The time has come for Saudi Arabia to truly “unbox” from oil
Saudi Arabia, a monarchical autocracy, possesses 18 percent of the world’s petroleum reserves. The oil and gas sector accounts for 50 percent of its GDP and 85 percent of its export earnings, and the kingdom enjoys one of the highest concentrations of uber-rich households in the world. The House of Saud (royal family) has an estimated 15,000 members, and former king Alwaleed Bin Talal Alsaud was recently named the world’s richest royal, with an estimated net worth of about $21 billion.
With the fall in global oil prices, which swung between $27 and $42 per barrel in the first quarter of 2016, Saudi Arabia, whose non-oil revenue currently stands at 6 percent, has been forced to look at ways to try to diversify its economy. Having resisted doing so for years while the rest of the region, namely the UAE, has made it a priority, Saudi Arabia has now, for the first time, announced steps towards promoting diversification across the kingdom.
The National Transformation Plan, which aims to more than triple Saudi Arabia’s non-oil revenue (to $141.33 billion) by 2020, roll back the role of the state, and focus on industry growth and the creation of 450,000 private sector jobs by 2020, is a major step towards encouraging a productivity-led economic transformation. However, with two-thirds of Saudis still employed by the state and public sector wages accounting for 45 percent of public spending, these are ambitious targets. Enlarging the private sector has never traditionally been a priority for the government, so it will be interesting to see if these targets are met.
The government has already announced specific plans to try to show that it is serious about diversification. This includes floating a stake of up to 5 percent in state oil firm Saudi Aramco, which could generate at least $1 billion to develop industries across the kingdom, and the possible sale of $15 billion of bonds this year in what would be the kingdom’s first foray into international capital markets. Saudi Arabia’s recent $3.5 billion investment in Uber is also an example of a step taken to aid sectors that can help diversification; to broaden transportation options, encourage entrepreneurship and possibly bring more women into the workforce.
Earlier this year, in a move to shake up Saudi Arabia’s archaic image and promote young, dynamic leadership, the king announced the appointment of one of his youngest sons, Mohammed bin Salman as deputy crown prince, with a responsibility for spearheading the reforms and overseeing the kingdom’s economy and defense strategy. At only 30 years old, he is the youngest royal to have been given this position of power for over 50 years, and is described as a risk taker whose energy and activism possibly make him the best placed royal to drive these reforms.
While Saudi Arabia’s bold diversification plans are gaining international attention, it should look to countries in the Middle East that have successfully diversified away from oil, such as the UAE, as guiding examples. In the 1970s, oil accounted for more than 90 percent of the UAE’s GDP and today it accounts for less than a third. This is thanks to the country’s world-class infrastructure and transportation, investor and business-friendly legislation, safety and economic stability. Moving away from oil and gas has been part of the UAE’s strategy and vision for nearly 20 years, and Dubai alone now attracts over 13 million tourists per year. Dubai’s international airport was named the world’s busiest airport in 2015, welcoming over 70 million passengers, and its financial district is home to over 1,200 companies. Industry giants such as Google and Microsoft all have their regional headquarters in Dubai, and the Emirate was named the world’s 16th most innovative city earlier this year, which is a significant achievement and reflection of its diversification efforts, given the city ranks above Milan, Madrid, Shanghai and Beijing.
Global companies now view the UAE as a great place to do business and a gateway to global trade, however this has taken decades to achieve and diversification did not happen overnight. Saudi Arabia’s plans are ambitious; Prince Salman recently announced that “by 2020 we will be able to live without oil,” and have been received with mixed reactions by the global media. While measures to promote diversification can no longer be avoided, it is still unclear whether the kingdom’s powerful and ultra-conservative religious establishment will be happy with a more Western-style economic model.
All eyes are now on how these ambitious plans will unfold, and whether one of the world’s most traditional, oil-dependent nations will start to move towards becoming a truly diversified economy. History suggests that it is best to take reform announcements in Saudi Arabia with a pinch of salt, yet the government is already undertaking measures to show they are serious about a pivot from oil. To avoid being seen as a talking-shop, key milestones, achievements, partnerships and so on should be regularly communicated across various media and international audiences, to show that Saudi Arabia is championing entrepreneurship, business and industry growth, and to restore confidence among various business and investor audiences.
Prince Salman was recently in the US to pitch the reinvention of Saudi Arabia’s economy to the likes of Barack Obama and Ban Ki-Moon. This is either part of a wider image-building campaign, or a real attempt at promoting diversification. Either way, it will be interesting to see how the discussions unfold…