Event

This month a long awaited ‘Vision 2030’ programme was launched by the Deputy Crown Prince (and currently the King´s favourite son), Mohammed bin Salman (MbS). The ambitious programme aims to transform the oil-dependent economy. Among the reforms are the partial privatisation of state assets (including 5% of the opaque oil giant Saudi Aramco), further cuts in subsidies, the introduction of new taxes, relaxing limits on foreign ownership and promotion of non-oil sectors. In addition, financial assets will be centralised in a huge sovereign wealth fund that will be used to invest in the domestic economy, notably the private sector which is now dominated by foreign workers with low-paid jobs. By developing the private sector MbS hopes to create jobs for the Kingdom’s rapidly expanding underemployed and often inadequately educated workforce.

Impact on country risk

A programme to diversify the economy is not new in Saudi Arabian history. Since the 1970´s governments have outlined several plans but with little result. However, the ‘Vision 2030’ programme is one of the most ambitious attempts because of its scale and speed. Implementation is likely to enforce the trend of declining fiscal deficits (-17.7% of GDP in 2015 and -16.6% of GDP expected in 2016) as in the past months fiscal policy has already tightened in reaction to the low oil prices. Implementation can also slow the sharp drop of the vast foreign exchange reserves (in 2015 the reserves declined by 15%, to reach 26.7 months of import cover). However, adjustment away from oil is likely to be slow. As a result, in the medium term, fiscal and current account deficits are projected to remain substantial and economic growth subdued. Moreover, it is uncertain how much support the programme will receive from the wider royal family (which is partly marginalised from decision-making since the transfer of power in April 2015), the clerical establishment (in control of education, a key area for reforms), vested business interests and the population (which is used to cradle-to-grave services in return for relinquished political rights).

Analyst: Jolyn Debuysscher, j.debuysscher@credendogroup.com