By any standards, Saudi Arabia is having a good crisis. Robust oil prices have helped keep state coffers flush, and allowed the kingdom to grow its economy at a steady clip.
Real GDP growth was an impressive 7.1% last year and – even more encouraging for policymakers looking to rid the economy of its oil dependence – the non-oil economy grew by 8%, the highest rate since 1981.
Throw in a stable inflation rate of 5%, a stock market index that at the end of August was up 11% on the start of the year and a major investment programme that is underwriting a massive upgrade of the country’s infrastructure, and the relatively chipper mood in Riyadh is easy to comprehend.
Long-term efforts to diversify are gradually yielding fruit. According to Riyadh-based SAMBA Financial Group, the value of non-oil exports has grown by an annual average of 17% over the past decade; they have increased their share of total exports from 14% to 17% over the period.
These positive trends have granted the ageing Saudi leadership some breathing space, as it tries to chart a new direction for a conservative kingdom that is feeling the pressures of modernization as painfully as any Arab state.
The strong fiscal position imbued by the sustained high oil prices has already proved its worth, enabling King Abdullah bin Abdul-Aziz to announce extra-budgetary spending measures to the tune of $130 billion in the spring of 2011 without putting a serious dent in the fiscus.
Designed to head off popular discontent in the throes of the Arab Spring, a series of pay and benefits increases for ordinary Saudis is filtering its way through the economy.
The problem is that healthy state finances are not traditionally a trigger for reform in the kingdom. And last year’s policy of throwing money at the problem – even if it succeeds as a short-term palliative – is not sustainable, despite oil prices being above $100 a barrel.
Further burdening the already bloated public sector with increased salaries and more staff – some 60,000 new civil servants were created at the stroke of a pen last year – is no solution to the long-term challenges confronting the kingdom, principally the need to find real private-sector jobs for the growing number of young Saudis entering the labour market every year.
“The political pressures of recent years have led to a dramatic increase in government spending at a pace and in ways that is probably not sustainable and certainly not prudent,” says Jarmo Kotilaine, chief economist at Saudi Arabia’s National Commercial Bank.
There remains concern at a potential trade-off between short-term tactical considerations and long-term strategic visions. Short-term considerations risk diverting financial resources away from the long-term strategic goals.
Progress in reforming key areas of the economy has faltered in the context of abundant oil revenues, on the back of production of more than 10 million barrels a day. “The momentum for privatization has slowed with the build-up of large fiscal surpluses,” says Said al-Shaikh, a Saudi economist and member of the Majlis al-Shura (consultative council).
The need to re-engineer the private sector as the main driver of economic growth is recognized at the highest levels of power. The problem is in the implementation. Retracting the state from its traditional dirigiste role in directing economic activity is proving a major challenge.
“Many of the industrial projects that were implemented in the last few years happen to be either under the complete control of government or at least semi-government control,” says al-Shaikh.
PRIVATE-SECTOR NEGLECT
The Saudi kneejerk response to the Arab Spring was to use the firepower of the state to douse the sources of social discontent; critics have said that the net result of this is to smother private-sector dynamism. New initiatives targeting social issues such as job creation, affordable housing and small and medium-sized enterprise financing led to an increase in government spending of 20% in this year’s budget.
King Abdullah’s gargantuan task in pushing ahead with educational, legal and social reforms is not made easier by his age – a reported 89 – and ill-health. Over the past year, the Saudi king has lost his two most senior adjutants: first Crown Prince Sultan, who died in October 2011, and this June Sultan’s heir apparent, Prince Nayef.
Though Nayef’s agenda was conservative, in contrast to the more progressive instincts of Abdullah, the disruption in the higher echelons of the House of Saud felt by the loss of two big political hitters may have sapped some of the momentum from the king’s reform programme.
“Some big figures have left the stage, and the problem is that Abdullah has to replace them in terms of maintaining balance within the factions of the royal family. He’s got to play a very careful balancing act among the second generation princes and lacks the basis of support within the family,” says Kristian Coates-Ulrichsen, a Gulf analyst at the London School of Economics.
Still, there is fresh blood in the form of 76-year-old Prince Salman who has taken over as crown prince, and who is seen as more supportive than his predecessor of Abdullah’s reforms. That is important, as Salman could be close to becoming king himself. “If anyone were to be more likely to continue reforming it would be Prince Salman,” says Coates-Ulrichsen.
Nonetheless, with security issues still resounding, notably among the Shia communities of the Eastern Province, much of the government’s attention is absorbed by the need to maintain domestic stability rather than advance key economic reforms. The arrest this July of a prominent Shia cleric Shaikh Nimr al-Nimr, provoked protests in the restive area of Qatif, and security forces have killed more than a dozen protestors in the past few months.
These conflagrations tap into much deeper issues of political marginalization and economic discontent. The resulting focus on domestic security could erode whatever capacity remains for pressing ahead with changes in the core areas of education, employment, legal affairs and the role of women.
Some of the groundwork for reform has been laid on one of Abdullah’s favourite themes: boosting women’s participation in public life. In September 2011, the king announced that women would be appointed to the 150-member Majlis al-Shura in 2013, and would be allowed to vote in municipal elections set for 2015.
King Abdullah University of Science and Technology (KAUST), a $10 billion project intended to spearhead the modernization of higher education, including co-educational learning, opened its doors in 2009.
These initiatives are the backbone of Abdullah’s broad-based reform programme. However, much of the educational establishment remains dominated by clerics, and there is concern that the king’s education reforms are too closely tied to him personally. The fear is that if moves to modernize education and support women’s participation are not properly institutionalized, they could be undone by a future monarch.
“KAUST may well have a $10 billion endowment, but once its founder dies, will it be similarly well placed?” says Coates-Ulrichsen.
There is, at least, a broader consensus in the kingdom for pursing economic reform compared to the politically sensitive social agenda associated with the king. This January Abdullah reshuffled senior economic positions in government.
Muhammad al-Jasser moved from heading the central bank, the Saudi Arabia Monetary Agency, to take charge of the economy and planning ministry, with a brief to oversee economic development and address structural challenges to the economy, such as unemployment and rising energy consumption.
SOCIAL AGENDA REFORMS
This year progress has been made on one of the more far-reaching reforms, with approval, after many years’ waiting, of the Mortgage Law by the Council of Ministers on July 2. This tackles head-on one of the more intractable of Saudi social issues, the shortage of affordable housing, besides offering substantial economic spin-offs.
“The mortgage law approval is an important milestone, and is basically an effort to encourage developers to provide for the underserved lower- and middle-income segments,” says James Reeve, deputy chief economist at SAMBA.
“Hand in hand with this effort to stimulate private-sector provision, will be a concerted push by the housing ministry to build affordable homes.”
But the passage of the Mortgage Law does not of itself solve the problem of housing, and there is concern that this effort might undercut the private sector: if the government is building affordable houses, says Reeve, it will presumably sell them to Saudis at subsidized prices. “But I’m not sure where this leaves the private sector, which will need to turn a profit.”
Labour market reform has also seen traction with a sprucing up of its Saudization effort under the Nitaqat programme, which is designed to increase the number of Saudis in the workforce through a colour-coded incentive scheme for companies that rewards those who employ the highest number of nationals, and penalizes those who do least.
Nitaqat was initially received cautiously by private-sector employers. Nevertheless, in the year since its introduction, it has gained grudging acceptance.
“Companies are definitely paying more attention to Nitaqat, and in spite of all the words said when it was introduced, the sky hasn’t fallen in. The execution has at least been a moderate success,” says Kotilaine.
Nitaqat may be an improvement on what went before, as it introduces the ‘carrot’ as well as ‘the stick’, but it does not address the age-old problem of the suitability of Saudi graduates for private-sector employment. “This is a long-term challenge that will require an overhaul of teaching standards, not just the curriculum,” says Reeve.
Further liberalization of the capital market is anticipated, after some slow going since the last major advance in 2008, when the Capital Markets Authority allowed non-Saudi asset managers to invest directly in the market.
Dismantling barriers to foreign portfolio investors in the $378 billion market capitalization stock market is a topic much talked about. However, momentum has visibly slowed given the lack of urgency in attracting foreign capital to the kingdom.
Faster progress is evident in the development of a sukuk market.
Saudi Arabia has established a lead in the issuance of Islamic debt securities this year, placing $6.55 billion, or 77% of the regional total, in the first quarter of 2012. That figure was inflated by the largest ever single-tranche sukuk, a $4 billion, 10-year issue by the General Authority of Civil Aviation (GACA) to fund development of Jeddah International Airport.
By opening up infrastructure projects to a more diverse array of funding sources, the GACA sukuk is regarded as a significant milestone, creating a mechanism for absorbing some of the big pools of capital that exist in the region for economic development. “It is more sensible than doing everything from the government budget, and helps to contain government overreach,” says Kotilaine.
These reforms may be under the radar but are potentially seismic in their impact.
The next challenge for King Abdullah is to show that his impulse for reform has not run dry in the face of age, ill health and burgeoning security concerns.
The clutch of social and economic reforms underway suggest the usual glacial pace of change is picking up speed. The big question, though, is not whether things are changing – it’s whether they are changing fast enough.