Towards an oil-free Saudi

 By Criselda Diala-McBride

The world’s largest producer of crude oil is on a mission to wean itself off its most precious export. By 2030, Saudi Arabia hopes to generate 50 percent of its GDP from non-oil revenue sources by empowering small and medium enterprises and exploiting the potential of industries such as mining, manufacturing, petrochemicals, logistics and transportation. However, with only 14 years in which to deliver on the promise, experts question whether the kingdom can truly realize its diversification vision…

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Crude oil has served Saudi Arabia’s economy substantially over the past seven decades, creating a healthy cash cushion that has shielded the country from the blows of recent global financial crises. But this addiction to petrodollars is about to end, according to Deputy Crown Prince Mohammed bin Salman’s statement on the unveiling of Vision 2030.

In a nutshell, the ambitious plan envisages $160 billion of the country’s income to be from non-oil sources by 2020 and $267 billion by 2030. The scheme also includes a projected reduction of unemployment from 11.6 percent to 7 percent. In addition, the kingdom’s most valuable asset, Saudi Aramco, is expected to be partly privatized, following an initial public offering where 5 percent of its shares will be sold. This seismic shift in focus comes as the country’s net foreign reserves have steadily shrunk to reach $572 billion – their lowest level in four years – due to plummeting oil prices.

Governments in oil-exporting nations within the GCC region have always recognized the importance of economic diversification in achieving long-term viability, but with oil at more than $140 per barrel, few saw the urgency to act quickly, according to Raid Madiyeh, senior sales trader, Middle East region, at Saxo Bank. “Now, in the midst of [an oil-price crash], economic reform looks like more than just a smart idea; increasingly, it’s looking like the only way for oil-producers to survive in a new-energy economy,” he said.

SEE MORE: GCC’s honeymoon with oil is over by Criselda Diala-McBride

This is true for Saudi Arabia, which ran a budget deficit of $98 billion in 2015. For 2016, the deficit is expected to reach 13.5 percent of its GDP. The government, he added, has already cut hiring and trimmed spending to cope with the downturn in oil prices. In September, further cost-saving measures were introduced, including cancelling bonuses for public sector employees and slashing ministers’ wages by 20 percent, which was unheard of in the kingdom.

While Vision 2030 is a permanent plan to end the country’s dependence on oil, Madiyeh said it appears to be a race against time. “This is a very constricted time frame and tough challenges will be expected ahead. We are talking about less than four years to transform a current economy generating about 90 percent of its revenue from oil,” he commented. “Economists have been arguing for years that oil revenues – rather than offering a strong foundation for a viable economy – actually create long-term systemic problems that can stifle practical growth, feed nepotism, patronage and corruption, and transform governments into rentier states disassociated from the needs of the people.”

Philip Rice, energy and utilities expert, MENA at PA Consulting Group, agrees that Vision 2030 is an “immensely ambitious” plan, but is necessary if Saudi wants to continue to prosper and maintain stability. “The plan places 346 targets on ministries and government agencies with the aim of [having] half of Saudis employed [in the private sector] by 2020,” he said. “The demand for new and improved services across areas including healthcare, education and transportation exists; in fact, major upgrade and investment programs have been underway for the past five years. What is changing is the intensity of the reform program and the pressure that this will place on both funding and human capacity.”

Rice sees benefits to this “managed revolution” because he believes incremental changes will not work, since they could be negotiated away or meet resistance from incumbent administrators and hardline religious influences in the kingdom.

The transformation of a new Saudi

“On face value, the viability of the plan is questionable. With less than four years until 2020, it may simply not be feasible to put the financing arrangements in place and set up the initiatives to deliver against all of the targets,” he added. “But that is not to say that the plan cannot achieve major reforms.The percentage of Saudis in tertiary education has climbed over the past few years and the number of female students in university is now higher than that of males. This is the workforce of the future.”

The Vision 2030 policy also puts a significant emphasis on renewable energy, with an initial goal of generating 9.5 gigawatts of power primarily from solar and wind sources, making Saudi Arabia a sizable market for the global renewable energy industry, and perhaps the largest in the Middle East and North Africa (MENA) region by annual new installations, according to Dr. Moritz Borgmann, partner at Apricum.

“The target appears ambitious at first sight for a country that has a meager 25 megawatts of renewable-energy generation capacity (mostly solar photovoltaic) installed as per the end of 2015,” Borgmann wrote. “[But] with its abundant solar resource and regions with high wind speeds, Saudi Arabia should, in principle, have no difficulty reaching and exceeding its target, if the political will exists and a renewable-energy program is rigorously executed.”

As the country undergoes this economic metamorphosis, analysts believe that oil will not entirely take a backseat. The black gold will continue to play an important role in financing the transformation of a new Saudi.

SEE MORE: The age of diversity by Benjamin Plackett

about the author
Criselda Diala-McBride
Dubai-based journalist with 20 years of experience writing and editing finance, aviation, tourism, retail, technology, property and oil and gas articles for a range of print and online publications.