Saudi reform plan lauded but decit hurdle looms

MAY, 2016

Saudi Arabia last month announced its Vision

2030 reform plan, but Moody's still cut the
kingdoms credit rating as low oil prices
continue to undermine government nances.

REUTERS/Ali Jarekji

SAUDI ECONOMIC REFORMS

Moody's cuts Saudi, Oman, Bahrain debt ratings

Moody's downgraded Saudi Arabia's long-term
issuer rating by one notch to A1 but gave the
kingdom a stable outlook, saying sweeping
economic reforms announced by the government
last month, envisaged by 31-year-old Deputy Crown
Prince Mohammed bin Salman, might stabilise the
state budget. However, the agency said it was still
uncertain how Saudi Arabia would fund a massive
budget decit averaging 9.5 percent of gross
domestic product between 2016 and 2020, which
would require total nancing of $324 billion.

Shaybah oileld complex is seen at night in the Rub' al-Khali desert, Saudi Arabia, November 14, 2007. REUTERS/ Ali Jarekji/File Photo

oody's Investors Service

cut its debt ratings for
Saudi Arabia, Oman and
Bahrain while assigning
negative outlooks to three
neighbouring states, as low oil prices
continue to undermine government
nances in the region.
The rating agency downgraded Saudi
Arabia's long-term issuer rating by
one notch to A1 but gave the kingdom
a stable outlook, saying sweeping
economic reforms announced by the
government last month might
stabilise the state budget.
In late April, Deputy Crown Prince
Mohammed bin Salman revealed
Saudi Arabia's biggest policy shakeup in decades, including tax rises, an
efciency drive and plans to give a
bigger role to the private sector.
"The government has ambitious and
comprehensive plans to diversify both
the economy and its balance sheet
which, if even partly successful,
should stabilise its credit prole and
which could, if achieved, offer a route

back to a higher rating level over

time," Moody's said.
However, the agency said it was still
uncertain how Saudi Arabia would
fund a massive budget decit
averaging 9.5 percent of gross
domestic product between 2016 and
2020, which would require total
nancing of $324 billion.
"It is not yet clear how this cumulative
nancing need will be met: while
Saudi Arabia's low levels of
government debt at 5.8 percent of
GDP in 2015 provide scal space, no
medium-term funding strategy has
yet been announced," Moody's said.
The agency downgraded Oman by
one notch to Baa1 with a stable
outlook, and cut Bahrain by one notch
to Ba2, deeper in junk territory, with a
negative outlook. Both countries lack
the huge nancial and oil reserves of
their wealthy neighbours.
While Bahrain can expect support
from its ally Saudi Arabia in a crisis, it
is likely to nd it increasingly hard to
borrow in the international markets,

particularly since it will be competing

for money with its neighbours,
Moody's said.
"The further deterioration in the
government's balance sheet,
combined with increased external
debt issuance from other countries in
the region, will lower the supply of
external funding, thereby heightening
the risk that nance is obtainable only
at much less affordable rates for
Bahrain, or potentially reduced
amounts."
Moody's also conrmed the Aa2
ratings of the United Arab Emirates
and its biggest member, Abu Dhabi,
but assigned a negative outlook to
them. The UAE has been more
proactive than its neighbours in
restraining spending and reforming
its nances in an environment of low
oil prices, but Moody's said the
government's policies to cut its
budget decit were still not clear.
Moody conrmed the Aa2 ratings of
Kuwait and Qatar but gave both of
them a negative outlook.

SAUDI ECONOMIC REFORMS

BREAKINGVIEWS

Saudi downgrade ought to galvanise reform

By Andy Critchlow

audi Arabia may have

already crossed the point of
no return with its economic
reform plan. A downgrade of
the kingdoms credit rating by
Moodys on May 14 came in response
to a sharp deterioration in its nances
caused entirely by falling oil prices.
The kingdom is taking the hard path
of reform rather than doing whatever
it can to push up its crude revenues.
That is undoubtedly the sensible
option.
Saudi is burning through its foreign
exchange reserves to offset declining
export revenue and plug a budget
decit that is expected to average 9.5
percent of gross domestic product
between now and the end of the

decade. Moodys predicts that the

kingdom will need to fund cumulative
decits of $324 billion by 2020. The
gure would be equal to 75 percent of
its gross income from crude exports at
current prices over the same period.
Riyadh could easily look for a shortterm x by just pumping up crude
prices to revive its nances. In the
past, the kingdom worked with the
Organization of the Petroleum
Exporting Countries to maintain
higher prices and boost revenue. So
far its powerful Deputy Crown Prince
Mohammed bin Salman - the
mastermind behind a reform policy
called Vision 2030 - looks determined
to push ahead with the challenging
restructure of its one-dimensional
economy.

That could end up with Saudi in an

even stronger position to service its
debts. The current plan, which
includes selling a stake in stateowned oil company Aramco, would
leave Saudi with a $2 trillion
sovereign wealth fund. But its a
riskier way to get there. Besides,
moving away from oil is only one of a
series of challenges the 31-year-old
prince faces, along with the need for
political liberalisation, high youth
unemployment and diabetes that
affects almost a quarter of the
population. Those alone justify
forging ahead with reforms. Over the
long term, whether the prince can
tackle them will matter far more to
lenders and investors than his
kingdoms credit rating.

An investor monitors a screen displaying stock information at the Saudi Stock Exchange (Tadawul) in Riyadh, Saudi Arabia January 18.
REUTERS/Faisal Al Nasser

SAUDI ECONOMIC REFORMS

FACTBOX

Saudi Arabia's Vision 2030 reform plan

audi Arabia announced on

Monday its Vision 2030
reform plan, a package of
economic and social policies
designed to free the kingdom from
dependence on oil exports.
Following are details of the plan,
released in public appearances by
Deputy Crown Prince Mohammed bin
Salman and in government
documents provided to the media.
PUBLIC INVESTMENT FUND
Restructure the state-owned Public
Investment Fund (PIF), which the
prince said would turn the world's top
oil exporter into a global investment
power. New assets, including state oil
giant Saudi Aramco, would be
included in the redesigned fund. The
prince said the PIF made returns of 30
billion riyals ($8 billion) in 2015 and
that it would aim to increase its assets
to more than 7 trillion riyals from 600
billion riyals.
SAUDI ARAMCO
Aramco will be converted into an
energy holding company with an
elected board and some subsidiaries
will be listed. Prince Mohammed said
he expected the parent company to
be valued at more than $2 trillion,
less than 5 percent of which would be
sold in an initial public offer. Selling
even 1 percent of the rm would
constitute the world's biggest IPO, he
added.
RESTRUCTURING
Restructuring state assets and
agencies, rather than spending cuts,
will be key to making government
nances viable in the long term;
Prince Mohammed said the reforms
would not require major new
spending by the government but work
on existing infrastructure projects
would continue. He cited the housing
ministry as a target for restructuring.
State price subsidies would be
targeted more carefully so they went
to the people who needed them, not
the rich.

MILITARY SECTOR
The government plans to set up a
holding company for military
industries that will be fully stateowned at rst and later listed on the
Saudi bourse. Prince Mohammed said
he expected the listing to take place
by the end of 2017.
"GREEN CARD" SYSTEM
Saudi Arabia will introduce a "green
card" system within ve years to give
resident expatriates more rights to
live and work in the kingdom over the
long term. Details were not given.
MINING AND RENEWABLE ENERGY
The plan sets a target for the kingdom
to generate 9.5 gigawatts of
renewable energy and to have the
industry produce more of its
equipment locally. It aims to raise the
mining industry's contribution to
gross domestic product to 97 billion
riyals ($25.9 billion) and to increase
the number of jobs in the sector by
90,000 by 2020.
PILGRIMS
The plan envisages a massive
increase in Saudi Arabia's capacity to
receive Islamic pilgrims, to 30 million
annually from 8 million.

GOALS
The plan includes more than a dozen
other numerical goals, though it does
not give details of how they will be
achieved.
The deadline to achieve most of the
goals appears to be 2030.
For example, the government's nonoil revenues are to reach 600 billion
riyals by 2020 and 1 trillion riyals by
2030, from 163.5 billion riyals in 2015.
Unemployment among Saudi
nationals is to fall to 7 percent from
11.6 percent. Financial institutions will
be encouraged to allocate up to 20
percent of their overall funding to
small and medium-sized enterprises
by 2030. Foreign direct investment
will be raised to 5.7 percent of gross
domestic product from 3.8 percent.
Household savings are to rise to 10
percent of total household income
from 6 percent.
The share of non-oil exports in GDP is
to rise to 50 percent of GDP from 16
percent. Doubling the number of
archaeological sites recognised by
UNESCO. Having three Saudi cities
recognised as among "the top 100
cities in the world".
Increasing the number of Saudis who
play sports at least once a week to 40
percent from 13 percent.

A Saudi woman poses with Saudi riyal banknotes at a money exchange shop in Riyadh,
Saudi Arabia January 20. REUTERS/Faisal Al Nasser

SAUDI ECONOMIC REFORMS

A man walks near the construction site of a high speed rail that will link the holy cities of Mecca and Medina, in Jeddah, Saudi Arabia May
6. REUTERS/Susan Baaghil

Revenue may be weak spot in Saudi economic reform plan

By Andrew Torchia

he cost of insuring Saudi

Arabia's debt against default
has risen since the kingdom
announced a plan to wean
itself off volatile oil exports, showing
that some investors fear it won't be
able to raise enough revenue to make
the reforms work.
The blueprint, unveiled two weeks
ago, includes creating the world's
largest sovereign wealth fund, selling
state assets and, with prospects for
an end to the oil slump uncertain,
shifting responsibility for growth to
the non-oil private sector.
Deputy Crown Prince Mohammed bin
Salman, author of the Vision 2030
programme, said that, by 2020, "we
can live without oil".
The need is pressing. Last year's
budget decit was 367 billion riyals
($98 billion), or 15 per cent of GDP, a
level that Riyadh could probably only
sustain for another two or three years
before nancial markets became
alarmed. But the plan requires tens of
billions of dollars of fresh revenue
from the private sector, not only to
shore up the state budget but also to
pay for the government's share of

development projects. The price of

ve-year Saudi credit default swaps
suggests that nancial markets think
that's a big ask. It has risen to 155
points in the past two weeks from 145,
implying a 10 percent chance of a
sovereign default over the next ve
years, making Saudi Arabia a riskier
proposition than the Philippines or
Thailand. "The core challenge around
the Vision and the Saudi economy is
scal sustainability," said Steffen
Hertog, economist at London School
of Economics and author of a book on
the Saudi bureaucracy.
He said the tax potential of the private
sector was much smaller than the
states spending needs, and
increasing that potential would be
hard since businesses depended on
government contracts and on
consumer demand fed by state
salaries. The planned sale of some
government assets, including up to 5
percent of oil giant Saudi Aramco,
may plug part of the budget decit
until the private sector can pay more
taxes. But since Saudi capital markets
are small, the asset sales will require
a leap in foreign inows at a time
when low oil prices are causing
unease among investors.

REVENUES
The plan envisages boosting the
government's annual non-oil
revenues to at least 500 billion riyals
($133 billion) by 2020 -- a gure of
600 billion has also been mentioned - and to 1 trillion riyals by 2030.
That would be a big jump from 163.5
billion riyals last year. Assuming oil
revenues rebound to their 2015 level
by 2020, the government would be
getting 53 percent of its income from
non-oil sources that year, compared
to 27 percent last year. Non-oil
revenues surged 29 percent last year,
the nance ministry said. But the
increase was almost entirely due to
income from investments and
unspecied "other revenues" sources that the government cannot
expect to soar indenitely. Riyadh
says it will boost returns from its
investments by managing its funds
more aggressively. But the current
global environment will not make that
easy.
"Theyre not going to get major
returns around the world because
nobody is getting major returns
around the world, said Shanker
Singham, chief executive of
consultancy Competere Group.

SAUDI ECONOMIC REFORMS

That leaves a raft of new measures

billed as boosting non-oil revenues by
nearly $100 billion over the next ve
years. Prince Mohammed has said
cutting energy subsidies and letting
domestic fuel and utility prices rise, a
process that has already begun, could
generate $30 billion by 2020.
But he said big changes would not
occur until Riyadh had introduced a
scheme to compensate the poorest
30 percent for the blow to their
incomes. That could limit the net
savings from subsidy cuts, perhaps to
around $20 billion. A further $10
billion is due to come from
introducing a value-added tax in
2018, which estimates by the
International Monetary Fund suggest
is feasible. The impact of other
measures looks more uncertain.
There are about currently 10 million

foreigners in Saudi Arabia, most in

low-paying service or construction
jobs. Riyadh says it can raise $10
billion a year from a charge on rms
that hire more foreign workers, and
another $10 billion from a scheme to
sell long-term residency rights to
foreigners. A total of $40 billion
annually is to come from "other
measures". Most of that may be
privatisation proceeds; Prince
Mohammed estimated Aramco was
worth over $2 trillion, so a one-off
sale of 5 percent could theoretically
bring in $100 billion, or $20 billion a
year over ve years. But with oil
currently so cheap, the size of any
privatisation is uncertain. A new tax
on undeveloped land is expected to
raise several billion dollars, and taxes
on luxury items, tobacco and sugary
drinks will bring more revenue.

OPTIONS
If the non-oil revenue push falls short,
Riyadh may still be able to escape
scal crisis. A rebound of the average
annual Brent oil price to, say, $60 a
barrel from last year's $53.60 would
add several billion dollars to
revenues. If necessary, Riyadh could
draw down foreign assets more
quickly - though that would risk
unsettling markets - or cut spending
more sharply, though that would slow
the economy and make it harder to
encourage private investment.
But the investment bank Credit Suisse
said the Saudi reform plan should not
be judged by whether it met all its
targets. "Even if half of all the targets
are reached, we believe it would yield
signicant improvements in the
structure of the Saudi economy," it
said.

Saudi rms cope with austerity but more pain lies ahead
By Celine Aswad

audi Arabian companies are

faring better in an era of
austerity than many
investors feared, but they
face more pain in the coming months
as gains from cost-cutting and efforts
to improve efciency become more
difcult.
The world's largest oil exporting
country is in the grip of a protracted
adjustment to low crude prices, which
have caused a state budget decit of
nearly $100 billion and forced the
government into spending cuts.
For decades, almost every corner of
the economy has depended on lavish
ows of petrodollars, so the austerity
is bad news for Saudi corporate
earnings. Last December, the
government announced its harshest
set of measures so far, in the form of
subsidy cuts that raised domestic
prices of gasoline, electricity, water
and the natural gas feedstock used by
the petrochemicals industry.
The rst-quarter earnings of listed
Saudi companies, released over the
last few weeks, show that many are
managing to avoid a steep slide in
prots. The combined net prots of
the 50 biggest companies by

capitalisation, which account for the

vast bulk of all earnings in the stock
market, fell only 3.0 percent from a
year ago to 19.88 billion riyals ($5.4
billion), Reuters calculations show.
That was much better than the
expectations of many analysts, who
had believed prots might drop at
least as steeply as they did in full-year
2015, when earnings shrank 13.9
percent. Nevertheless, there were big
differences in rst-quarter

performance between individual

sectors, with industries directly
exposed to consumer demand, such
as retailing, hit hard. Statements by
the companies attributed much of
their better-than-expected earnings
to cost-cutting and gains in
operational efciency - processes
that cannot continue indenitely if
they want to grow. That suggests the
decline in prots could accelerate
later this year or next. "Companies

SAUDI ECONOMIC REFORMS

were able to benet from the easy

wins of cutting back on excess
spending this time around," said
Jassim al-Jubran, senior analyst at
Aljazira Capital in Riyadh.
"But the next several quarters will
prove companies will be scavenging
for top-line growth and undergoing
massive restructuring as they face
further pressure from austerity."
BANKS, PETCHEMS
Most of Saudi Arabia's 12 listed banks
beat analysts' expectations in the rst
quarter as their combined earnings
rose 0.6 percent to 10.01 billion riyals,
a slowdown from 7.2 percent growth
in all of 2015. Provisions for bad
loans, while generally slightly greater
than a year earlier, were not as large
as feared. Many analysts, however,
think provisions could rise in the
coming quarters as austerity
continues to hurt the economy. Major
construction company Saudi Binladin
Group, for example, has been laying
off thousands of workers and bankers
believe a restructuring of some of its
debt is possible. Another concern for
banks is slowing deposit growth
because of reduced inows of
petrodollars. Total bank deposits
shrank0.6 percent from a year earlier
in March; as recently as last year, they
were growing at double-digit rates.
"Many believe that 1Q16 results for
banks in particular were a 'lagging'
indicator, not forward-looking i.e.
results are more reective of presubsidy change days," said one Saudi
economist who works with the
government, declining to be named
because he is not authorised to speak
to media. "In coming quarters you will
start to see defaults increasing and
banks getting into a mess, so results
will worsen." Earnings of the top 10
petrochemical companies shrank 8.9
percent in the rst quarter to 4.33
billion riyals, but that was much
better than in 2015, when low product
prices due to cheap oil slashed their
prots 36.9 percent.
Saudi Basic Industries Corp, one of
the world's largest petrochemical
groups, reported a 13.2 percent drop
in rst-quarter prot to 3.41 billion
riyals, but that was better than

analysts' average forecast of 2.84

billion. "In general, gross margins
were able to come ahead of
expectations because producers were
able to control costs, both operational
and general," said Jubran.
So far, the impact of the subsidy cuts
on petrochemical rms' margins has
been far lower than analysts and even
the companies themselves had
expected, said Jubran. But he warned
that some rms were still enjoying
low feedstock prices and these would
eventually rise in an environment of
austerity. "Part of the current strategy
adopted by companies to improve
efciency and slash costs may prove
to be unsustainable, because if
current prices of feedstock, which
some players continue to use at
discounted prices, increase then
margins will compress in future
quarters." The earnings of retailers
reveal the effect of austerity on
consumer demand in the kingdom, as
some of its 10 million foreign workers
are laid off and sent back to their

home countries. While there have

been no major lay-offs of Saudi
citizens so far, their purchasing power
has been curbed by less generous
bonuses and overtime payments,
while economic uncertainty has made
them more cautious about spending.
Retailing chain Fawaz Alhokair, which
owns franchise rights for brands
including Mango, Zara and Banana
Republic, barely broke even in the
January-March quarter with its net
prot plunging 98 percent.
This drop was partly due to unusually
strong sales in the year-ago quarter,
when public employees received a
bonus of two months' salary to mark
the accession of King Salman, but it
also reected deteriorating consumer
sentiment. Mohammad al-Shammasi,
head of asset management at
Derayah Financial, said domesticfocused Saudi companies would face
more pressure on their margins as
consumers became more priceconscious and rms offered discounts
to attract them.

SAUDI ECONOMIC REFORMS

Domestic focus may limit clout of $2 trillion Saudi fund

By Andrew Torchia

audi Arabia aims to create

the world's biggest sovereign
wealth fund, a $2 trillion
behemoth that can throw its
weight around global markets, but
the fund's growth abroad is likely to
be slowed by its responsibility for
aiding the economy at home.
Building the Public Investment Fund
(PIF) into "the largest fund in the
world by far" is a cornerstone of
radical economic reforms announced
by Deputy Crown Prince Mohammed
bin Salman last month to cut the
kingdom's reliance on oil.
The PIF, founded in 1971 to nance
development projects in Saudi Arabia
and until now little known abroad, is
to grow from 600 billion riyals ($160
billion) to over 7 trillion riyals, helping
make Riyadh a global "investment
power", he said. The biggest
sovereign fund so far is Norway's,
worth $852 billion.
"There will be no investment,
movement or development in any

region of the world without the vote of

the Saudi sovereign fund," Prince
Mohammed told Al Arabiya television.
Under the plan, Saudi Arabia would
partly live off returns earned on the
PIF's foreign investments, which
would help offset Riyadh's loss of oil
revenues due to low crude prices.
But the PIF is also being pressed into
service for a second purpose: it is to
use its money to revitalise the Saudi
economy and create jobs by
developing new industries and
pushing through stalled multi-billion
dollar development projects.
The PIF will "help unlock strategic
sectors requiring intensive capital
inputs. This will contribute towards
developing entirely new economic
sectors and establishing durable
national corporations," the reform
plan reads.
For example, the government will
transfer ownership of Riyadhs
oundering King Abdullah Financial
District to the PIF, sources told
Reuters.

The PIF may also get involved in areas

such as mining, shipbuilding and
developing six industrial cities.
The government says it is examining
ways to salvage the industrial city
scheme, plagued for a decade by
delays and a lack of enthusiasm
among potential tenants.
The result, say bankers and
consultants familiar with Saudi
ofcial thinking, is that in the initial
years at least, the PIF's resources and
management attention are likely to
focus more on domestic projects than
foreign markets. The PIF did not
respond to requests for comment.
Sven Behrendt, head of German
consultancy GeoEconomica, said the
PIF's foreign role, where it would face
pressure to maximise returns by
taking risks, would contrast with its
domestic role as a strategic investor,
where returns would be secondary as
projects could not be allowed to fail
for political reasons.
If you look around the world, you will
see there are only a few funds that

A view shows the construction of the King Abdullah Financial District, north of Riyadh April 11. REUTERS/Faisal Al Nasser/File Photo

SAUDI ECONOMIC REFORMS

have this double mandate. Usually its

one or the other.
"The two approaches require different
investment philosophies different
capabilities, different management
skills and different evaluation
criteria...Its difcult to square."
ASSETS
Bankers and consultants in touch with
the PIF say the fund, under new
secretary-general Yasir al-Rumayyan,
a former chief executive of Saudi
Fransi Capital, is still designing its
new operations and structure, while
looking to hire managers within the
kingdom and abroad.
To build up the fund, the government
has been transferring corporate
assets and land to it, including
ownership of state oil giant Saudi
Aramco.
But that simply makes the PIF a large
holding company rather than a fund
that can funnel large sums into new
investments.
A total of $579 billion in net foreign
assets held by Saudi Arabia's central
bank (SAMA), which has traditionally
served as Riyadh's sovereign fund,
will not be transferred to the PIF, the
sources said.

So to raise money that the PIF can

reinvest, Riyadh plans to sell shares in
PIF companies over coming years - a
complex process that will depend on
the appetite of foreign investors for
Saudi assets in an era of cheap oil.
The sales will include up to 5 percent
of Aramco; Prince Mohammed
estimated the company was worth
over $2 trillion, implying the offer
could raise $100 billion. A number of
bankers and consultants are sceptical
of that gure, however, saying it will
depend on factors such as Aramco's
dividend policy, political risk and
willingness to disclose sensitive
information to investors. Some
analysis suggests all of Aramco might
have a market value of $250-460
billion, excluding the value of rening
assets and guaranteed access to oil,
said Washington-based consultancy
Foreign Reports. In any case, the PIF
looks set to have much less than $2
trillion to play with in global markets
for the foreseeable future, limiting its
contribution to Saudi state nances.
Norway's sovereign fund returned an
average 5.6 percent in 1998-2015,
before costs and ination. Earning
that on $100 billion raised from
selling Aramco shares would deliver

Saudi budget, SAMA assets and crude oil price

about $5 billion annually - not much

against a state budget decit near
$100 billion.
Shanker Singham, head of Britishbased consultancy Competere, said
the PIF might successfully imitate
Singapores Temasek, which in
addition to investing abroad has
played a strategic role in the economy
by managing major state assets.
The fund could achieve substantial
returns by investing in commercial
projects at an early stage when no
commercial investor can go in," he
said. It could use its money to make
unbankable projects bankable.
The PIF might also try to make foreign
investments that secured expertise or
market access for projects in Saudi
Arabia. For example, it might buy a
stake in a foreign mining rm to
support the reform plan's emphasis
on growing the mining sector.
But if the PIF is deployed for Saudi
geopolitical ends for example, to try
to win commercial or political
inuence abroad, it could hurt its
ability to make money, Singham
added.
Saudi ofcials say investment
decisions are made on exclusively
commercial grounds.

SAUDI ECONOMIC REFORMS

Saudi King Salman bin Abdulaziz attends the nal session of the South American-Arab Countries summit, in Riyadh November 11, 2015.
REUTERS/Faisal Al Nasser

Saudi shake-up rolls on with big reshufe of economic posts

By Angus McDowall and Katie Paul

audi Arabia's King Salman

on Saturday replaced his
veteran oil minister and
restructured some big
ministries in a major reshufe
apparently intended to support a wide
-ranging economic reform
programme unveiled last week.
The most eye-catching move was the
creation of a new Energy, Industry
and Natural Resources Ministry under
Khaled al-Falih, chairman of the state
oil company Aramco. He replaces the
80-year-old oil minister Ali al-Naimi,
in charge of energy policy at the
world's biggest oil exporter since
1995. But major changes were also
made to the economic leadership,
with Majed al-Qusaibi named head of
the new Commerce and Investment
Ministry, and Ahmed al-Kholifey
made governor of the Saudi Arabian
Monetary Agency (SAMA), the central
bank.

The changes, announced in a series of

royal decrees, go far beyond Salman's
previous reshufes since he became
king in January last year, and also put
the stamp of his son, Deputy Crown
Prince Mohammed bin Salman,
author of the Vision 2030 reform
programme, on the government.
Prince Mohammed's programme has
been presented as a sweeping rethink
of the entire way that Saudi Arabia's
government and economy will
function to prepare for a future that is
less dependent on oil income.
Some of the most important elements
of the plan, which will be eshed out
in coming weeks, involve creating a
massive sovereign wealth fund,
privatising Aramco, cutting energy
subsidies, expanding investment and
streamlining government.
The plan also seeks to boost revenues
by increasing the number of foreign
pilgrims outside the main annual Haj,
and encouraging Saudis to spend

money at home by creating more

entertainment opportunities.
RAPID RISE
Prince Mohammed's dizzying rise
since his father became king has
astonished Saudis and, in becoming
second in the line of succession
behind his cousin, he has swept past
dozens of other contenders.
The 80-year-old Naimi, for his part,
has for two decades been the most
inuential man in world energy, able
to move oil markets with a mere word,
but his inuence had appeared to
decline sharply under King Salman.
He has been appointed as an adviser
to the royal court.
Falih has long been seen as a leading
contender to replace him. Like Naimi
a career Aramco man, he was chief
executive of the oil giant from 2009
until last year, when he was made
company chairman and health
minister.

SAUDI ECONOMIC REFORMS

Whether he will play the same role as

Naimi did in the Organisation for
Petroleum Exporting Countries
(OPEC), or in crafting Saudi oil policy,
remains unclear, however.
The new SAMA governor, Kholifey, is
promoted from deputy governor for
research and international affairs. He
replaces Fahd al-Mubarak, who has
held the post since December 2011.
A veteran of SAMA and graduate of
King Saud University in Riyadh and
Colorado State University, Kholifey
had also served from 2011 to 2013 as
executive director for Saudi Arabia at
the International Monetary Fund in
Washington. He is set to take over a
central bank with more limited
functions than it had under his
predecessor. While SAMA remains
responsible for monetary policy, it will
no longer act as the countrys biggest
sovereign wealth fund because a

larger one is being created under the

Vision 2030 reforms.
QUEST FOR EFFICIENCY
Finance Minister Ibrahim Alassaf, who
has held the post since 1996, remains
in place. However, other economic
departments have over the past year
taken over some of his ministry's
responsibilities. Saturday's decrees
broke up the Water and Electricity
Ministry, with the water portfolio
added to a new Environment, Water
and Agriculture Ministry, and
electricity added to the new energy
ministry. Those changes may help
Saudi Arabia to cut subsidies, reduce
domestic power and water
consumption, make sure that energy
pricing meshes clearly with industrial
development goals, and that nuclear
and solar policy are more carefully
integrated.

"The merging of ministries is opening

the door to efciency gains that the
government is keen to enforce," said
John Sfakianakis, a former adviser to
the government and head of economy
at the Jeddah and Geneva-based Gulf
Research Centre. Two other senior
economic gures, royal court adviser
Yasir al-Rumayyan and former SAMA
governor Mohammed al-Jasser, were
appointed advisers to the Secretariat
General of the Cabinet. Tawq alRabeeah, formerly commerce
minister, was appointed health
minister in place of Falih, Suleiman al
-Hamdan was appointed transport
minister, and the Pilgrimage Ministry
was renamed the Haj and Umrah
Ministry. The royal decrees also
merged the ministries of labour and of
social affairs into a new department,
and created a new Commission for
Recreation and Culture.

New Saudi minister is believer in reform and low oil price

By Dmitry Zhdannikov and Rania El Gamal

t was January 2016 and oil prices

had crashed to their lowest in
more than a decade.
Saudi Arabia's health minister,
Khalid al-Falih, a favourite to take
over the oil ministry from his mentor
Ali al-Naimi, was not panicking.
Falih told an audience of oil
executives, bankers and policymakers
at the World Economic Forum in
Davos that the world's top oil exporter
might benet from oil below $30 per
barrel.
It could help to speed up reform and
restructure the economy, and move
Saudi Arabia to a smaller and more
effective government and unleash its
private sector, he said.
For decades Saudi Arabia, a de facto
leader of OPEC, had targeted certain
oil price levels. If it did not like the
price, it would try to orchestrate a
production cut or increase together
with its fellow OPEC members.
Things were different this time. For
the rst time in decades, output cuts
were not on the agenda to x the
growing global glut that Saudi Arabia

Saudi Arabia's health minister, Khalid al-Falih at the Bahrain International Exhibition
Centre in Manama May 19, 2014. REUTERS/Hamad I Mohammed/File Photo

helped create by ramping up supply

to drive higher-cost producers such as
U.S. shale rms out of the market.
Also for the rst time in decades, a
royal rather than a non-royal - Deputy
Crown Price Mohammed bin Salman had been appointed a few month
earlier to oversee Saudi oil policies
and drive the massive change.

Do you not think Prince Mohammed,

who is just 30, is doing it all a bit too
fast for the generally conservative
Saudi society, Falih was asked.
"The Royal Highness is very ambitious
where he wants Saudi Arabia to be
sooner rather later. I can assure you
that everybody who works around him
is very excited by his vision and

SAUDI ECONOMIC REFORMS

energized by his energy," Falih told

the audience. "Some people were
concerned that we were too slow in
the past.. As a former runner, I can
tell you that it helps to go through
sprints at times to develop your
muscular strengths. We are
accelerating reform."
The writing was on the wall, said the
executives leaving the Davos
conference. Falih would soon become
oil minister reporting to Prince
Mohammed, who is quickly turning
into the world's most powerful oil
gure.
Three months later, Prince
Mohammed had a chance to
showcase his might when he
effectively ordered the Saudi
delegation led by Naimi not to agree
to a global production freeze deal
with OPEC and non-OPEC Russia.
Fellow OPEC members accused
Naimi, who initially said he liked the
deal, of no longer speaking with the
voice of authority.
Three weeks later on Saturday, Naimi
was gone and Falih became energy
minister.
"It is an end of an era when Naimi
fought hard and struggled to create a
price environment which would have
been good for both consumers and
producers," said Gary Ross, a veteran
OPEC watcher and founder of New
York-based consultancy PIRA.

"We are moving to a new era where

OPEC will no longer be managing the
market while supply and demand will
determine the price. The new Saudi
oil leadership believes the market will
dictate the price and that means
higher volatility. We will see higher
highs and lower lows," Ross said.
IMPETUS TO REFORM
Naimi, born in 1935, had orchestrated
several OPEC oil output cuts and
increases since taking on the oil
minister job in 1995.
The former Saudi Aramco's clerkturned-chairman saw oil priced as low
as $9 per barrel during the Asian
nancial crisis at the end of 1990s, as
high as $147 in 2008 and back to $36
several months later after the
collapse of Lehman Brothers.
Rumours about Naimi being nally
allowed to retire have been hitting the
market periodically in the past four
years.
But even though the Riyadh-born and
U.S.-educated Falih has long been
tipped to replace Naimi, his fortunes
and career kept zigzagging from
Saudi Aramco's chairman to health
minister until nally securing the job
on Saturday - combining energy,
industry and mineral resources in a
new super ministry.
Falih takes the job in a much better
market environment compared to

January - oil prices have indeed

recovered from their January lows of
$27 per barrel to trade at around $45
last week on the prospect that the
market has begun to rebalance
thanks to lower U.S. output.
Born in 1960, Falih joined Aramco in
1979, and went to study engineering
at Texas A&M University in 1982 on an
Aramco sponsorship programme.
Falih probably knows every oil chief
executive in the world as he was the
key negotiator behind a Saudi
initiative to jointly develop gas
resources with oil majors in early
2000. Over the past year, when Naimi
was carefully choosing his words or
not commenting at all, Falih has
become more vocal about his views
that the oil market needs to rebalance
through low prices and that the
Saudis have the resources to wait.
"That doesn't really point to
somebody who would invest a lot of
time and energy in trying to reconcile
different OPEC members," said
Richard Mallinson from Energy
Aspects. Falih says job creation and
economic reforms are top worries for
the Saudi government these days, not
an obsession with oil price levels.
"Those transitions sometimes takes
years, sometimes decades.
The current low oil prices will give us
an impetus to accelerate this," Falih
said in Davos in January.

A driver waits to ll his car with fuel at a petrol station in Riyadh, Saudi Arabia, December 22, 2015. REUTERS/Faisal Al Nasser

SAUDI ECONOMIC REFORMS

INSIGHT

Saudi prince makes bold challenges to kingdom's old ways

By Samia Nakhoul, William Maclean and
Angus McDowall

audi Deputy Crown Prince

Mohammed bin Salman got
a standing ovation when he
visited a gathering of Saudi
youth last month. Last week, after
hearing about his economic plans in a
meeting with religious leaders, one of
the kingdom's most conservative
sheikhs tweeted a smiling sele of
himself with the prince.
Whether the 31-year-old son of King
Salman will achieve his goal of
modernising the kingdoms economy
is the subject of animated debate on
social media, in ofce buildings and
at coffee shops here.
The plans, aimed at ending
dependence on oil by 2030, require
shaking up a bureaucracy that has
stymied changes in the past,
challenging powerful religious
conservatives and building up a
private sector currently reliant on
state spending.
Diplomats and economists say the
programme, which relies on the
private sector driving growth and
providing new sources of revenue to
the state via new taxes and fees, will
be exceptionally difcult to
implement. Saudi Arabia is far
away" from its economic goals, said
Steffen Hertog, an economist at the
London School of Economics (LSE)
who studies the kingdom. The
prince's close aides acknowledge the
difculties.
Some ruling family members fear too
rapid economic changes could cause
social unrest or tension inside the Al
Saud dynasty, Saudi analysts say.
Yet in this country of 20 million
Saudis and 10 million expatriates, the
rise of Prince Mohammed -- who runs
economic, defence and oil strategy -underscores a dramatic shift towards
a leadership seemingly more in tune
with the needs of a country where 70
percent of the population is under 30.
It is the rst time that effective power
has passed from the royal
gerontocracy of 70- and 80-

REUTERS/Charles Platiau

something rulers to a third generation

of a family founded by the prince's
grandfather, known as Ibn Saud. King
Salman still has the nal word, but he
has delegated nearly unprecedented
powers to his son.
That has meant changes in style and
substance.
Prince Mohammed works 16-hour
days -- unlike the more sluggish
schedules of his older predecessors -and has appointed business people
and economic experts instead of other
royals to top jobs.
Many younger Saudis see the rise of a
man who is usually referred to as
"MbS" as evidence their generation is
at last playing a role in a country
whose patriarchal traditions had
made power the province of the old.
"I'm so excited! I want him to be our
king now.
I mean he's open-minded, has a great
plan and maybe a little handsome,"
said Najla, 20, who did not wish to
give her family name.
That backing, and widespread fears
about plunging oil prices, is providing
MbS with an important springboard
for his efforts.

When in December, he and his team

raised petrol prices -- a step previous
administrations had hesitated to take
for fear of public backlash -- Saudis
took the move in stride.
The lack of protests surprised MbS,
according to people close to the
prince, but also helped convince him
that Saudis were ready for a change.
Jihad al-Najjar, one of those who lined
up outside petrol stations that night
to ll up on the lower cost fuel, said
he understood the country could no
longer afford such subsidies.
"It's not the real price," the 22-yearold medical student said.
Abdulaziz al-Sager, head of the
Jeddah and Geneva-based Gulf
Research Centre, says there is a
growing recognition among Saudi
leaders that the oil-based economic
system is not sustainable. That will
necessarily lead to social and political
change.
"You cannot do the economic change
and the transformation without some
sort of political change," he says.
"That raises the question of what sort
of a new social contract we are going
to have."
CONFIDENCE
Few had heard of Prince Mohammed
before his father, 80-year-old son of
modern Saudi Arabia's founder,
became the kingdoms 7th monarch in
January 2015. Today, Prince
Mohammed is second in line to rule
behind Mohammed bin Nayef, a
cousin who is crown prince and, as
Interior Minister, head of internal
security.
Unlike many other royals, Prince
Mohammed did not go to school
abroad but graduated from King Saud
University with a law degree.
Informed Saudis who follow royal
affairs say he is the favoured son of
King Salman, who made him his
personal adviser at a very young age.
In his few public appearances with
journalists, the powerful prince
projects condence.

SAUDI ECONOMIC REFORMS

He listens to questions in English but

speaks through the Royal Courts
interpreter, and sometimes corrects
the interpreter's phrasing of English
translations. His picks for top cabinet
positions and senior advisers have
leant more heavily on former
businessmen than those of former
administrations, which relied more on
professional bureaucrats.
Last week, Prince Mohammed
ofcially unveiled Saudi Vision 2030,
his blueprint to move the economy
decisively from that he called its
addiction to oil towards the private
sector. The phased removal of
subsidies on fuel, water and electricity
-- part of the welfare lavished on
Saudis, of whom about four out of ve
workers hold public sector jobs -- is
already underway.
The new plan includes earning nonoil income from private investment
and privatisation and setting up the
largest sovereign wealth fund in the
world. The idea is to create millions of
new jobs and raise the participation of
women in the workforce from 22
currently to 30 percent by 2030.
The plans also include selling a stake
of less than 5 percent in Saudi
Aramco, the state oil giant, and
placing the proceeds and the
company in the Public Investment
Fund (PIF), along with other assets
that could eventually create an
investment vehicle worth up to $3
trillion. Another ambitious target is to
locally source 50 percent of Saudi
military procurements -- part of the
third largest defence budget in the
world -- by 2030, up from a mere 2
percent now. Many diplomats,
analysts and economists say the
magnitude of the goals -- including
the primary one of ending
dependence on oil by 2020 -- defy
credibility. "To achieve the economic
goals, the kingdom would need a
thriving non-oil private sector that
caters to private demand, offers

sufcient productive jobs for nationals

and produces substantial non-oil
exports of goods and services, said
the LSE's Hertog, who has written a
book about how the Saudi
government works.

Many younger Saudis see

the rise of a man who is
usually referred to as
"MbS" as evidence their
generation is at last
playing a role in a country
whose patriarchal
traditions had made
power the province of the
old. "I'm so excited! I want
him to be our king now. I
mean he's open-minded,
has a great plan and
maybe a little handsome,"
said 20-year old Najla.
RELIGIOUS CONSERVATIVES
There are social challenges because
some of Prince Mohammed's
ambitions, including giving women a
bigger economic role, will anger
religious conservatives, the source of
the most dangerous threats to Al
Saud rule since the kingdom was
founded. Some had hoped, for
example, that Vision 2030 would
include moves to lift the ban on
women driving, which it did not.
Answering a question on it, the
deputy crown prince said the issue
was a social rather than religious
question, therefore it was up to
society to decide. Moreover, the
countrys education system is
traditionally regarded as under the
thumb of religious fundamentalists
who, among other things, insist on
the cloistering and segregation of

women, hindering their ability to enter

the workforce. Some older Saudis,
ruling family members and Saudi
businessmen fear that Prince
Mohammeds plans to streamline the
kingdoms bureaucracy could cause
social fractures if they fail to maintain
comfy living standards or soothe
conservatives. And MbSs meteoric
rise has also prompted rumours
among some Saudi analysts of friction
with Crown Prince Mohammed bin
Nayef, 56, a veteran security chief and
a favourite of Riyadhs top ally, the
United States. So far, both men have
appeared careful in public, with the
younger prince showing deference
and respect to his cousin, diplomats
say. Prince Mohammed and his close
advisers appear fully aware of the
entrenched resistance they will face -and are working to overcome it.
For example, MbS -- like his father
and previous Saudi rulers -- has
devoted signicant effort to wooing
clerics, who have great inuence in
the legal system. One adviser said
that the prince meets between four
and ve religious leaders a week.
Last week, right after announcing
2030 Vision to reporters, he met a
group of religious and intellectual
leaders in the next room and directly
assured them that he would not go
too far. When asked about the issue of
women drivers, he turned specically
to look at the religious leaders and
said it would not happen yet, a person
present said. Young people say they
like MbS's business-like approach of
announcing systemic plans, rather
than speaking in generalizations as
many of his predecessors did.
Still, there is a long road ahead,
especially on social change, they say.
"I'm waiting for the moment where I
can travel without a male with me,
said Najla. And drive - I already
know what car I want," she said,
sending by phone a picture of a bright
red sports car.

Compiled by Bodhisattya Chakraborty and Shashwat Sharma in Bengaluru.

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