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Accueil > Entretiens > Interview with Philippe Dauba-Pantanacce - Saudi Arabia’s “Vision 2030” plan (...)

Interview with Philippe Dauba-Pantanacce - Saudi Arabia’s “Vision 2030” plan and its economic impact
Article publié le 17/05/2016

Questions by Anne-Lucie Chaigne-Oudin

Philippe Dauba-Pantanacce provides analysis of MENA economies and Turkey for Standard Chartered Bank. He is based in London after having spent over half a decade in the Middle East. He appears regularly in the press and participates in conferences throughout the region. Philippe Dauba-Pantanacce exchanges with institutional stakeholders, such as in the diplomatic arena, policy makers, the World Bank, the IMF and the IIF.
Prior to joining Standard Chartered, Philippe Dauba-Pantanacce worked for HSBC for five years, both in New York and Paris. At HSBC Asset Management, he was responsible for its global emerging market fund expertise for continental European clients.
Before that, Philippe Dauba-Pantanacce worked in Washington DC for the French embassy and as a legislative aide for a member of the US Congress.
Philippe Dauba-Pantanacce holds a Bachelor’s degree in Applied Economics and a Master’s in Business Management, both from University of Paris, Dauphine. He is also a graduate of Sciences-Po Paris, with a Master’s in International Relations. He holds a Master’s from Columbia University, specialising in Emerging Market Finance.

The analysis and opinions expressed hereby reflect the author’s personal points of view. They do not embody the institution to which the author belongs.

Can you go back to the “Vision 2030” plan, which was just unveiled by deputy crown prince Mohammed bin Salman ? What does it represent, and what are the reasons behind it ?

First of all, the main spirit of the Vision 2030 is essentially to envision a country post-oil dependency, to liberalise and modernise the economy, but also and perhaps more importantly to alter the foundation of the social contract whereas the state would provide generous handouts from cradle to grave to the population at large in exchange for a certain level of political apathy.

The strong figure of Saudi’s current leadership – deputy crown prince Mohammed bin Salman - specifically talked about taking his country off its ‘addiction to oil’.

When the plan was unveiled it revealed a few main points :

- The confirmation that Saudi Arabian Oil Co. – “Saudi Aramco” – would be listed, although only 5% of the company’s capital would be sold. The proceeds would feed into a sovereign wealth fund (SWF) (1) which would likely become the largest in the world at above USD2trn (the largest SWF today is the Norwegian one estimated at around USD 850 mln)
- More generally speaking, privatization is seen as one of the main routes in this plan : not only will it raise new funds outside of oil proceeds, but it will also infuse a private sector mentality into the workforce, as well as accountability. The plan aims to push up private sector’s contribution to the economy from 35 to 60%.
- One important announcement would be a profound change in the approach to foreign workers : the idea of a green card (hence long term residency) system is being floated.
- Some targets seem to be quite unrealistic from the beginning, including the aim to localize over 50% of military equipment sourcing in the Kingdom compared to around 2% today.
- The plan aims to encourage foreign investments, raise the authorised foreign participation in listed companies (without gaining majority control though, which means 49% max). This will also mean a modernisation of the current stock market with some changes in the rules already effective.
- The plan also crucially envisions revamping the education system, one of the main challenges in Saudi Arabia with an abrupt mismatch between the job market needs and the education system curriculum. This might be one of the thorniest issues as this area is traditionally the preserve of the powerful clerics. In recent development, the new Saudi leadership has tried to curb the influence of this second pillar of the country’s power structure.
- The social changes will also come through the aim of having a 30% women participation in the workforce rate against 22% today.
- Tourism will also be a development priority : primarily the strengthening of religious tourism (at 8mn visitors today it is one of the first religious tourism destinations in the world) but prince Mohammed bin Salman also alluded to possible developments in other non religious tourism areas, which are close to non-existent today owing to the strict social norms.

Generally speaking, Prince Mohammed bin Salman is refocusing the policymaking decisions in the hands of a few technocrats whom he feels close to and who have his trust.

What are the reasons behind the appointment of Khalid al Falih as Minister of Energy, Industry and Mineral Resources ?

The appointment of Khalid al Falih is both very revealing of changes as well as the expression of continuity.

o It gives a sense of continuity in the sense that Khalid al Falih is a pure product of the “Aramco system” : he has been there for about 30 years and was anyway widely seen as the successor to Mr Naimi.

o It is also - and very importantly - a continuation on the issue of the global oil price strategy : public announcement talked about pursuing a similar policy.

But it is certainly a change, in many respects too :

o First, many would argue that Mr Naimi – after 20 years of praised service – has had a pretty unceremonious exit when he was lauded by everyone for his stewardship, both at home and abroad, but also because it is not like he wanted to stick around : it was no secret that he had expressed a desire for retirement a few times.

o Mr Naimi had earned a lot of respect from the markets but also domestically and politically, with a certain degree of independence in conducting Saudi oil policy on the global markets.

o Traditionally, the crucial oil policy was essentially left to technocrats (Mr Naimi and the efficiently run Aramco) with little to no comments from Royal family members, almost like the way a Central Bank and its monetary policy would be guaranteed independence in developed countries.

o But Prince Mohammed bin Salman made it very clear on the eve of the Doha meeting that he was disagreeing on the need to have Iran on board with the previously discussed oil production freeze (Mr Naimi hinted that they did not need Iran – hence allowing for a possible freeze - ; while Prince Mohammed bin Salman argued the opposite, rendering virtually dead any hope of a deal). Their disagreement went public, a very unusual occurrence in traditional Saudi oil policy.

o Most importantly, whether or not the decision to demand Iran’s participation in the tentative production freeze was based on an impartial analytical assessment, it left the impression that Saudi was politicising its oil policy. Mr Naimi’s tenure had been marked by his repeated message for two decades that Saudi was only looking at market fundamentals to inform its oil policy decisions.

o This could change and in that sense could mark a new era. Mr Falih is close to MbS and this proximity could be instrumental in the new Saudi oil policy, even if I tend to think that a pragmatic approach should retain the largest share of the decision making process.

Can you analyse the Saudi decision to take a small part of the Aramco group public ? What will the resulting inflow of funds be used for ?

The Aramco IPO (Initial Public Offering) announcement was seen as one the most emblematic signs of a historical turn in state policies, in a region where oil production and extraction is seen as undistinguishable from the sovereign and its attributes. There are many reasons for this announcement.

o First it is important to put things in perspective : the announcements talk about a maximum 5% listing. The immediate result of this will be a massive inflow of fresh money. Multiple reports have mentioned a total valuation of USD2 trn for the company, which would mean the largest company in the world, by very far. 5% of this would mean USD100bn which represents about 45% of the 2016 budget, a massive figure. Saudi Aramco pumps more than one in every eight barrels of crude in the world.

o But beyond the direct – but one-off – positive financial gain, the benefits are much more profound. The very important one would be a requirement for transparency : Aramco would have to announce its earnings every quarter, it would be observed and followed by bank analysts, think tanks etc, and the books will be open for everyone to scrutinize them. Startlingly, it looks like the company would be listed not only in Saudi but also on 2 other main financial markets, implying an absolute readiness to be subjected to the inquisitive look of any analysts in the world.

o This means that this will impose a restructuring of the giant company so that the entities that are listed can be clearly identified and valued. That means in turn a rationalisation of the organisation and a probable streamlining.

o The clear announced objective is to use the funds to invest in economic diversification strategies.

Is there talk of other IPOs ?

Aramco will actually be the source of various IPOs as the company is so massive, it includes various activities in the hydrocarbon value chain. The reform plan has laid out a series of IPOs with the objective of raising money, financing the diversification, having the private sector share of the economy grow, and promoting transparency.

The Tadawul – Saudi Arabia’ stock exchange – have already appointed a financier to work on its IPO. The country’s civil aviation authority has also mentioned that some airports and airport-related services could be part of the IPO list, the cargo subsidiary of Saudi Airlines (“Saudia”) being one mentioned. Other sectors have been rumoured : infrastructure, health, ports or education – although for the latter the resistance from the clerics who have a big say in the curriculum could be an impediment.

One other point is important : part of the strategy of privatisation is to shift part of the country’s revenues from (mostly) oil to a (growing) share that would come from returns on investments derived from the revived PIF SWF - a strategy long pursued by Qatar or the UAE. So defining the SWF’s mission will be key to this economic transformation. Economic literature has shown that the key to a SWF success is above everything else a clear mandate and the means to achieve it. It needs to be rule-based, process-oriented (including in its investment process) and disconnected from political interference. This takes place through legislation that spells out the SWF’s objectives. White papers and recommendations on SWF’s best international best practices show that the risks of financial mismanagement and failure in objectives are high if strong procedural and governance rules are not strictly adhered to. In that sense, the role of SAMA and PIF should be clearly defined, delimited and designed to make sure that they do not compete.

How are these economic reforms received ?

There is no question that while the “Vision 2030” plan is very close to what most economists, strategic management consultants and advisers have been advocating for, there are a lot of uncertainties about both its scope and its timeline.
About half of government expenditures go to public-sector salaries, and there is no doubt that shifting even a small part of this workforce to the private sector would massively lighten fiscal pressures.
But this also means that many of these new entities might not be as sympathetic to what is overwhelmingly considered an overstaffed administration, low level of demands, and very often a massive mismatch between the job requirements and the qualifications earned.
This in turn could provoke unease if not social pressures in a country where wealth is not as prevalent and ubiquitous as sometimes perceived from abroad
Concretely, some targets simply seem unrealistic. The plan talks about raising the locally sourced production of arms to 50% within 15 years from the current 2%, when Saudi has the third largest arms procurement in the world.
In the same vein, raising tourism figures from 8 to 30 mn figures seems farfetched, and reducing unemployment among Saudis down to 7% seems all the more difficult when demographic dynamics will add massive pressure on the job market, when the private sector keeps complaining of skillset mismatch, gaps in work ethics and expectations, as well as the great challenge of finding right candidates amongst the locals.
There will also most likely be a lot of roadblock in the implementation part : it is safe to say that there is a huge discrepancy between the plan developed and argued by the consultants/Saudi leadership on the one side and the middle management/rest of the society which would need to implement it on the other side. Socio-cultural resistance could represent a major challenge.
The IPO program might also benefit from a careful/prudent implementation so that the country does not find itself in the situation of a Russia post-perestroika economic liberalisation. This well-documented episode of economic transition from one system to another saw state assets being sold off and ending up in the hands of a select few, wealthy and connected, fostering the conditions to develop crony capitalism and the emergence of a dual society, predisposed to social tensions.

Note :

(1) in fact, all assets would be transferred to the revived Public Investment Fund (PIF). The PIF was established in 1971. The fund played an important role in a few occasions, including in the oil sector, downstream, etc. But this is not where the bulk of Saudi’s assets were kept : most of the excess cash derived from oil proceeds have been managed by the Central Bank SAMA (Saudi Arabia Monetary Agency), in a role slightly away from the traditional monetary policy. This confusion of mandates in state agencies will need to be addressed if a SWF becomes a cornerstone strategy for the future development of the country (see further down for more on this). The PIF’s remit was extended in July 2014 (giving it the authority to fund new companies domestically or offshore) and its activities started to pick up notably in 2015.

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