Saudi Deputy Crown Prince Mohamed bin Salman has laid out an ambitious vision for the world’s largest oil producer as well as the largest Arab economy to diversify away from the over-dependence on oil revenue for decades. The boldest reforms being planned in the history of kingdom envisage selling stake in Saudi Aramco; creating the world’s largest sovereign wealth fund and accelerating subsidy cuts and imposing more levies in an economy more accustomed to lavish welfare spending.
Saudi Arabia plans to sell a stake “of less than 5%” in the parent of its state-owned oil company by 2018 or even a year earlier. Saudi Arabian Oil Co, or Saudi Aramco, is in a league of its own. Aramco pumps 10mn-plus barrels daily (expandable up to 12mn bpd on short notice), more than the domestic output of every US oil company combined. It has 261bn barrels of proven reserves, according to its 2014 annual report. The company could be worth anything from $1tn to upwards of $10tn, which would make it the most valuable company in the world.
The biggest domestic economic shakeup since the founding of Saudi Arabia - which foresees levies on expats, energy, luxury goods, sugary drinks - would raise at least an extra $100bn a year by 2020, more than tripling non-oil income and balancing the budget.
The plan for the all-dwarfing $2tn Public Investment Fund (the $825bn Norway SWF is currently the world’s No 1) would see Saudi Arabia getting ready for the twilight of the oil age by creating the world’s largest sovereign wealth fund for the kingdom’s most prized assets.
The Saudi government is also planning to increase its debt, in the meantime, to help finance spending and test the market with a dollar bond later this year.
The two-year decline in oil prices has hit the finances of the Gulf countries hard. Nowhere is it, perhaps, felt more acute in Saudi Arabia. Youth unemployment in the country is among the highest in the world and economic growth is set to slow to 1.5% this year, the worst since at least 2009, according to a Bloomberg survey.
Almost eight decades since the first Saudi oil was discovered, King Salman’s 30-year-old son is aiming to transform the world’s most influential crude exporter into an economy fit for the next era. There’s no reason to doubt his determination. He has already moved surprisingly quickly to cut wasteful spending and subsidies, and is pushing for large-scale privatisations.
In a wider sense, policymakers in every Gulf country now know for sure the oil windfall the region has been accustomed to for decades is a thing of the past in an era of lower-for-longer oil. Prince Mohamed, for sure, will face obstacles. But his bold economic reform plan, detailed in a five-hour interview with a group of Bloomberg journalists in Riyadh last week, bodes well for Saudi Arabia’s non-oil future. But its success will require moving fast on the kinds of political and cultural reforms that usually take decades.
Time is money.