Despite oil's rebound off cyclical lows and the world's exuberance that the energy space may be saved (on the basis of headline-reading algos pumping momentum into commodity futures products that only leveraged Chinese speculators could find value in), something ugly is occurring in Saudi Arabian money-markets.There appears to be a growing funding squeeze in The Kingdom as 3-month interbank rates spike above 2% for the first time since Jan 2009 prompting King Salman to approve a 'post-oil economic plan'.
Whether this spike is responsible or not, The Kingdom is clearly seeking ways to reduce its reliance on crude.
As Bloomberg reports, King Salman approved a blueprint for diversifying the country’s economy away from oil on Monday, a package of developmental, economic, social and other programs.
Saudi Arabia’s plan for the post-hydrocarbon era will have to overcome habits developed over decades of relying on crude sales to fuel economic growth, create jobs and build infrastructure.
Almost eight decades after oil was first found in the country, officials on Monday are to unveil Deputy Crown Prince Mohammed bin Salman’s “Saudi Vision 2030,” a blueprint seeking to reduce the reliance on revenue from crude exports. King Salman approved the package of developmental, economic, social and other programs. Prince Mohammed, known as MbS among diplomats and Saudi watchers, disclosed details of the plan in interviews with Bloomberg in Riyadh.
“Shifting from an oil-based economy to something different is very difficult,” said Gregory Gause, a professor at Texas A&M University. “The Saudis have been talking about it for decades, but have made little progress. So MbS has his work cut out for him.”
Prince Mohammed is leading the biggest economic shakeup since the founding of Saudi Arabia in 1932, with measures that represent a radical shift for a country built on petrodollars. His drive may face resentment from a population accustomed to government largess and power circles stunned by the rapid rise of the 30 year-old prince, political analysts say.
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Part of the program envisages selling less than 5 percent of Saudi Aramco and the creation of the world’s largest sovereign wealth fund.
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The drop in crude prices has prompted Gulf Arab monarchies to dip into reserves they had accumulated since 2000. Saudi Arabia’s net foreign assets fell by $115 billion last year to plug a budget deficit that reached about 15 percent of economic output. The government also turned to the domestic bond market and is planning its first international dollar bond sale.
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After decades of talk of diversification, more than 70 percent of Saudi government revenue came from oil in 2015 and the state still employs two-thirds of Saudi workers. Foreigners account for nearly 80 percent of the private-sector payroll.
“The issue really is how to get the Saudi private sector to hire locals, how to make the numbers on that right, since so much of the Saudi private sector has had business models based on lower-wage foreign labor,” said Gause.
In response to the country’s weakened fiscal position, Prince Mohammed’s plan is to raise non-oil revenue by $100 billion by 2020. The government announced cuts in utility and gasoline subsidies in December. Including future reductions, authorities expect the restructuring to generate $30 billion a year by 2020.
“There is a realization among many Saudis that the economic challenges that the kingdom is facing are daunting,” said Fahad Nazer, who worked at the Saudi embassy in Washington and is now a political analyst at JTG Inc. “Given the fact that some 70 percent of Saudis are under age 30, Prince Mohammed’s penchant for making quick decisions and holding officials accountable for their performance – or lack thereof - does have wide support among Saudis.”
Past rulers of Saudi Arabia have largely avoided seeking additional revenue from their citizens. As water prices surged after the reduction in subsidies, Saudis turned to social media to express their anger at the government. King Salman fired the water minister on Saturday.
Saudi leaders also have unique social challenges that other nations implementing economic changes didn’t have to manage. While steps have been taken to get women into the workforce, the kingdom still prohibits them from driving. The country’s feared religious police, despite having their powers to arrest curbed this month, still enforce gender segregation and prayer times.
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“The foremost challenge Mohammed bin Salman faces over time is the inevitable need to restructure the Al Sauds’ relationship with the Wahhabis,” said James Dorsey, a senior fellow in international studies at Nanyang Technological University in Singapore. “This restructuring is inevitable both to be able to truly reform the economy and because the increasing toll identification with the puritan sect is taking on Saudi Arabia’s international reputation.”
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His efforts to shake up the economy come against the backdrop of mounting domestic security threats and regional turmoil, with the Sunni-ruled kingdom bogged down in a war in Yemen against Shiite rebels it says are backed by Iran. He has also consolidated more power than anyone in his position since the founding of the kingdom.
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“Within Saudi Arabia, the main challenges MbS will face will involve not the substance of oil policy but rather resistance within the royal family to so much power being concentrated in the hands of one prince of his generation,” he said.
So perhaps the spiking money-market rates are more indicative of the potential for social unrest?