Is Saudi Arabia likely to unshackle itself from oil dependency any time soon? Our view is — not.
Determined to overcome its oil revenue dependency, the gulf state's deputy crown prince, Mohammed bin Salman, has pledged to implement Vision 2030.
It includes an ambitious programme to diversify Saudi’s economy, treble non-oil revenues to $100bn (£68bn) by 2020 and dramatically reduce government spending.
But Riyadh’s intervention comes on the back of two concerning statistics: year-on-year gross domestic product growth has slowed to 3.4 per cent and the budget deficit spiralled towards $98bn in 2015.
Growth in 2016 is expected to be even slower at 1.2 per cent, according to the IMF. Indeed, one concern over Saudi Arabia’s commitment to economic renewal is whether it can curb its persistent government overspending, which was 13.4 per cent over budget in 2015.
Perhaps the most pressing statistic, however, is the Kingdom’s foreign currency reserves, which have decreased by $150m in 18 months. This is three times greater than the second largest decline, suffered by Algeria during the same period.
This makes diversification an urgent driver if the country is to meet its Vision 2030 goals.
Whether the government can sell this vision to such a conservative population, however, remains questionable. Possibly only continued low oil prices will persuade a population, insulated by decades of oil wealth, that it requires social as well as economic liberalisation if it is to diversify the economy, including the removal of subsidies.
That said, oil price hikes would also be essential to generate enough revenue to invest in non-oil industries. Therefore, the optimal conditions to achieve Vision 2030 would be high exports and a low-to-medium oil price.
Yet, this relies on the market moving in the right direction, which is itself questionable.
The Kingdom’s tentative market position and growing domestic demand has put pressure on its spare capacity and raised concerns over its ability to maintain crude exports, which could push up oil prices during times of high seasonal demand.
This may cause the market to turn towards Iran, which is increasing production and cutting its official selling price.
These struggles are causing observers to focus on Saudi’s next move: the first outing for the newly-appointed oil minister, Khalid al-Falih, to the Organisation of Petroleum Exporting Countries (Opec) meeting on 2 June.
Al-Falih is likely to face Opec members eager to revive talks of an oil production freeze, which would spell disaster for KSA’s desire to maintain low prices. And yet, this is key if public support for economic diversification in Saudi Arabia is to grow.
A freeze agreement is unlikely, however — meaning there is a high risk of a price war, with both Saudi Arabia and Iran ramping up production (and pushing down prices).
Regardless, in the mid-term future two outcomes seem certain — price volatility will ensue and Saudi’s efforts to diversify its oil-based economy will continue.