Saudi Arabia is the world’s 19th largest economy. It is the largest exporter of oil, the most important source of oil to the big Asian economies and an important source of oil for Europe, the U.S. and many other parts of the world. It has the largest conventional oil reserves known, at about 800 billion barrels in place with about 266 billion barrels in proved reserves, depending on the price of oil.
Islam started in what is now Saudi Arabia, and millions visit the country for the Muslim pilgrimages of the Umrah and the Hajj. There are 1.6 billion Muslims worldwide who pray to Mecca 5 times daily.
Saudi Arabia is also a major supporter of the linchpin states of Egypt and Jordan. Saudi Arabia is in the midst of complex and expensive conflicts in Yemen, Syria and elsewhere. Saudi Arabia is the anchor for the Gulf Cooperation Council, the GCC, which is not just an economic grouping, but also a defensive one. These are just a few of the many reasons why Saudi Arabia is an important country.
Internal and external threats
#Saudi Arabia wants to increase the importance of the private sector, attract #foreign direct investment and increase domestic #savings
Saudi Arabia has had major problems with terrorism on its own soil, and there have been numerous attacks on the country from various extremist groups in recent years, including the multiple attacks in the country just recently. Contrary to the prevailing narrative, the Saudis are doing a lot to counter terrorism. If Saudi Arabia ever faces an existential threat from ISIS or another terror group, the entire world would face a major strategic calamity. Not only would Saudi Arabia be at threat, but also the U.S. 5th Fleet’s base in Bahrain and the massive Al Udeid Air Base in Qatar would be at risk. The UAE, Qatar, Bahrain, Iraq, Jordan, Iran, and many more places would be threatened if Saudi Arabia fell to extremists. In short, the global impact would be huge if such a regional calamity took place.
Saudi Arabia’s most important global concerns include its reliance on the price of oil and the effects of global financial markets, perceived threats to its security from various global actors and relations between the Muslim and non-Muslim worlds. Its most important regional concerns include the security and prosperity of the GCC and other allies and partners, such as Egypt, Jordan, and Morocco. These concerns also include the direct perceived threats that issue from Yemen, Syria, Iraq, and, most particularly, Iran. Some of its most important domestic concerns include domestic threats from terror cells and potential instability in its East Province, where the Shia are the most highly concentrated in this Sunni dominated state. The Saudis are concerned about Iran stirring up further trouble in that part of their country, home to most of its oil production. Other domestic concerns include unemployment and underemployment and their actual and potential social and security implications.
For many decades, oil has dominated the economy and has been related to changes in the economy. Oil is roughly 35-45% of the GDP of Saudi Arabia and oil revenues are about 80-90% of all revenues
Economics and national security
Like all countries, Saudi Arabia needs a healthy, stable and growing economy to support its global, regional and domestic concerns. Unemployment in Saudi Arabia is on average about 11.2%, but underemployment is much higher. Both unemployment and underemployment are sources of personal stress and potential social stress and instability. Further, the unemployment rate for people from 15 to 30 years old is, on average, 35%. For those aged 15 to 19, it is close to 50%. A full 60% of Saudis are under 30. And their job prospects seem limited. Women are a massively underutilized resource as they have a very low labor participation rate, at about 20%, and very high unemployment for those trying to participate, at about 30%. And they are half the population.
Most employed Saudis work in the public sector in jobs that pay on average about 70% more than the private sector, but the public sector is often far less productive than the private sector. Public sector compensation is a huge part of the government budget, and it has been growing rapidly since the "Arab Spring" shocked the region and the world. Unfortunately, while compensation has risen, productivity has been stagnant.
Most of those who work in the private sector are expatriates from South Asia, Southeast Asia and the Arab world. They are usually on short term, and often tenuous, contracts, whereas many of the government jobs are long term, if not for life. Moving Saudis from the public sector to the private sector will be difficult, but every time there is downward volatility in the price of oil, there are pressures to do just this.
There is a big disconnect between the Saudi education system and the sorts of employees they need. The primary education system is not performing up to the standards the previous King had hoped for when he poured money into education. The secondary schools are not up to international standards. Even with the growth of the number of universities and university students in the past few decades, not enough has been done to get Saudi students up to speed for the work force. Sadly, about 50% of Saudi college students drop out. There need to be far more business, engineering, science, entrepreneurship and other university and training courses to connect Saudi students to the needs of their country.
For many decades, oil has dominated the economy and has been related to changes in the economy. Oil is roughly 35-45% of the GDP of Saudi Arabia, while oil exports are about 30-40% of GDP. Oil exports make up roughly 75-80% of all exports. Oil revenues are about 80-90% of all revenues. The lower percentages apply at times of low oil prices. There is a distinct correlation between the changes in the price of oil and the changes in the GDP of Saudi Arabia - the curves nearly shadow each other.
When the price of oil increases, Saudi Arabia has responded with increases in government expenditures: money dedicated to large construction projects, ambitious plans for new cities, infrastructure and more. When the price of oil drops, Saudi Arabia responds with cutbacks on government expenditures and other development plans.
Saudi Arabia has massive social contract programs, which can include free education, free health care, and other social benefits. It also has considerable military programs and recently has been involved in expensive conflicts. When oil times are good, the Saudi government is flush with funds. When oil times are bad, Saudi Arabia has had to dig deep into its financial reserves
Saudi fiscal balances have been increasingly in the negative range since the recent drop in oil prices. At present, Saudi Arabia has a small foreign debt, but it could grow much larger if oil prices remain low. Recently, they have been going to international financial markets for bond issues. This has all happened before, but it is time to stop this disruptive cycle.
The disruptive changes of Vision 2030
The challenges that Saudi Arabia is taking on with its Vision 2030 are breathtaking. 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 strains and cause pushback from ultra-conservatives.
They want to increase non-oil revenues to about 7 times what they are now. Success on this will depend on how taxes are increased, how other fees are increased, and how the country moves toward a more diversified set of industries and services. There are ambitious goals for tourism, which are technically and economically possible, but socially they could raise real issues. Saudi Arabia wants to drastically increase the importance of the private sector, including small to medium sized industries and non-profits. It also wants to attract larger amounts of foreign direct investment and to considerably increase domestic savings. It wants to start the privatization of health care, increase renewable power (although lately some of these goals have been cut back), 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 start developing a viable defense industry of its own. The leadership wants to make its government one of the most effective in the world.
Saudi Arabia wants to modernize its education and training systems, as this is vital if other parts of this program are to work. If education and training do not keep up with and enable needed changes, Vision 2030 is in deep trouble. There will also need to be a change in behavior towards taking private sector jobs, and work ethics and behaviors will have to change among some workers. Entrepreneurship and the entrepreneurial spirit will need to be developed quickly.
The Aramco IPO, the PIF and other sources of funding
Saudi Arabia is developing ideas for an IPO for Aramco, and it will have to make public a lot of data on this massive company and its subsidiaries. There is no accurate, audited valuation of the company, and there seems to be a lot of guesswork about its valuation. The most common guess is about $2.5 trillion, but guesses range from $2 trillion to about $12 trillion. Data and analyses supporting any of these guesses are not public and may not actually exist in a cogent form. Figuring out the present value of its massive and complex assets could take considerable time and effort, so an accurate estimation will not appear tomorrow or even in the next few months if it is done properly.
The planned Aramco IPO seems to be for only 5% of the company, a figure that may increase later. Which 5% of Aramco will be sold off and to whom is not clear at all. What the value of that 5% may be is not clear, but 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). Aramco 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 moved into the PIF. 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 firmly set yet. Saudi Arabia still has massive financial reserves, considerable mineral and other resources, and especially human resources that have yet to be fully tapped. However, there are some serious questions about how long it can continue to drain its reserves and continue on similar economic paths. It is vital that the right decisions be made with this money.
Hopes and worries
If the oil price shoots up to $70, $100 or even $150 per barrel, then this may take the edge off the need for a Vision 2030. Saudi Arabia can get oil out of the ground for an average total cost of about $10 per barrel, but it needs over $70 a barrel to get to a break-even government budget given the importance of oil revenues to the budget. So the $70 and $100 targets are something to keep an eye on. If the coffers of the reserves in SAMA (the Saudi Arabian Monetary Agency) and others start to fill up quickly and the budget pressures are dissipated, then there may be social and leadership pressures to move away from the disruptive changes that Vision 2030 would bring. This would be a short run view that could prove dangerous. If Saudi Arabia brings back its previous expenditure levels or more, then the breakeven budget could be even higher.
Oil prices can drop again. There could be new huge finds in tight oil fields globally that could see the increase in non-Saudi oil production, much like what happened in the U.S. in the last few years. There is likely to be greater global emphasis on a movement toward electric, natural gas and far more efficient transportation vehicles. Globally transportation vehicles are now fueled 95% by oil-based products, and about 65% of global oil use is for transportation. Other uses of oil, such as in industrial processes, chemicals, and more, could also begin to move further from oil-based feedstock if there is yet another upward oil price shock.
There is increasing pressure to move from fossil fuels for environmental reasons as the threat of global climate change gets closer and more pronounced. If many countries enact regulations and laws to respond to perceived and actual climate change threats, the oil markets could suffer from those changes. The recent COP21 meetings in Paris could be a strong indicator of where this might be going.
The conservative nature of Saudi society could bring challenges to Vision 2030. One must consider what happened to Saudi Arabia’s rival Iran in the 1970s when the Shah tried to move the economy and the society forward too quickly. The Vision 2030 program, even with its breathtaking ambitiousness, is far more realistic than the Shah’s program. However, there are still possible problems with how well Saudi culture can absorb the changes that Vision 2030 entails. This may be especially so in the change to the ratio of the public to the private sector and in the greater incorporation of women into the labor force, and hence into public life. Sharp and fast economic changes can also produce unexpected social dislocations.
The Shah did not have a project to move away from oil, but he had massive ambitions for his country, ambitions that contributed to shattering Iran’s economy as roads and ports clogged, inflation and unemployment skyrocketed, and the country’s economy literally choked on the changes. Iranian society also reacted badly to his societal and economic "modernization" plans and their effects.
Vision 2030 focuses mainly on economic change, without much planning for political or social change, but with more and more women entering the labor force, some social change will occur. When there is a major movement from the public to the private sector, work behaviors will have to change. Moving away from oil, a rentier commodity that has allowed Saudi Arabia to grow and develop by pumping it out of the ground and selling it, to the complexity of more manufacturing, service, and value-added and more competitive industries and projects could also bring social changes. Many of these changes could be an improvement for some Saudis, but some others may object. Also, many government jobs are far less stressful and demanding than these new and different private sector jobs. An entrepreneurial class would have to be enlarged from what exists now. The pressures of being successful in the private sector could bring significant changes to some Saudi lifestyles.
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 – and when the King was more interested in finding water than oil because there were few uses for oil during those early times. The Saudi Arabia of today is astonishingly different from what it was in 1940, 1950 or even 1990. Saudi Arabia has experienced economic and other changes in its past, but there has been nothing as substantial as what is planned in Vision 2030 in 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, and with Saudi society moving smoothly with these changes, we will all be in trouble.
The real problems with such ambitious and disruptive programs are often found in the details. What Saudi Arabia says it wants today for 2030 may not be what happens by 2030. Expectation management will be vital, most particularly for Saudis under 30, who represent about 60% of the population and a growing labor pool in need of many jobs and a lot of economic hope.