Prince Mohammed bin Salman's TV interview to launch Saudi Arabia's Vision 2030 was an unprecedented event, where headline writers rushed to describe the details as a transformational plan to wean the country off oil.
Most remarkable of the things said in that interview on April 25 was the deputy crown prince’s promise to end oil dependence by 2020 – in four short years.
How would this be achieved? Well, about US$100 billion of new taxes will be introduced by then, austerity would be into its fourth year, while Saudi Aramco’s transfer to the Public Investment Fund (PIF) would “make investments the source of Saudi government revenue, not oil”.
It is plausible that the Saudi Arabian budget could balance by 2020. It will run a fiscal deficit of 13 per cent this year, down from a deficit of 15 per cent last year. This will obviously depend on oil markets and assumes that the country has solved its recurring problem of ministerial indiscipline – in which individual government departments reliably overshoot their spending targets.
But Saudi Arabia is as dependent on oil as it is possible to be. Its efforts at diversification have led it to develop a minerals extraction industry and a petrochemicals industry. But these are procyclical areas to invest in – when oil prices suffer, so, too, do demand for minerals and revenues from petchems. Oil still accounts for 80 per cent of exports and 80 per cent of government revenues, the IMF says. Corporate profits remain dependent on government spending.
The best time to diversify was in the past. Saudi Arabia enjoyed an era of budget surpluses between 2003 and 2013, during which time the oil price steadily increased, swelling state assets and allowing the state to spend more on its citizens. The public sector grew rapidly – oil wealth was spent on salaries, not diversification. Had it spent more wisely during the boom, it would have been better prepared for the bust.
This brings us back to the PIF, which is the main idea behind Vision 2030s efforts at diversifying. If 95 per cent of Saudi Aramco is transferred to the PIF, then the PIF will be the largest sovereign wealth fund in the Gulf, the reasoning goes. Sovereign wealth funds have played a key role in shoring up Gulf states during periods of low oil prices before – Adia, for example, allows the UAE to exert economic and political influence abroad, while helping to ensure the country has a very favourable asset position for the foreseeable future.
But the PIF would not be a real sovereign wealth fund. It would be a government holding company. Under the deputy crown prince’s plan, Aramco would be transferred from one part of the government to another. If the PIF wanted capital with which to do the things a normal sovereign wealth fund does – defend the value of its assets over time or invest in local economic development – it would have to sell more of Aramco to do it, which is unlikely, or take out debt on the back of its Aramco holdings, which is indistinguishable in result from the Saudi government funding development through issuing bonds.
Crucially, this does not involve either the Saudi government or the PIF spending more money to develop new, non-oil-dependent industries in the real economy, in sectors where being capital-rich can provide a source of comparative advantage. The only thing said about the real economy was that Saudi Arabia would aim to develop a local arms industry – something that will take decades, and will require the government to continue paying for Western arms in exchange for expertise and skills. The other alternative is for Saudi Arabia to open up its economy to international flows of trade, people and capital, as Dubai has done.
The political situation in Saudi Arabia is hard to gauge. Prince Mohammed clearly wants to do things differently compared to his predecessors, and it may well be that the ideas in the Vision 2030 plan are just the first steps of a broader reform effort.
Either way, Saudi Arabia will still be dependent on oil in 2020.
Adam Bouyamourn covers the economics beat for The National.
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