The reform blueprint is inspired by a McKinsey study – Beyond Oil – that laid out how the country can double GDP over the next fifteen years and reinvent itself with a $4 trillion of investment across eight industries, from electrical manufacturing, to cars, healthcare, metals, steel , aluminium smelting, solar power, and most surprisingly tourism. McKinsey warned that half-hearted reform risks disaster, and bankruptcy.
There is some logic to the Vision2030 plan given Saudi Arabia’s access to cheap energy. Delivery is another matter. “We have seen these sorts of transition plans before and they never come to much,” said Patrick Dennis from Oxford Economics.
“I don’t think they can pull this off. The riyal peg is grossly overvalued and that makes it even harder. We think market pressures will become overwhelming if there is little evidence of real reform by 2018.”
Under the plan, Riyadh will sell up to 5pc of the state oil giant Aramco to global investors, and convert the secretive behemoth into a modern company with transparent accounts.
He valued the group at $2 trillion but this figure is plucked out of thin air. Investment funds have demanded a steep discount before buying into partial privatisations of this sort in Russia and other petro-states with a weak rule-of-law, fearing that they may be held hostage to politics.
The aim is to transfer the proceeds into the country’s sovereign wealth fund, using the money to diversify into global investments. These will generate a non-energy income in the future along the lines of the Norwegian petroleum fund.
It is unclear how this Saudi fund can plausibly reach $3 trillion unless oil rises back above $100 a barrel, and stays there for a long time. The country is currently depleting its foreign exchange reserves by $10bn a month to cover a budget deficit still near 15pc of GDP, drawing down its overseas wealth to fund its military build-up, a war in Yemen and life-support for Egypt, as well as paying state salaries.
The Saudis may have left it too late to break oil dependency in time, especially as renewable energy reaches parity and the COP21 climate accords signal a move to worldwide carbon pricing. India is already examining plans to switch its entire transport system to electric power.
Here is a PDF of AE-P's column.
I hope Prince Mohammad bin Salman succeeds, as that would be best for a degree of stability in the Middle East. However, I agree with all the reservations in this article above and also others which I have published. Nevertheless, at least the Prince has ambition, energy and a plan for dragging his country into the 21st century. Good luck to him.Back to top