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.
Do you feel that keeping low oil price is a sustainable policy?
I would say two things: low oil prices at the current level might not be desirable for Saudi Arabia, but the gyration of oil prices is probably even worse. It prevents any budgetary planning, triggers succession of boom/bust cycles, and finally, can be difficult to tame.
Saudi Arabia still reels from its experience in the 1980’s, when, faced with a similar situation of lowering oil prices, it cut aggressively its oil production, to no results, hence loosing on both fronts of revenues and market shares.
But History will probably not repeat itself: it is clear that in the current oil extraction industry, Saudi is most likely the one best equipped to ride a prolonged low oil price level. If we look at the latest data release from the US, the strategy seems to be paying: on 2 February it was announced that the number of US rigs has been through its biggest weekly decline on record, and its longest monthly stretch of declines since 2009. Beyond the US, most non Middle East oil producers suffer a lot at these price levels.
The Kingdom was not impacted by the Arab Spring (at least on the surface) through a mix of abundant redistribution. Will this policy continue?
It looks like some more is to come. Barely 10 days after the new Kings’ ascent to the throne, a package of USD33bn of new spending was announced, primarily consumption driven. This is different from the previous package of spending though, as it tends to accompany the celebration of a new monarch’s tenure. But without any doubt, adding over 4% of GDP in spending is anything but austerity.
One needs to distinguish between current expenditures (salaries, wages, benefits or pensions) and capital expenditures. It is indisputable that Saudi will have to go through a rationalization exercise in its expenditures, in rebalancing toward more capital spending. More immediately, and in lights of the lower oil prices environment, certain non-essential/non-strategic projects will be reassessed or pushed back in time. But any infrastructure spending tied to the strategic development of the country will most likely continue. Saudi Arabia has not only the cash to sustain it, but is also quasi debt-free if it ever needed to go back to the debt market.
Generally, what is the market assessment of the Kingdom’s economy? Where is Saudi Arabia on its way to diversify its economy? Is there urgency? What are current obstacles? What about labour issues and the saudisation of work force?
There are two ways to look at this.
In the short to medium term, there is no real worry. Saudi Arabia sits on one of the largest oil reserves in the world (according to the EIA it has the largest proven reserves of crude oil with 16% of the total, 266 billion barrels – Oil & Gas Journal), is cash rich (the second largest assets under management along with the UAE at about USD750bn) and has quasi no debt. At current levels of production, reserves could last for close to a century. The fact that the cost of oil extraction in Saudi Arabia is much lower than in any other regions in the world, insures that Saudi will most likely continue to be an undisputable world player on the oil market.
Medium to long term challenges should not be underestimated, the main one being related to its own source of wealth: oil. Because of a series of problems related to incentives misalignment, domestic oil consumption growth in Saudi Arabia is on an exponential trend. Saudi Arabia consumes more oil than Brazil, which is 7.5 more populated, or than Germany, which has a GDP 5 times larger. If nothing is done, Saudi will not have any oil to export anymore within about two decades (various studies including Chatham House, 2011). One of the reasons oil consumption per capita is so high is the absence of incentives to energy saving. But at the same time, cheap oil at the pump, subsidized electricity and water (produced through energy intensive water desalination plants) is part of an unspoken social contract in the region. Altering this very delicate equilibrium could prove very challenging. Today, about 50% of the budget essentially goes to subsidies in all forms.
Addressing the challenges of a future beyond oil has meant a race to diversify the economy. This is the second issue: today, diversification (in the ‘industry’ sector) is overwhelmingly on sectors that are highly energy intensive and which economic model precisely relies on the subsidized supply of energy and/or water as a cheap feedstock. So, essentially, putting into question the subsidy system – which hampers more productive budget spending and any energy efficiency attempts – also poses the problem of the diversification strategies.
The problem of labour is that a lot of the diversification strategies have relied on the subsidies described above and also on cheap imported labour. Saudisation programs are in line with other programs in the region of local employment promotion. But they present challenges. On the mid to higher labour market they can have the tendency to result in mere added costs to foreign companies instead of addressing the original issue of a mismatch between market needs and the available qualifications. On the lower end of the labour market, imported foreign labour (on construction sites, domestic helps and retail/wholesale: the three of them representing 2/3rd of the foreign workforce employment) fills a gap not occupied by the local pool of workers.
According to an IMF study, 1.5 of the 2 million new jobs created in the last four years got filled by non-Saudis. Until recently, about a third of the 30 millions Saudi population was made up of migrant workers. A campaign to encourage saudisation and crack down on illegal workers led to the leaving of an estimated 1.5million workers. Official figures give unemployment at 12.2% in 2013 and 28.4% for the 15-29 age group.
Beyond reluctance vis-à-vis working instead of rents, do you feel that a religious conservatism has expanded within Saudi population, opposing modernization of social life?
King Abdullah has attempted, over his tenure, to very progressively relax the social norm, break some taboos (i.e. his mixed gender university) and promote certain cultural aspects of Saudi Arabia. This was not always understood by the wider population and not all segments of the power structure necessarily recognize the need for such steps…
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.
