BY GEORGE HAY

Hang out in Saudi Arabia long enough and you may encounter sidewall skiing. This pursuit, a big hit among the kingdom’s underemployed youth, involves changing the tyre of a speeding car that is being driven on only two wheels. Crown Prince Mohammed bin Salman is performing a similarly precarious balancing act with his Vision 2030 reforms. His best chance of maintaining equilibrium is to wisely use a windfall that Saudi could receive by plugging gaps left by sanctioned Iranian oil.

Vision 2030 aims to turn a closed, religiously conservative rentier state that has often seen oil receipts account for 90 percent of its revenue into a modern, more liberal haven of capitalist enterprise – in just over a decade. Attention has understandably focused on eye-catching social reforms, such as allowing women to drive. But that was a comparatively easy win for the crown prince, whose name is often contracted to MbS. Following the detention of Saudi businessmen and officials last November, he is all-powerful. The more difficult challenge is to reform an economy that contracted in 2017 while preserving political stability.

The crown prince’s 2030 plan has a blizzard of targets that cover everything from cutting Saudi unemployment from nearly 12 percent to 7 percent of the labour force, to boosting the proportion of people who exercise at least once a week from 13 percent of the population to 40 percent. The toughest goal may be to grow the private sector so that it accounts for 65 percent of GDP, compared with its current 40 percent.

The simplest way to do this would be to remove barriers that encourage Saudis to remain either in generously paid public sector jobs, or unemployed. Change has begun. A new bankruptcy law incentivises private enterprise, by giving would-be investors Chapter 11-style protection if a company faces temporary difficulties, and a legal process should the enterprise fail. Foreigners are now allowed to own up to 49 percent of a domestically listed group compared with an effective bar on such holdings before 2015. And governance has improved enough for Saudi Arabia to have climbed from 63rd in the World Bank’s rankings for the protection of minority investors to the top 10. Entering the FTSE Russell emerging markets indices and a likely inclusion in the larger MSCI equivalent could see over $40 billion of foreign active and passive funds flow into the $500 billion Tadawul stock market, according to asset manager NCB Capital.

But fixing the labour market will be complex in a country where lower-paid foreign workers make up more than half of the workforce. Instead of making it easier for businesses to hire and fire, the government is penalising them for employing cheap foreigners. Meanwhile, borrowing costs are rising because of the policy of pegging the Saudi riyal to the U.S. dollar, which has been appreciating. The upshot is that small and medium-sized businesses face a hit, and demand may be dampened by higher interest rates. Bank lending to the private sector has shrunk every month for more than a year and manufacturing is growing at its slowest pace for nearly a decade.

If the crown prince grabs a bigger share of the oil market when crude is trading at nearly $80 a barrel, the good news is he can more easily balance the budget without jeopardising social stability. Saudi slashed spending and increased energy utility costs in 2016, but since the end of 2017 Riyadh has doled out more in subsidies to help Saudis deal with the reforms. That’s unsurprising in a state that has long bankrolled fuel and electricity costs, but it shows that even a regime as powerful as the House of Saud has to keep its population on side.

That imperative makes it hard for Saudi to wean itself off oil. In theory the crown prince could spend any surplus on wage subsidies to private companies so that they can hire Saudis, who demand higher pay than migrant workers. A healthier private sector would result in more tax revenue and higher foreign investment, helping Vision 2030’s social and economic objectives. More money and attention could also usefully be spent on education to improve the employment prospects of the workforce, by improving teacher quality and increasing the focus on science and maths.

The danger, however, is that the crown prince spends the extra oil wealth on grandiose projects like NEOM, the Red Sea complex that may turn out to be another King Abdullah Economic City, which was supposed to have 2 million residents but currently has only 5000. That would help the small number of non-oil groups that have strong ties with the government, but leave the wider private sector unreformed. That’s risky, given that by 2030 Saudi could have 5 million new workers and global oil demand could have peaked. Like an overambitious sidewall skier, the crown prince’s grand reforms might then career off the road.

First published May 14, 2018

(Image: REUTERS/Mohamed Al Hwaity)