Summary: Mohammed Bin Salman is beginning to run out of options as Saudi Arabia grapples with the twin challenges of Covid-19 and the oil price rout.
While the extraordinary crash of the WTI price of crude into negative territory, the first ever, can be viewed as something of an anomaly, the 25% drop in the price of Brent to $16 a barrel today (22 April) is a stark statement about the vulnerability of the Saudi economy and of crown prince Mohammed Bin Salman’s Vision 2030.
Let us briefly recall in broad brushstroke the bold outlines of Vision 2030 when it was released 25 April 2016. It called for a radical restructuring of the Saudi economy and with it a social and cultural revolution: economic diversification with the banner headline of increasing the share of non-oil GDP from 16% to 50%. The empowerment of women into the private sector workforce together with a call to increase the contribution of the sector to GDP to 65%. The listing of private and government owned companies, including Aramco, on the Saudi stock market Tadawul. Commitments to realize jobs for young Saudis through the creation of entertainment, hospitality and non-religious tourism industries. The provision of affordable housing for those same young Saudis struggling to get on the property ladder. The ramping up of religious tourism – just one statistic should suffice to illustrate the scope of that particular ambition: by 2020, the number of Muslims performing Umrah to nearly double to 15 million a year and then by 2030 to double again to 30 million.
Umrah this year has been indefinitely postponed and Covid-19 in Mecca (where authorities are racing to try and contain the outbreak) could well force the cancellation of the Hajj. No one, of course, could have anticipated a coronavirus pandemic. But it has been clear for two months or more that in a global economy already slowing, the virus would impact in a significant way on the oil market.
The Saudi response was to launch a price war with Russia in early March that was only partially resolved on 12 April with the intercession of US president Donald Trump. All the while the glut of oil has grown and grown. Hence the ongoing collapse of prices. While lockdowns are being eased in some countries the time when the world was consuming 100 million barrels a day are gone for now with some analysts suggesting those days may be gone forever. Pre- Covid-19, most assumptions were that peak demand, the point at which the world’s appetite for oil begins its permanent decline, would hit around 2030. That scenario dovetailed rather nicely with Mohammed Bin Salman’s Vision 2030. What if, however, peak demand has already arrived?
If such is the case, the breathing space that MBS could reasonably have expected in order to achieve his revolution has evaporated literally overnight. A crown prince and a kingdom that had sought to move in double quick time to liberate itself from oil dependency through economic diversification now has no time whatsoever.
What then for those sectors that he has with great determination opened, sectors which for decades had been denied by religious authorities? The non-religious tourism industry which launched with great fanfare celebrating, for example, the extraordinary natural beauty and ancient sites of Al Ula, has been halted in its tracks. The opening of entertainment venues to men and women similarly stilled. And religious tourism which has generated huge amounts of revenue for the government has been forced to the side lines by the coronavirus.
The millions of jobs that Vision 2030 promised for young Saudis in the private sector have for now at least simply gone away and finding them has suddenly become an overwhelmingly difficult task. As David Roberts, a Gulf specialist at King’s College London, noted yesterday in a Chatham House webinar “Saudi Arabia’s non-oil economy has gone into reverse for the first time in three decades.” And speaking at the same webinar Kristian Coates Ulrichsen, an associate fellow with Chatham House’s MENA programme argued that the three sectors most in need of foreign investment – hospitality, (non-religious) tourism and entertainment – are the ones that will be hit hardest and therefore least likely in the near term to generate such investment.
The European Council on Foreign Relations’ Cinzia Bianca in a tightly argued piece published 20 April notes that though Saudi Arabia may have won the oil price battle with Russia it may well be on the road to losing the war. And she adds: “Riyadh announced in March that it would reduce government expenditure by $13.2 billion, or nearly 5 percent of its budget for 2020. And it has prepared emergency plans to scale back expenditure by an additional 20 percent.”
With oil falling to $16 a barrel and no sign that it will get much better – indeed suggestions are that it could well slide even lower to as little as $5 to $10 – those emergency plans are very likely to come into play. That means deep spending cuts. The question is where will Mohammed Bin Salman, having already saddled the kingdom with a war in Yemen that has consumed hundreds of billions of dollars, make those cuts?
The obvious choice would be to mothball the “AI” city of Neom, the Red Sea luxury tourism project, the entertainment city of Qiddiya, that is, all the giga-projects that the crown prince is so enamoured of. But to do so would be a huge loss of face. Cuts could come in health and education but the latter needs a huge boost to upgrade standards in order to meet the demands of Vision 2030. And cutting health spending while the kingdom is in the throes of the coronavirus crisis is unthinkable. Defence spending could be slashed. Unlikely, however, given that the Saudis see Iran as an existential threat that must be matched or overmatched with the latest in high tech military equipment. MBS could always go back to the princes of the ruling house and to the big merchant families and squeeze them once more as he did with the Ritz Carlton round-up of November 2017. The risk there is that with such a move his enemies only multiply.
In order to avoid the dreaded L, a flatline where the economy does not over time trend upward, he will need to do more than use the country’s sovereign wealth fund to snap up bargain basement deals as the world economy crashes. His problem is that with the collapse of oil and the economic derailment engendered by Covid-19, the cards he’s holding are beginning to look weak indeed.