Saudi Arabia Chases a Mirage

by robert looney

bob looney teaches economics at the Naval Postgraduate School in California.

Published December 17, 2020


Does Saudi Arabia have the will and the way to join the league of stable, high-income economies? Is the Brooklyn Bridge for sale?

The cratering of oil markets, along with the dislocation of global trade and investment in the wake of Covid-19, has delivered a sobering reality check to Saudi Arabia’s uber-ambitious Vision 2030 development program. Introduced in 2016 by the country’s de facto leader, Prince Mohammed bin Salman (who has become known as “MBS”), Vision 2030 is a $4 trillion gamble that Saudi Arabia can quickly buy its way onto an irreversible private-sector-led path of growth independent of oil — an economic makeover that provides high-paying jobs for a rapidly expanding (and inadequately trained and motivated) labor force. Now it appears headed for the fate of unrealistic makeovers before it. 

Déjà Vu All Over Again?

Vision 2030 is a top-down program that relies on massive investment, privatization of state-owned enterprises, and sweeping reforms to improve the business environment and make capital markets more efficient. The policymaking process is dominated by a few senior technocrats and numerous foreign consultants. The private sector, which is supposed to foot part of the bill in addition to doing the heavy lifting, has not been involved in the coordination of economic policy in any institutionalized way.

Such niggling considerations aside, the main concern when the plan was first announced was that higher oil prices would induce complacency, delay reforms and slow Vision 2030’s implementation. Now, with oil prices in the basement and untapped opportunities for fracking outside the Mideast likely to keep them depressed indefinitely, the shortage of funds is making it increasingly unlikely that the country will be able to afford the plan’s massive public and private sector price tag. Add to that push-back from local groups displaced by proposed projects or offended by the swiftly changing cultural values that the plan promotes, and it’s obvious that Vision 2030 faces some serious obstacles.

Following the oil-price drops and the pandemic’s onset, Saudi GDP contracted by 7 percent on a year-over-year basis in the second quarter of 2020. The economic downturn has caused a 10 percent output decline in the non-oil private sector (mostly services), which, in turn, has contributed to record unemployment among Saudi nationals. And while GDP has recovered modestly in the interim, there’s no true rebound in sight.

Chickens Coming Home to Roost

The government projects a fiscal deficit of 5 percent of GDP in 2021, down from the 12 percent forecast for 2020. This deficit incorporates a significant 7.5 percent government spending cut, with additional cuts planned in upcoming years to contain the public debt, which has risen above 30 percent of GDP.

Lower public investment expenditures have not been offset by foreign direct investment, which is crucial to the development of Vision 2030’s nascent high-tech industries, as well as the urban megaprojects scattered throughout the plan. Foreign investors have shied away after a series of disastrous miscalculations by MBS, including the forced confinement and extortion of wealthy Saudis on questionable charges of corruption, the blood-soaked intervention in Yemen’s civil war, the impulsive boycott of Qatar, and, of course, the grisly murder of journalist Jamal Khashoggi. Net outflows of foreign direct investment from 2016 through 2019 offer a grim measure of the damage done to Saudi Arabia’s reputation. And the situation will likely get worse once MBS’s best buddy, President Trump, is replaced by Joe Biden, who has “branded MBS a ‘pariah.’”

Investor doubts about MBS’s judgment almost certainly affected the tepid response to the ginormous initial public offering of stock in Saudi Arabia’s national oil company, which MBS hoped would help make up part of the government’s revenue shortfall. The IPO raised a disappointing $29.4 billion, implying a $1.7 trillion market valuation of the whole company — a figure well short of the $2 trillion expected. Even worse than the shortfall, Aramco had to guarantee shareholders at least $75 billion in annual profits from 2020 to 2024 to get local investors to buy in. Aramco’s third quarter 2020 dividend already exceeded the company’s cash flow, raising the issue of sustainability. If oil prices remain low, the government could suffer a steep decline in revenue just as Vision 2030 projects are scheduled to ramp up.

Given the growing investment shortfall and planning miscalculations that plague Vision 2030, there is little chance it will succeed in significantly boosting Saudi Arabia’s private sector growth, much less create anywhere near enough jobs to support the still rapidly growing Saudi population over the coming decade.

To make up for decreasing oil revenues, the government introduced a 5 percent value-added tax in 2018. In July 2020, after cuts in consumer spending from Covid-19 lockdown measures dramatically reduced VAT revenues, the government announced that it was raising the VAT to 15 percent. At the same time, it suspended a 2018 cost-of-living allowance that had compensated an estimated 3.7 million lower-income Saudi households for the effects of the VAT and cuts to energy subsidies.

These fiscal changes spotlight the fragility of the implicit Saudi social contract, whereby an autocratic oil-rich government dispenses jobs, benefits and subsidies, and refrains from taxing personal incomes, in exchange for its citizens’ loyalty. Increases in taxes and the price of services not only break this contract but, by reducing domestic demand and the incentives for new firm creation and expansion, undermine Vision 2030’s goal of expanding the private sector.

To offset these setbacks and gain popular support for Vision 2030, MBS introduced social reforms, such as widening entertainment options (movie theaters!) and allowing women to drive. While these changes resonate with the Kingdom’s youthful population, his move away from the ruling family’s traditional conservative base of support carries high risks.

Vision 2030’s projects themselves are alienating large segments of the population. Take, for example, MBS’s ambitious plan to create NEOM, a 10,000-square-mile “smart city” and tourist destination in the remote Red Sea coastal region on the Egyptian and Jordanian borders. From the time it was announced in 2018, with headlines that promised holographic teachers and flying taxis, the project was met with skepticism. And skepticism turned to outrage when, in April 2018, state security forces in Tabuk province killed Abdul Rahim al-Huwaiti, a tribal villager who had posted a Twitter video the previous day accusing the government of being a “terrorist organization” for forcing him to accept compensation in exchange for his home in order to free up the land for NEOM.

Deeper, more fundamental doubts about the viability of NEOM stem from the failure of a similarly ambitious 2005 program to build a string of six “economic cities.” King Abdullah Economic City (KAEC), the only one to survive the planning stage, not only is losing the battle to woo foreign investment but also has attracted only 7,000 inhabitants to date — a far cry from the government’s goal of 2 million by 2035.

Hard Numbers

Given the growing investment shortfall and planning miscalculations that plague Vision 2030, there is little chance it will succeed in significantly boosting Saudi Arabia’s private sector growth, much less create anywhere near enough jobs to support the still rapidly growing Saudi population over the coming decade. At present, the private sector employs only around 30 percent of the Saudi labor force. And, with more than 70 percent of Saudis below 30 years of age, the economy would need to create hundreds of thousands of jobs each year to keep them fully employed. Indeed, to prevent joblessness from soaring, the Saudi government will be forced to maintain costly jobs in the public sector for the foreseeable future, further delaying economic diversification.

In December 2020, the contract price of oil to be delivered three years later was $47.85 a barrel. Unless global markets are very wrong and oil prices magically recover to levels of at least $70 per barrel, the growth and diversification promises of Vision 2030 will be revealed as a costly and unrealistic distraction from the country’s real problems of mounting youth unemployment and a private sector ill-equipped to survive without government aid.

• • •

It’s tempting to take some pleasure in the troubles of an autocratic leader who persecutes his enemies and has turned Yemen into a killing field. But the joys of schadenfreude are likely to be short lived. It is sobering to contemplate a future in which Saudi Arabia no longer has the resources to keep the peace at home — let alone to anchor stability in the Middle East. The only real winners will be the mullahs in Iran.

main topic: Region: MENA