Continuity remains key to Saudi Arabia economy after death of King Abdullah
Change comes slowly in Saudi Arabia and when history reflects on King Abdullah bin Abdulaziz Al Saud it will probably be with that caveat in mind.
Much was made of King Abdullah’s role as a cautious reformer following the 90-year-old’s death on Friday and despite Saudi Arabia’s opacity and conservatism, the country the late king formally inherited in 2005 is undeniably a different one today.
King Abdullah had ruled Saudi Arabia in all but name for a decade before he became king, after his brother King Fahd had a severe stroke in 1995. He took on a country that was oil rich but otherwise largely undeveloped, mostly closed to foreign investment and with a dire need for housing, education and jobs for its 18 million residents.
And while significant challenges in all those areas remained on his death, a five fold increase in GDP has seen a spike in government spending and the building blocks put in place to address unemployment and a lack of affordable homes.
King Salman inherits a far better Saudi Arabia than King Fahd left for his brother.
“[King Abdullah] has left a mixed legacy really; of reform but also cautious tiptoeing forward. But I think that is the way in Saudi. You can’t be a renegade. You can’t just move into the future and expect everybody to come with you,” says Michael Stephens, the deputy director at Rusi in London, a British defence and security think tank.
Imad Ghandour, the managing director at the private equity firm CedarBridge Partners — which has offices in the UAE, Saudi Arabia and Egypt — goes further: “Abdullah was a visionary,” he says.
But that visionary leaves a Saudi Arabia facing challenges. Oil prices have dropped 50 per cent since June last year to just under US$50 per barrel, hitting Saudi Arabia — which derives 85 per cent of its income from oil — hard. Government spending will be maintained at a level similar to 2011, when the oil price was about $110 per barrel, raising fears of a large deficit this year.
Saudi Arabia had refused to cut production to shore up prices under King Abdullah, and King Salman suggested on Friday he would continue this policy. He also said he intended to keep the current oil minister, Ali Al Naimi, in his position, suggesting Saudi policy towards the oil price crash will remain.
Saudi Arabia possesses one fifth — or about 16 per cent — of the world’s oil reserves and as a result has wielded enormous power over Opec. While in the 1970s this power had been used politically — such as during the 1973 oil embargo — King Abdullah was reluctant to do so.
Indeed, when Venezuela’s Hugo Chavez urged Opec to use its domination of world oil prices to act as a “political agent” while at a summit in Riyadh, King Abdullah refused. “Oil is an energy for building and prosperity, it shouldn’t become a means of conflict,” he said.
“Under King Abdullah’s reign, Saudi Arabia certainly approached the oil market in a more business-minded manner rather than use oil as a political weapon to try to get its way, as it did in the 1970s for example,” says Jason Tuvey, Middle East economist at Capital Economics in London.
King Abdullah also realised early on the importance of securing business in Asia, encouraging links with China that will undoubtedly survive him. By 2009, around two-thirds of Saudi Arabia’s oil exports were sold to the Far East, according to the IMF, and China and Korean firms were heavily involved in oil and gas and infrastructure projects in Saudi Arabia.
The recent crash in the oil markets has demonstrated more than ever the need for Saudi Arabia to move away from reliance on oil if it is to secure its long-term future. Indeed, 2014 was a difficult year for the Saudis: in the first half of the year growth was recorded at 5 per cent, but the third quarter saw 2.4 per cent and the fourth just 2 per cent, according to data released by Capital Economics last week, demonstrating just how reliant the economy is on oil.
The price is having an affect on all other areas of the country’s economy: the trade, hotels and restaurants sector, for example, grew 3.7 per cent year on year in 2014 compared with 8 per cent in the previous year, and manufacturing was also hit. “All in all, this suggests that the fall in oil prices has hit the non-oil economy but, for now at least, the fallout hasn’t been too large,” says Mr Tuvey.
But while King Abdullah was often outspoken about the need to diversify the kingdom’s economy, he had limited success in putting these words into action.
While limited steps were made to open the country’s stock exchange, the Tadawul, to foreign investment, giving access to billions of dollars of international capital to Saudi Arabian firms, the government always shied away from throwing open the doors.
And while major infrastructure and building projects touted for international contractors, archaic labour laws and stifling bureaucracy kept all but the biggest firms away.
These included a widespread “Saudisation” drive that required firms to hire locals rather than expatriates and penalised those that did not. Meanwhile visa restrictions for foreign businessmen — let alone women — remained severe and the process for licensing foreign companies was selective, unpredictable and unclear. All this, said one contractor who developed huge projects in Riyadh in the early 2000s, was keeping foreign investment away at a time when Saudi needed it most.
“New laws around nationalisation meant foreign companies needed to hire more locals, which discouraged foreign companies. I heard [many people] saying they would rather work in the UAE, Oman, Bahrain and Kuwait than work in KSA,” says the contractor, who declined to be named.
This mismatch between intentions and action was to be seen in other areas, too. When the Arab Spring highlighted the very real need for low and middle-income housing in Saudi Arabia, King Abdullah announced that the Saudi government would spend 250 billion riyals (Dh246.09bn) to provide it. Then in 2012, Saudi passed a mortgage law, laying the foundations for young Saudis to get on the property ladder.
The hope was that the availability of credit would encourage developers to target low and middle-income Saudis, rather than building almost exclusively in the luxury sector — but such optimism was sadly unfounded.
Three years on there has been little movement in the low to middle-income sector and the property market continues to be dominated by high-end luxury developments only a fraction of Saudi Arabia’s 28 million people could ever hope to afford. Meanwhile, only a handful of buyers are able to get mortgage finance, despite the passing of the law in Saudi Arabia’s Shura Council.
In terms of what lies ahead, King Salman is undoubtedly faced with significant challenges, at 79 not least his own advanced years. For the most part, King Abdullah’s plans were left half finished and it will be up to King Salman to see them through — be they multibillion-dollar construction projects or the long-awaited opening of the Saudi Tadawul. He will also be trying to do so at a time when Saudi oil is worth a fraction of what it was when King Abdullah proposed his reforms.
But perhaps the greatest challenge will be safeguarding the future of a growing population, one that almost doubled during King Abdullah’s reign and will continue to swell. Whether he secured it or not, the late king saw that Saudi Arabia’s future was better engagement with the world and moving away from a dependence on oil.
One of King Abdullah’s lasting achievements was joining the World Trade Organisation in 2005, integrating his country into the global economy.
He opened the country up for foreign direct investment and committed huge sums of the country’s oil wealth on infrastructure and mega-projects such as the $86bn King Abdullah Economic City, announced in 2005.
The reforms reflected King Abdullah’s recognition of the need to diversify the country’s economy ahead of the inevitable day the oil money runs out. It will be up to his heir to conquer the mountain he had only begun to climb.
“Saudi Arabia under a new monarch will be defined by continuity in its policies on the economic reform front. The country has no choice but to modernise and reform its sources of revenue,” says John Sfakianakis, the Middle East director of Ashmore Group. “Slowing down is not an option.”
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Published: January 25, 2015 04:00 AM