From: Saudi Arabia Hurries to Reinvent Itself for an Era of Low Oil
By: Ben Holland
Saudi Arabia, one of the most tradition-bound societies on the planet, where family structure and tribal patriarchy differ little from a century ago, is suddenly in a hurry. It has done more in the past week than in most years.
State-run Saudi Arabian Oil Co. confirmed comments from Deputy Crown Prince Mohammed bin Salman that it was considering an initial public offering, which could see the producer leapfrog Apple Inc. as the world’s biggest listed company. The move capped eight days in which the kingdom executed dozens of militants, severed ties with Iran and took steps toward a radical rollback of the state.
The flurry of action, a result of tumbling oil prices, shifting U.S. interests and regional turmoil threatening rulers across the Middle East, appears to be the largely the work of the 30-something son of King Salman, in office less than a year. And while his ambition to modernize has drawn praise, some fear he is in over his head.
“The Saudis had a reputation of being kind of cautious, secretive,” said Eckart Woertz, a senior researcher at Barcelona Centre for International Affairs. “Right now there are some concerns about rash decisions.”
Thatcherite Revolution
The biggest bombshell this week: Prince Mohammed’s announcement, in an interview with the Economist, that an initial public offering in Saudi Aramco may form part of the kingdom’s privatization plans. A decision will be taken in the coming months, he said.
He called his plans a Thatcherite revolution, like the overhaul of the U.K. economy in the 1980s, saying private investors will be invited to play a bigger role in health care, education and some defense industries; state land will be sold off; and sales taxes introduced on consumer goods.
The new government is rapidly abandoning its old slow style, said Saud Al Tamamy, a political theorist at King Saud University in Riyadh.
In a single day last week, the government announced and implemented a cut in fuel subsidies, sending drivers speeding to gas stations and spurring a spate of company statements on how the change would affect them. In November, an annual fee on undeveloped urban land intended to transform the kingdom’s property market was approved by the cabinet after years of talks.
Some of the reforms “bode well for the long-term health of Saudi Arabia, in the sense that they have shown a willingness to cut subsidies, to implement taxes, to cut spending,” said Allison Wood, Middle East and North Africa analyst at Control Risks in Dubai. “But on the other hand, these do increase risks for investors in the sense that they’re often unpredictable and implemented, as we saw, overnight.”
Embassy Burned
Among the Sunni-ruled kingdom’s 47 executions, many of which included convicted terrorists and which were strongly supported at home, was Nimr al-Nimr, a Shiite cleric and activist on behalf of the Shiite minority.
Protests erupted throughout the Shiite world, especially in Iran where a mob set the Saudi embassy on fire. The Saudi foreign ministry sent a text message to reporters in Riyadh on Sunday calling a press conference 30 minutes later to announce it wascutting ties with Iran. It thus escalated years of verbal sparring between regional powers on opposing sides of wars in Yemen and Syria.
Alarms went off in the U.S. and Europe, concerned that efforts to end those conflicts were set back. Some analysts noted, however, that the move was aimed partly at the U.S., that the new muscular Saudi style results from its feeling abandoned.
“The U.S is and remains their primary security patron,” Reva Bhalla, a geopolitical analyst at the strategic advisory firm Stratfor in Austin, Texas, said by phone. But the Iran nuclear deal “meant Saudi Arabia would have to take more matters into its own hands, knowing they couldn’t rely on the U.S. exclusively to back up their interests.”
Plunging Reserves
Pressure for change is coming from a budget deficit that reached 15 percent of economic output last year, as oil fell by about two-thirds from mid-2014 levels. Saudi Arabia has dipped into its savings to cover the shortfall — reserves declined for 10 straight months through November, sometimes at an unprecedented pace.
Investors began to question whether the Saudis would be forced to devalue their currency, or make an about-turn at OPEC and sanction production cuts that would push oil prices back up. Saudi credit-default swaps spiked this week to the highest since the global slump of 2009, and riyal futures have weakened on speculation about the dollar peg.
Some wonder whether the economic changes will occur. A few weeks ago, Prince Mohammed made an unexpected announcement, telling a hastily assembled press conference that Saudi Arabia would head an Islamic military coalition of 34 nations to combat terrorism. Several of the countries knew nothing about it.
Meanwhile, war in Yemen — still largely under the control of the Shiite rebels the Saudis are fighting — is set to drain the same budget that the kingdom is seeking to shore up. And tensions over Yemen and Syria, now heightened by al-Nimr’s execution and the severance of ties, won’t help efforts to attract the cash that Prince Mohammed’s ambitious plans will require.
Unprecedented Powers
Prince Mohammed came to power with little experience, yet has titles that put him in control of the army, the oil industry and most other areas of the economy.
“We’ve seen fairly unprecedented consolidation of power in the hands of a fairly young prince,” according to Wood at Control Risks.
Prince Mohammed is “seen as the driving force behind many recent decisions,” said Mohammed al-Sabban, a Saudi economist and former oil ministry adviser. Saudi Arabia’s new stripped down decision-making process, with power taken away from a finance ministry that had previously delayed or blocked reforms, is more attuned to the nation’s needs, he said.
“The Ministry of Finance is now basically a treasury ministry. It used to be the ministry of ministries,” al-Sabban said.
The other leading figure among the younger generation of Saudi royals is Prince Mohammad bin Nayef, who as heir to the throne outranks the other Prince Mohammed Nayef is a longtime point-man for the U.S. on counter-terror issues and is in charge of internal security. Primarily, that means the fight against al-Qaeda and Islamic State, which have sought recruits in the kingdom and carried out attacks there.
So far there’s been no public indication of disagreement between the kingdom’s two rising stars, though there have been mutterings of unrest among some more junior royals at the changes since King Abdullah’s death a year ago.
‘Disconcert People’
But opening up the economy in the ways proposed by the young prince may be anathema to Saudi conservatives. The kingdom’s clerics enjoy an exalted status in return for their backing against radical Islamists such as al-Qaeda who have challenged the Al Saud family’s legitimacy.
“People used to express frustration about how things weren’t happening fast enough but at the same time these radical changes disconcert people,” said Crispin Hawes, managing director of Teneo Intelligence. “There is a more aggressive attitude about this government on certain issues, which has created a lot of unease among people used to a certain ways of doing things.”