Saudi leadership shift bolsters economic reforms

Mohammed bin Salman, the architect of Vision 2030, has become crown prince.

The elevation of Mohammed bin Salman to crown prince of Saudi Arabia will strengthen his hand in implementing the economic overhaul he had initiated as deputy crown prince, a move that was widely expected in the world’s biggest oil exporter, economists said.

The 31-year-old son of King Salman is expected to forge ahead with Vision 2030, a plan aimed at weaning the kingdom off oil, its biggest source of income.

MBS, as he is commonly known, is in charge of the oil, defence and economic portfolios in the kingdom. As the architect of the 2030 vision and the 2020 National Transformation Programme (NTP) revealed last year, he has initiated radical actions such as the planned initial public offering of state-run energy firm Saudi Aramco and the curtailing of subsidies on energy, gas, electricity and water.

“The shift in royal succession announced this morning should help underpin the durability and credibility of the economic reform process in Saudi Arabia,” said Tom Rogers, associate director at Oxford Economics. “Market reaction was positive, underlining local confidence in the move.”

Saudi stocks surged 5.5 per cent, buoyed by the succession news, the reinstatement of benefits for state employees and inclusion of Saudi Arabia on the watchlist of Index compiler MSCI for a potential upgrade to emerging market status.

“We do not expect an economic impact in the short term as this move was largely anticipated, albeit timing was more difficult to predict,” said Dima Jardaneh, head of Mena economic research at Standard Chartered Bank. “Prince Mohammed bin Salman was already behind the recent economic policies adopted in Saudi Arabia and these are likely to be maintained in his new role.”

Vision 2030’s ambitious targets include selling up to 5 per cent of Saudi Aramco, and creating a sovereign wealth fund with 7 trillion Saudi riyals (Dh6.86tn) worth of assets.

But economists said resistance to unpopular reforms may stymie the efforts of the new crown prince.

“Vision 2030 still faces a number of significant hurdles,” said Jason Tuvey, a regional analyst at Capital Economics. “In particular, MBS is likely to struggle to break through vested interests within the royal family, the business elite, the civil service and the religious establishment.”

Some of the reforms may be hard to implement, economists said. One of the key planks of Vision 2030 is increasing the private sector’s contribution from 40 per cent of GDP in 2016 to 65 per cent of GDP. The NTP envisages lowering the public wage bill from 45 per cent of the budget in 2016 to 40 per cent by 2020.

“The challenges facing the economy remain just as great as yesterday, with several areas of economic policy requiring important changes to spur private sector job creation,” said Mr Rogers. “Improving the competitiveness of the large number of young Saudis entering the workforce each year is key.”

Saudi Arabia is also grappling with low economic growth spurred by an oil price slump that started in mid-2014, despite the Opec member’s leadership in crafting a global oil output cut deal with a Russia-led group of countries to prop up prices this year.

Such a state has taken a toll on its economic growth, which is forecast at just 0.4 per cent this year, according to the IMF. The fund in April lowered its forecast for growth next year to 1.3 per cent from a projection of 2.3 per cent it made in January.

“In the short term, growth prospects will remain hampered by cuts in oil production and weak consumption both in the public and private sectors,” said Ms Jardaneh.

Standard Chartered is forecasting a 0.5 per cent contraction in Saudi Arabia, with the kingdom expanding 2.4 per cent next year.

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