A coffee shop in one of Riyadh’s late-night malls offers a glimpse of the social and economic changes that are sweeping across Saudi Arabia. Liberally dressed Saudi twenty-somethings scroll through social media feeds on their iPhones and kick back as the basslines of Stromae, a Belgian hip-hop artist, reverberate across the room. Art works depicting feminist iconography and 1920s-style hedonism – painted by a local artist – adorn the walls in a floor-to-ceiling display.
Scenes of this kind would have been unthinkable in the capital just a few years ago. But Saudi Arabia is changing. Under the auspices of crown prince Mohammad bin Salman, the cultural fabric of the country is transforming; conservative orthodoxies hold less sway and the political, social and cultural centre of gravity now lies with a new generation of globally minded and progressive young Saudis. This constituency forms the bedrock of the crown prince’s support across the country.
“Crown prince Mohammad bin Salman enjoys strong popular support, particularly among the younger generation of Saudis,” says James Reeve, chief economist at Samba Financial Group.
Liberal vs conservative
But a country as large and as complex as Saudi Arabia is not without its contradictions. Every pocket of liberal reform has a deeply traditional counterpart. The same is true of the country’s efforts to revive its oil-dependent economy. As the government marches towards its Vision 2030 reform agenda – which envisages a transition to a non-oil, private sector-led economy – progress remains patchy. Advances in niche or technical domains, including the capital markets, remain the standout success story. Elsewhere, such as with the all-important privatisation agenda, little has been achieved.
This matters because restructuring the Saudi economy to meet the needs of the young and educated patrons of Riyadh’s late-night coffee shops will define the country’s future. In short, the authorities know they must find a way to give this generation a stake in the new Saudi Arabia, with education, employment and housing opportunities just some of the requirements. For this to happen, the economy will have to expand at a steady clip – and do so in non-traditional sectors.
At present, the scale of the task is producing difficulties of commensurate size. Unemployment, for instance, remains stubbornly high at 12.7% and every year Saudi’s educational institutions churn out hundreds of thousands more graduates, all on the hunt for high-end employment. To address this problem the authorities have introduced measures to incentivise the private sector to hire nationals over foreign expatriate workers.
They have done this in a number of ways. First, fees have been levied on foreign workers and their dependents. Second, Saudi nationalisation scheme ('Saudization') programmes have been enhanced through increased hiring quotas for Saudi nationals, while wage subsidies have also been introduced for nationals in the private sector.
Unintended impact
But private businesses have suffered as a result, not least because these changes have contributed to the departure of foreign workers. “The private sector has been burdened by the exodus of expatriate workers, the implementation of value-added tax and Saudization. That burden has been difficult to shoulder so the government is trying to redress the balance by offering people more disposable income through additional incentives, including a rollover of the inflation allowance,” says Mr Reeve.
As a result, labour market nationalisation policies have hit the very area of the economy that needs to lift Saudi Arabia out of its current model of oil dependence – the non-oil private sector. The likely outcome of all of this, according to Thaddeus Best, an analyst at rating agency Moody’s, is that the government will have to fine-tune these policies. “There are some indications that this has begun: Saudi Arabia’s government has initiated a review of expatriate worker fees implemented in 2017 after the policy contributed to an exodus of expatriates without a commensurate increase in national employment,” he says.
Indeed, about 1.5 million foreign workers have departed the country since 2016 with only tens of thousands of Saudi nationals filling the jobs that have been left in their wake, according to government figures. This lack of job take-up partly reflects the lower skilled positions being vacated, as well as a broader skills gap mismatch that exists in the labour market. Regardless, these numbers depict the scale of the challenge the country faces.
Increasing levels of foreign direct investment (FDI) offers one solution to this problem. Not only does FDI stimulate widespread job creation but in the right sectors it can lead to the kind of higher value-added professions prized by the architects of Vision 2030. But in recent years, however, FDI into Saudi Arabia has collapsed. In 2017 it was $1.5bn, while in 2018 it was little better (even though it more than doubled) at $3.5bn, according to the UN Conference on Trade and Development. This compares unfavourably with the $8.1bn in FDI the country secured in 2015 and is a long way off the stated goal of FDI figures reaching 5.7% of gross domestic product by 2030.
Reputational hit
This collapse is, in part, linked to several government actions over the past 18 months – both at home and abroad – that have sullied the country’s brand, puzzled onlookers and spooked foreign investors. Overcoming these missteps will take time. But as this happens, the Saudi authorities are taking other measures to improve the country’s attractiveness to foreign investors and Saudi Arabia’s privatisation agenda is a case in point. With a vast array of assets and sectors to privatise, the scope for foreign investor participation is massive.
“The privatisation programme has been a little slower than many had hoped. But I think this will move in 2019 and the point I would make here is it that it’s really important to have the right ecosystem and right foundations in place for this to prosper. It’s not something that can be done quickly and the authorities are working to get this right. I think you will see the emergence of a privatisation pipeline in 2019,” says David Dew, managing director of the Saudi British Bank.
This sentiment is shared by Riyadh’s financial and business elite. Most point to the fact that the government is taking the time to get the legal and regulatory groundwork for privatisation right before beginning, what is, a highly complex task. “To be fair to the Saudi authorities, there is quite a lot going on behind the scenes. There is a major push to update the country’s legal foundations in order to ease privatisation and foreign investment. That’s a great ambition but it is going to take time to get it right,” says Mr Reeve.
A private plan
The launch of the draft Private Sector Participation Law in July 2018 is a good example of the government’s intentions in this domain. The proposed law eases the way for public-private partnerships and, more generally, greater private sector participation in the economy. If something close to its draft version is released – which is expected to occur soon – it will go a long way to improving Saudi Arabia’s foreign investment credentials. The launch of a new bankruptcy law in 2018 is further evidence of this trend.
As a result of these reforms, and the country’s undoubted economic potential, the business community at large remains relatively upbeat about Saudi Arabia’s short- to medium-term prospects. Though most recognise that an array of serious challenges need to be overcome, particularly in the context of the labour market, optimism nonetheless prevails. An expansionary 2019 budget should feed into strong non-oil growth for the year, with purchasing managers’ index figures in the opening months looking positive.
“[We are] optimistic about the prospects of the Saudi economy and look very positively towards the reform programmes outlined in Vision 2030,” says Rania Nashar, chief executive of Samba Financial Group.
