oil revenues about 7 times what they are now. The workability here depends on how they do this, how taxes are increased and on what, how other fees are increased and how, and this is very important, the country moves toward a more diversified set of industries and services. There are ambitious goals for tourism, which are also technically and economically possible, but socially there could be some real issues. Saudi Arabia wants to drastically increase the importance of the private sector, small to medium sized industries, and non-profits. It also wants to attract much larger amounts of foreign direct investment and to increase savings considerably. It wants to start to privatize health care, increase renewable power, and make big changes in other parts of its energy sector. Saudi Arabia wants to be far more competitive and be one of the top logistics countries in the world. Saudi Arabia wants to reform its defense sector and to start developing a viable defense industry of its own. This may entail changing some of the behavior patterns within its military and military procurement sectors. That could be very difficult. The leadership wants to make its government one of the most effective in the world. They will have to if the other many moving parts in this vision are to work. Saudi Arabia wants to modernize its education and training. This is vital for all other parts of this program to work. If education and training do not keep up and enable change then this program is in trouble. There will also need to be a change in behavior towards taking private sector jobs and some jobs that Saudis may not want to do. And all of the above are just the broad outlines of this astonishingly ambitious plan. The real problems are often found in the details and how to work those out. What Saudi Arabia says its wants today in 2030 may not be what happens by 2030.
Hopes and worries for the future
The Aramaco IPO and Saudi Arabia Vision 2030 taken in their parts seem ambitious. Putting them together with the other things that are and may be happening in and with Saudi Arabia, such as the war in Yemen and other challenges, would surely make one wonder about the chances for success. These are plans for massive change. Massive change at such complex levels and in such a fluid and complex environment will need a lot of education, training, expertise, investment, and deep and creative thinking. It will also need innovative and strong, yet flexible leadership. It is almost as if a traditional country is now shifting into fifth gear from second. Saudi Arabia has come a very long way since the days when The King lived in a fairly small earthen palace or a tent and his treasury could fit into a camel bag. The Saudi Arabia of today is astonishingly different from what it was even in 1950 or 1970. Saudi Arabia has gone through economic and other changes in its past - but nothing like this in its speed, depth and breadth. If they get this right they could save themselves from political, economic and resource troubles coming their way and possibly help stabilize the region. If they fail to diversify, change and use and develop their resources and people better, to be very frank, we will all be in trouble.