Economic reality has gripped the Kingdom of Saudi Arabia, which aims to move away from oil dependency.
With plans for brand new megacities, allowing women to drive and foreign-run cinemas, Saudi Arabia’s Crown Prince Mohammed bin Salman is on a charm offensive trying to promote his country as an international investment destination.
The strategy aims at luring foreign money to help the world’s biggest oil exporter create a new economy away from oil dependency in order to prevent future instability.
Although the oil price is up considerably from 2014, the director of the IMF’s Middle East department Jihad Azour said the focus in Saudi needs to remain on economic and social reforms.
“I think the fact that we are currently witnessing a recovery globally and in the region, and the fact that the oil price is going up, it shouldn’t at any point in time be considered as a way for them to relax efforts and to be complacent,” said Azour.
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I wouldn’t necessarily say they’re [Saudi Arabia] taking on too much risk, but I would say that they are biting off more than they can chew, so maybe they need to take smaller bites. |
For Saudi Arabia, oil prices are still too low to fully balance the books – with the kingdom’s 2018 budget deficit predicted to come in around $52bn.
On Wednesday, the International Monetary Fund (IMF) said Riyadh’s break-even oil price for 2018 is likely to be around $88 a barrel. North Sea Brent is currently trading down around $74 a barrel.
“In order for the Saudis to meet their goal for increasing the size of a non-oil economy, they either have to be more patient – meaning wait 10-15 more years, or allow the economy to become much more diverse and I think it’s probably more likely the latter. I think they will achieve their goals, but it will take longer than they hope,” Richard Segal, a senior emerging markets analyst with US-Based Manulife Asset Management, tells Counting the Cost.
“The Saudi market hasn’t been very open to foreign investment yet, but years down the road, there could be tremendous opportunities,” he adds.
Segal says that a lack of transparency in the country isn’t going to sit well with investors, so “this is something Aramco and other companies that will be privatised will have to consider.”
While Saudi Arabia has a $250bn sovereign wealth fund that’s being put into everything from artificial intelligence to robotics, those kinds of investments take time to pay off.
“I wouldn’t necessarily say they’re taking on too much risk, but I would say that they are biting off more than they can chew, so maybe they need to take smaller bites,” said Segal. “They will eventually get there, but not as quickly.”
Source: https://www.aljazeera.com/programmes/countingthecost/2018/05/saudi-arabia-biting-chew-180505105327776.html
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