Stratfor looks at the Saudi Princes’ plans for a 21stC Kingdom under their rule

Summary:  Saudi Deputy Crown Prince Mohammed bin Salman gave his first-ever live interview to announce a bold new plan for the Kingdom. Stratfor sketches the details. It’s the standard conservative schtick: “tightening the social contract” (i.e., cutting subsidies to the public), privatizing national assets, and big talk about a glorious future — in which the Saudi Princes will still live like Croesus.

Stratfor

A Vision of Reform in Saudi Arabia

Stratfor, 24 April 2016

Summary

Saudi Arabia has lifted its veil of secrecy ever so slightly. Deputy Crown Prince Mohammed bin Salman gave his first-ever live interview to Saudi-owned Al-Arabiya television on April 25, less than an hour after the Cabinet in Riyadh approved the kingdom’s National Transformation Plan.

The five-year plan, which will kick off officially in the next couple of months, outlines Saudi Arabia’s strategy to expand and develop its economy while de-emphasizing oil revenue. Within the framework of the larger Vision 2030 (text here, other materials), the plan focuses on broadening privatization efforts, lifting power and water subsidies across socio-economic classes, decreasing unemployment, bolstering domestic industrial military production, and spinning off some of Saudi Arabian Oil Co.’s assets into what the kingdom hopes will become the world’s largest sovereign wealth fund.

Analysis

Among the Gulf Cooperation Council (GCC) countries, Saudi Arabia has the longest tradition of setting out ambitious economic goals encapsulated in five-year plans. The kingdom implemented its first five-year development plan in 1970, 11 years before the GCC even formed, and finished its ninth plan in 2014. Nonetheless, compared with its neighbors, Saudi Arabia is a late adopter of grander “vision” plans. Bahrain, the United Arab Emirates and Qatar announced National Vision 2030 plans in 2008, and Kuwait announced its State Vision 2030 in 2010 {Ed. note: it’s State Vision 2035}.

Saudi flag

Whereas previous development plans across the region focused on gross domestic product targets and the spending that would surround them, the longer-term visions chart a flexible course for achieving goals less dependent on specific GDP figures. Since GCC governments need to cultivate more adaptive investment environments and proceed with economic reforms to appeal to increasingly young, educated and interconnected populations, this flexibility is essential.

Putting a Face to Reform

But most of Saudi Arabia’s National Transformation Plan was made public before the April 25 announcement. Consequently, more important than the subject of bin Salman’s interview was its subtext. The latest in a series of prominent and unprecedented interviews that the prince has given recently, bin Salman’s television appearance is significant for the transparency it represents — the type of openness and responsiveness that Saudi youth demand. In this way, the announcement was intended less for international markets than for young Saudis who want a future as prosperous as the one their parents have enjoyed.

During the interview, these young people heard their deputy crown prince assure them that the kingdom is aware of and receptive to their needs. Two days before bin Salman’s appearance, Saudi Arabia’s justice minister gave an interview on Al-Arabiya, further underscoring the move toward transparency that the infamously opaque kingdom has undertaken lately.

So far, restructuring the Saudi Arabian Oil Co., better known as Saudi Aramco, has been a central component of the promised reforms. As much as 5% of Saudi Aramco will be opened to initial public stock offering, most likely next year, and other units may be listed in the future. The rest of Saudi Aramco would be placed under the ownership of the Saudi Public Investment Fund, which the Saudi government hopes to expand to a scale rivaling the Norwegian Oil Fund, with a value of $2 trillion by 2030.

At the same time, bin Salman has promised that Saudi Aramco’s board will run the company and that political intrusion on the company’s decision-making will be limited. On top of this, the company’s financial information will be released. As the economic juggernaut of Saudi Arabia’s oil and natural gas industry, Saudi Aramco provides an important model for reform, indicating that all of Saudi Arabia’s economic actors need greater transparency and that no single economic entity is too close to the House of Saud to avoid it.

Aircraft of Saudi Prince Alwaleed bin Talal
747 aircraft of Saudi Prince Alwaleed bin Talal, the ideal place from which to order cuts of people’s subsidies.

Realizing Reforms

Furthermore, the country’s water and electricity minister was fired during the week of April 18 in response to public outcry over increased tariffs. Since the first subsidy cuts went into effect in December 2015, some Saudis have reported 500% increases in water bills. Dissatisfaction grew until ultimately someone had to take the fall for it. But the minister’s dismissal is only a stopgap solution to the problem of reform. Although the subsidy cuts aim to generate $30 billion per year by 2020, 86% of Saudis reportedly support subsidies, which they have known for most of their lives. Until Riyadh finds the sweet spot between public outcry and utility prices high enough to alleviate the country’s record budget deficit, reform progress will be slow.

As Saudi Arabia heads on its path toward ambitious reforms, the minister’s firing was the first of many challenges that lie ahead. The vision plan does not offer a perfect set of steps to reach the country’s goals or an actionable way forward for financial planners, investment bankers and consultants. Instead, like those in neighboring Gulf states, Saudi Arabia’s vision plan is more about tightening the social contract. It is a promise to the kingdom’s citizens that the House of Saud is working to keep up its end of the bargain even if oil, still the backbone of Saudi Arabia’s economy, is no longer as lucrative as it once was.

Whether young Saudis will continue to put their trust in the House of Saud, and whether the lofty tenets of Vision 2030 will hold in the face of compounding political, social and security pressures, are the looming questions on the kingdom’s horizon.

A Vision of Reform in Saudi Arabia
is republished with permission of Stratfor.

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About Stratfor

Founded in 1996, Stratfor provides strategic analysis and forecasting to individuals and organizations around the world. By placing global events in a geopolitical framework, we help customers anticipate opportunities and better understand international developments. They believe that transformative world events are not random and are, indeed, predictable. See their About Page for more information.

Predicting the end of Saudi Arabia

From John Robb at his website Global Guerrillas…

See some of the many other such articles. Pat Lang (Colonel, Special Forces, retired) at his website Sic Semper Tyrannis: “Will Saudi Arabia survive the Yemen War?“, 11 April 2015.  John Hannah at Foreign Policy:  “It’s Time for the United States to Start Worrying About a Saudi Collapse”, 7 October 2015. Sarah Chayes and Alex de Waal at Defense One: “Start Preparing for the Collapse of the Saudi Kingdom”, 16 February 2016.

 

For More Information

Here’s a powerful article about the Saudi crisis, and their unwise decision to respond based on advice from McKinsey: “Why Saudi Arabia Is Suddenly in Serious Trouble” by Vijay Prashad (Prof of international studies, Trinity College) at AlterNet, 4 May 2016 — “A major report is forcing Saudi Arabia to consider a future without its lifeblood: oil.” Here is the McKinsey report: “Saudi Arabia beyond oil: The investment and productivity transformation“, December 2015 (they’re not always wrong, but that’s the way to bet).

Text of the Saudi Princes’ plan: “Saudi Vision 2030“. Here are supporting materials.

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4 thoughts on “Stratfor looks at the Saudi Princes’ plans for a 21stC Kingdom under their rule

  1. It does not sound like KSA is expecting a similar financial outcome to previous oil wars. Assuming they have not lied about their proven reserves and production capabilities they must be expecting some combination of stiff competition in the oil markets and a softening of global oil demand growth. Or perhaps they have lied and can neither flood the oil market and regain price control nor maintain current production levels and are preparing for decline.

    I can not tell, I fell for the idea of near term peak oil previously and it was a costly foolish error. Will be very interesting to see how this shakes out.

    Like

    1. Roamer,

      (1) “It does not sound like KSA is expecting a similar financial outcome to previous oil wars.”

      I don’t know what you mean by “oil wars”. There has been only one oil price war in the past century, which the Saudi’s won. I expect them to win this one also. See the links in the For More Info section for details.

      (2) “some combination of stiff competition in the oil markets and a softening of global oil demand growth.”

      This is a reaction to the existing “stiff competition”, using their financial reserves and low cost of production to force out the high-cost competitors.

      (3) “and can neither flood the oil market”

      They are already “flooding the oil market”, which has forced prices from $150 to low $40s. Since oil cannot be easily or cheaply stored, the price is VERY sensitive to excess production. Does not take much to crash prices.

      Like

  2. In thinking a bit more it seems that if indeed KSA was short on reserves they would cut now to raise oil prices and maximize worth of their reserves. That they are financially stressed and are not cutting seems to me to support the idea of near to medium term oil glut with big competitors fighting for share of pie.

    Like

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