Why Saudi Arabia Can’t Change Too Quickly

Saudi Arabia, Al Ula, the oasis from the top of the cliff
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Crown Prince Mohammed bin Salman hasn’t wasted any time implementing his vision for Saudi Arabia’s future. Since leapfrogging other senior royals on the line of succession to the throne, the prince has granted women the right to drive and curbed the power of the religious police. Music plays in restaurants, and many women are swapping their black abayas for colorful ones, sharp contrasts in a country that’s been guided by an austere brand of Islam for decades.

The prince’s proposals for the economy are even more ambitious and are detailed in a plan called Vision 2030. The blueprint aims to reduce the country’s overwhelming dependence on oil revenue by promoting the development of new industries such as tourism and entertainment. To fund that effort, he wants to sell shares in the state-owned giant Saudi Arabian Oil Co. as well as privatize state assets, including flour mills, soccer clubs, and the stock exchange. Proceeds from the sales would be channeled into what would be the world’s largest sovereign wealth fund. The plan also calls for austerity measures to wipe out a budget deficit that by last year had ballooned to more than 15 percent of gross domestic product because of the drop in the price of crude oil.

But the 32-year-old prince, who’s known casually as MbS, has to be careful: If he moves too quickly, he could stir up dangerous opposition to his project from Saudis sympathetic to militant Islamic groups and a royal family that fears his policies will lead to their marginalization. He’ll have to balance his impatient demands for change with the population’s willingness to adapt. It’s also unclear if the private sector has the ability to become the engine of economic growth after decades of government largesse. “This is a huge challenge for the country, and it has great implications for the world,” Lloyd Blankfein, chief executive officer of Goldman Sachs Group Inc., said at the Bloomberg Global Business Forum in New York in September. While there should be urgency, there’s also a case for caution so the change needed for “stability in the long run doesn’t produce instability in the short run,” he said.

Already, there are signs that MbS may be moving too fast. “The people reject women driving” was the top-trending Arabic hashtag on Twitter after the government announced on Sept. 26 that women will have the right to drive. A rare attack on Oct. 7 on a palace in Jeddah used by the royal family killed two security personnel and injured three others, suggesting the ruling Al Saud family is once again the target of militant groups such as Islamic State or al-Qaeda.

To preempt a backlash against its policies, the government launched the most severe crackdown on dissent in years, detaining prominent clerics and activists. “The regime has made enough opposition-quashing moves for it to be confident—more so than it might have been earlier—that it can make this sort of controversial policy change stick,” says Paul Pillar, a professor at Georgetown University in Washington and a former CIA officer, referring to the decision to allow women to drive.

Cutbacks in government spending have reverberated through the economy. Companies that supply medical devices have seen sales plunge as health-care purchasing was curtailed. Petrochemical companies are having to pay higher prices for feedstock, because state subsidies have been reduced. Construction, with its reliance on government contracts, has been particularly hard hit. Official data show growth in non-oil GDP came in below 1 percent in each of the first two quarters of 2017, down from a peak of almost 10 percent when oil was above $100 a barrel.

Efforts to impose austerity on the massive civil-sector workforce have faltered. After widespread grumbling, the government reinstated allowances and bonuses to state employees, who make up one-third of the population.

Ali Alireza, managing director of Haji Husein Alireza & Co., a Saudi company that sells everything from dump trucks to Aston Martins, agrees the economy needs to change but worries that it’s too much, too soon. “The time frame in which these things are going to be addressed, this is the problem,” he says.

It’s not only local businesses that are sounding the alarm. The International Monetary Fund has warnedSaudi policymakers that the rush to reform could cripple the economy. While in Washington for the fund’s annual meeting in October, Saudi Finance Minister Mohammed al-Jadaan told reporters that the government has some breathing room because it’s on track to reduce the budget deficit to below 10 percent of GDP this year. Authorities don’t see the need “to go from 10 percent to zero in two years,” he said.

The government’s commitment to overhauling the economy could weaken in 2018 if prices for Saudi crude exports head higher. When countries “kick-start reform programs when oil prices are low, sometimes the enthusiasm wanes when commodity prices move higher,” James McCormack, global head of sovereign ratings at Fitch Ratings Ltd., said at an event in Riyadh in October. A delay in selling a stake in Aramco or a disastrous turn in the war in Yemen, where Saudi-backed forces have been unable to corral Shiite rebels after more than two years of fighting, could also damage the prince’s reputation, hampering his ability to press ahead with changes.

Alternately, the prince would see his hand strengthened if his father, King Salman, were to abdicate the throne. This would allow MbS to personally steer the economy’s transition, while quashing dissent from other powerful royal family members, Eurasia Group Ltd. said in a report in September.

Either way, it’s clear the future of Vision 2030 hangs on one man. At the end of the day, Prince Mohammed understands that the reforms aren’t “something he can pass on to somebody else,” says Emily Hawthorne, Middle East and North Africa analyst at Texas-based advisory firm Stratfor Enterprises LLC. Economic change “is his problem.”

Source – Forbes

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