Saudi Prince’s reform will be tested by economic pain

More than a year after the kingdom’s dominant leader, Crown Prince Mohammed bin Salman, unveiled a blueprint for the post-oil era, the drop in crude prices is making economists more skeptical about whether some of the plan’s medium-term targets can be met. The reason: lower oil revenue deprives the government of money needed to balance its books by 2020 while trying to stimulate growth to ease the transition’s burden on the population.

Deeper economic pain will test the authorities’ resolve to pursue tough reform measures as they seek to go against the run of history, which suggests that successful diversification efforts depended largely on policies put in place before a price shock.

The non-oil activity remains “too weak to offset” the expected overall contraction, said Mohamed Abu Basha, Cairo-based economist at EFG-Hermes, an investment bank. Just as oil discoveries transformed Saudi Arabia — dotting the Arabian desert with major cities and bolstering the kingdom’s political influence — so do low prices offer an opportunity to reshape the economy, Prince Mohammed says. In the past two years, authorities cut spending, curtailed costly energy subsidies and announced plans to sell government stakes in multiple companies, including oil giant Saudi Aramco. But, will this be enough to sustain the kingdom in the tumultous times ahead?

Source credit: Bloomberg
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