HSBC: Saudi Arabia faces 'stagnation and decay'
In the note titled "Saudi Arabia: Why the Kingdom can must be reformed" HSBC economists Simon Williams and Razan Nasser argue that "a protracted period of marked economic decline" will be unavoidable if the oil-rich Gulf state doesn't start moving towards
When the increasingly powerful Prince Mohamed Bin Salman revealed plans to curb Saudi Arabia's "addiction" to oil with the country's new Vision 2030 plans in April, many people were hugely sceptical, suggesting that not only did the reforms pledged not go far enough, but also that the Saudi government might not actually be committed to implementing the reforms laid out.
HSBC is particularly wary, noting that it cannot think of an energy dependent economy meaningfully weaning itself off commodities (emphasis ours):
But while Vision 2030 may be all about the future, history counts against it. Successive generations of Saudi policymakers have promised change but have delivered little. Moreover, those decades of poor policy making also mean that the structural imbalances the Kingdom faces have continued to build, making the task of reform even more complex than in the past. Looking across the Middle East and beyond, we can think of no example of an energy rich economy that has successfully reformed itself after decades of commodity dependence.
One of the biggest reasons for this scepticism is the country's inherently conservative nature - with HSBC citing the small number of women in the workforce as an example - along with certain laws that are incredibly specific to Saudi:
Above all, though, the reform programme will face resistance. Some elements of this are particular to Saudi Arabia - a commitment to boost the female labour force participation rate, for example, must overcome restrictions that prevent women driving and limit men and women working alongside each other. Plans to develop the entertainment sector must overcome a longstanding ban on cinemas.
However regardless of the difficulty faced in implementing reforms, Saudi Arabia simply doesn't have a realistic alternative to sweeping changes in its economy.
Ever since oil prices started to plunge in mid to late 2014, imbalances in the economy that have "ballooned" in the last decade have started to be exposed. Government revenues now cover just over half of outlays, and the country is deep in deficit, in both budgetary and current account terms. Here's the kicker from HSBC:
Without ever rising levels of oil money to boost spending and liquidity, activity [has] already fallen sharply away as a fiscal and monetary squeeze has replaced the stimulus and domestic and international sentiment has dropped (see chart 4). In place of the 5% plus growth rate of the boom, we think trend growth in the current oil price environment could be as low as 1% - a pace of expansion that is inadequate to meet the rising demand for jobs, infrastructure, houses and services guaranteed by its overwhelmingly youthful demographic.
And here are the charts to show just how bad things are:
To address these problems, HSBC agrees that many of the reforms set out in Vision 2030 - including exploiting untapped mineral reserves, boosting its position in the pantheon of global trade, and increasing revenues from religious tourism - would likely provide a much needed boost to the economy. However, it is bigger structural reforms to the composition of the country's labour markets, that will reshape the Saudi economy for the future.
Here's HSBC (emphasis ours):
It is not the plans for sectoral development, however, that persuade us that the work can be done, but rather the change to the function of the economy that we expect to occur axiomatically as a result of the slump in oil income. When we stand back and look at the distortions and inefficiencies that have built up within the Saudi economy, we see shortcomings that have emerged not as a result of some inherent flaw in the character of the Saudi polity, but as a direct consequence of oil wealth - the Kingdom's own particular experience of the resource curse.
Indeed, since the emergence of the modern Saudi state in the 1970s, the Kingdom has been able to generate rent from the production of oil for a fraction of its export price. That rent created no incentive for innovation or productivity in the private sector, or for the development of functioning financial and labour markets or for an effective government sector.
By fundamentally altering the way it runs the country, diversifying revenue streams, and accelerating labour market reform and productivity growth, Saudi can avoid decay and stagnation.
As HSBC notes, it will be painful, it will be difficult, and it is a process that will take decades to achieve, but for Saudi Arabia to prosper in the long term, it must be done.