As visions go, transforming leading GCC economies such as Saudi Arabia's is exciting. Transformation promises more diversification and security. Instead of having all the eggs in the fossil fuel basket, different sectors of the economy are set for development.
This frees GCC countries from excessive risks linked to a monolithic economy. The last two-and-a-half years have shown what happens when crude oil prices crumble. The foundations of oil-producing countries have been shaken to the core. All the financial and economic pain is sending a signal. It appears to be a foregone conclusion that diversification is urgent.
So much for the necessity for economic modernisation. But the devil is in the details, as the saying goes. The recent slowdown of the transformation process sent a warning message to investors. Still, the reaction has been relatively mild, possibly due to the stabilisation of the oil price. The markets may not be alarmed, but economic risk-reward scenarios are back under the microscope. GCC countries would struggle if they took another hit like the last two-and-a-half years of low oil prices.
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Right now, investors are focusing on the key issue of privatisation and the Saudi state's fossil fuel companies, such as Aramco, in particular. Even partial privatisation would spread the risk and reduce the burden on the state structure. Repaying bonds would, in theory, be easier with more investment from private sources, reduce the risk of default and give monetary policy makers more leverage.
Sovereign debt is always a vulnerable spot during economic downturns. In this context, privatisation is seen as a plus. So, it's positive that the programme is still on track, but negative that it's being pared back. Investor uncertainty always accompanies a switch and change in fiscal policies. Meaning that if expectations are disappointed any further, there could be a stronger reaction from the bond markets.
Other risks include longer-term inefficiencies and reliance on a single mainstay of the economy - oil. It can't be denied that the prolonged period of weaker oil prices undermined the commodity's value. US Shale production powered up, meaning that world supplies are plentiful and that it's a buyer's market. In this case, the buyer is a bear, growling at price rises and refusing to take the bait. When the salmon are plentiful, all the bear has to do is sit on the river's edge and put out a claw to catch its quarry. What if the catch is not big enough? Then the fish can go back in the water as there's another one right next to it.
Profit-taking is prevalent in the oil markets at the moment, and even when the price skips up, a drop back down is par for the course. In other words, there is a risk to competitiveness given Shale's resurgence, in spite of the hurricane damage setbacks.
It's not all about risks; there are rewards to a slower economic transformation. No matter how needed, change is difficult, so managing the adjustments and making them palatable is important. Less radical changes could be more lasting at the end of the day. A more measured approach would also give investors, and the state, time to evaluate the results. Instead of being a knee-jerk reaction to lower oil prices, the transformation would be more controlled.
All told, the plans to slow down transformation have been well tolerated by investors, but that’s not to say that further delays would be wise. Economic performance is the main supporter of sovereign debt repayments, and investors prefer their expectations to be fulfilled. Staying consistent to the development plan is key going forward.
Hussein Sayed is the chief market strategist at FXTM
