Low crude prices and the war in Yemen have sent a shock through the kingdom’s budget and forced it to revise its social contract even as it seeks to diversify its businesses.
Prince Mohammed’s plan for an economic overhaul has sent tremors through
a nation whose citizens have long enjoyed a cosseted lifestyle
underwritten by the state. “The government is moving very fast at
reforming things in
Saudi Arabia,
while the people are finding themselves left behind,” said Lama
Alsulaiman, a businesswoman and board member of the Jidda Chamber of
Commerce and Industry. “Life as usual and business as usual can no
longer continue.”
Rewriting the social contract carries high risks for the 31-year-old deputy crown prince, who has staked his reputation on
transforming the economy.
“People are looking to see if he can do it,” said Ibrahim Alnahas, a
political-science professor at King Saud University in Riyadh, the
capital. “If so, his future would be king. If not, his future would be
lost.”
The
vast subterranean seas of petroleum here have seeped into almost every
part of the Saudi economy. Crude oil does more than deliver billions of
dollars in profits to Saudi Aramco, the state oil company, and Sabic,
the chemical giant; it also buttresses energy-intensive sectors like
cement production and aluminum smelting.
Saudi
Arabia burns barrel after barrel of crude oil for electricity, one of
the few countries to do so in large quantities. Commercial
air-conditioners cool shopping malls as temperatures outside soar past
100 degrees in the summer, and children go sledding at Snow City, a
frigid new recreation center in the capital. Much of the drinking water
needed to keep this desert nation alive comes from energy-draining
desalination. And the S.U.V.s idling in Riyadh’s enormous traffic snarls drain gasoline.
“It
is striking the extent to which every major industry relies on cheap
energy, whether directly or indirectly,” said Glada Lahn, co-author of
a study
for Chatham House, a London think tank, that warned that the kingdom
could become a net importer of oil within a few decades if it did not
make significant changes.
Saudi
Arabia’s about-face last month at a meeting of the Organization of the
Petroleum Exporting Countries in Algeria, agreeing to cut production to
raise the price of crude, showed the urgency policy makers here are
feeling. Prince Mohammed announced plans this year to sell off a small
piece of the country’s economic crown jewel, Saudi Aramco, to free up
money for investment.
The
budget deficit was nearly $100 billion last year. The country’s foreign
reserves have dropped by a quarter since oil prices started falling in
2014. The government has taken loans from foreign banks and will try to
borrow more from the global bond market.
Hedge
funds are wagering that the Saudi central bank will be forced to
revalue its currency, the riyal. Zach Schreiber, the head of PointState
Capital, which made $1 billion betting that oil would fall, told
investors in May that the Saudi riyal was “massively overvalued” and
that the country had only “two to three years of runway before it hits a
wall.”
The
government has abruptly cut construction projects, forcing contractors
to lay off workers. This year, foreign laborers set fire to buses in
protests demanding months of back pay. The sudden jump in water bills
this spring led to such an outcry on social media that the minister for
water and electricity was fired after telling customers to dig their own
wells if they were unhappy with prices.
“If
you’re a Saudi, you’ve grown up with that expectation of the financial
largess that’s dished out,” said Adel Hamaizia, the vice chairman of the
Oxford Gulf and Arabian Peninsula Studies Forum. “Things are likely to
get more difficult for the government in terms of managing frustration
from the everyday people.”
Adding
to the pressure, the kingdom’s population has nearly doubled since
1990. With half of all Saudis younger than 25, the private sector does
not offer enough good opportunities for the estimated 300,000 young
people entering the work force each year, especially women. Fewer of the
public sinecures that have sustained earlier generations are available,
with plans for deeper cuts.
Despite
Saudi Arabia’s image as a haven for Ferrari-driving sheikhs with
stables full of racehorses, oil revenue is much lower per capita than in
small states like Qatar or Kuwait. There is poverty in the kingdom as
well as an increasingly anxious middle class.
One
evening last month, it was a stifling 99 degrees in Riyadh after
sunset, with dust hanging in the air. Um Rashed Al-Rashed was selling
jewelry and baskets of seeds at a small souk, hoping to supplement her
husband’s modest pension.
“The
prices are increasing for everything,” Ms. Rashed said. The couple’s
electricity bill after the Ramadan holiday was so high they could no
longer afford it, so the power was shut off. “Only a camel can live
without electricity,” she said.
On
billboards across the country, the king, crown prince and Prince
Mohammed appear, eyes toward the horizon, with a purple 2030 logo with
the national emblem — a palm tree and crossed swords — above them. The
Vision 2030 plan calls for a steady diversification of the economy over the next 14 years.
That
would include expanding the country’s mining industries to exploit
gold, phosphate and uranium deposits, and building up the financial,
technology and entertainment sectors. And while many countries declare
that they will generate added revenue through tourism, only Saudi Arabia
has Mecca, which more than 1.6 billion Muslims worldwide are instructed
to visit on a pilgrimage before they die.
Prince
Mohammed gathered business leaders, government officials and even
athletes and artists at the palatial Ritz-Carlton in Riyadh late last
year to discuss the economic targets his team was developing.
Consultants with tablet computers fanned out across the country,
surveying Saudis to determine how far the government could pare back
subsidies without setting off protests.
After
decades of rule by octogenarian kings, some young Saudis said in
interviews that they felt energized by the role played by a prince from
their generation. “Subsidies should have been done a long time ago.
Things are still so cheap,” said Salman M. Al Suhaibaney, a Saudi
entrepreneur, holding up his drink to demonstrate. “This bottle of water
is more expensive than the same amount of gas.”
Mr. Al Suhaibaney founded an app for tow trucks called
Morni,
like an Uber for roadside assistance, including fixing flat tires,
delivering gas and jumping batteries. His business is in a
government-supported start-up incubator in a Riyadh office building.
Staffed by 20 young Saudis, Morni is a model for the kind of business
the government, and in particular the tech-savvy young deputy crown
prince, hopes will buoy the work force.
But
more public funds are needed right now to close the budget gap. The
government has announced plans to more than triple non-oil revenue by
2020, starting with rising fees for visas, higher fines for traffic
violations, and a sin tax on sugary drinks.
Officials
have seized on every opportunity to squeeze costs. After cutting pay
for ministers, freezing hiring and curtailing regular bonuses and
overtime for the entire public sector work force, the government
announced last week that workers would be paid according to the
Gregorian calendar (as in the United States and Europe), instead of the
slightly shorter Islamic Hijri calendar, adding roughly one unpaid
workday a month.
“If
your salary is going down and your costs are going up, something’s got
to give,” said Mr. Hamaizia of the Oxford Gulf and Arabian Peninsula
Studies Forum.
Less
spending by government, businesses and increasingly strapped consumers
means less growth and fewer jobs. The only way to create more jobs for
Saudis in such an environment may be by getting rid of foreign workers
and replacing them with locals. That policy, known as Saudization, has
been pursued at least since the early 1980s and always failed, with the
number of foreign laborers ballooning from roughly one million to 10
million.
Now,
though, the government is pressing companies harder. Foreign workers
cost less, but the government levies fines and refuses to renew visas
for foreign workers if business rosters dip below a certain percentage
of Saudis. The kingdom’s
targets for increasing employment include more than 450,000 new private-sector jobs by 2020.
The
Almarai dairy employs 8,000 Saudis among its work force of more than
40,000. On a recent morning, 150 Holsteins moseyed into the milking
parlor where workers from Kenya, the Philippines and elsewhere hooked
them up to automated pumps. The business — which also produces yogurt
and cheese and includes a bakery — has its own training academy for
Saudis, drawing 15,000 applicants annually for just 400 slots.
Prince
Sultan bin Mohammed bin Saud Al Kabeer, a member of the extended Al
Saud royal family and one of those rich Saudis with a stable of
thoroughbreds, founded Almarai in 1977 with the help of Irish dairy
farmers.
“We
try to keep it to a standard that if the prince wants to come in
tomorrow with his friends, he’s welcome,” said Tony Gavin, the Irish
manager of the largest Almarai dairy farm, in Al Kharj, southeast of
Riyadh. Wearing brown shorts and Ray-Ban sunglasses, Mr. Gavin gave a
tour of the sprawling farm.
The
cows rest under a cooling mist scattered by large fans, the temperature
and quantity of water computer controlled. A nutritionist optimizes the
cows’ diet with cottonseed from Greece, sugar beet pellets from the
Netherlands and locally grown alfalfa.
But
the government has dictated that dairies must phase out local feed
production because water is so scarce. Despite its arid environment,
Saudi Arabia once pursued large-scale farming, even becoming a wheat
exporter before all but abandoning cultivation to save water. Almarai
has bought farmland in Argentina, California and Arizona to produce
alfalfa to ship here.
Still,
the business is getting squeezed. While utility and feed prices are
rising, the dairy has not been allowed to raise the price of milk.
“We’ve
tried in the past, and the king sort of tapped us on the shoulder and
said, ‘What are you doing?’” said Stuart Gouk, manufacturing manager at
the plant here. Higher milk prices could have political repercussions.
The
kingdom’s subsidy cutbacks are expected to deepen. There may well come a
point where, as with wheat farming, policy makers will have to decide
whether it really makes sense to produce milk in the desert.
“People
who visit can’t believe there are cow herds here,” Mr. Gavin said, “but
they never thought about where the milk comes from.”
Posts
