Faced with dramatically fluctuating oil prices and pressing demographic realities, Saudi Arabia is working to envision a future beyond reliance on energy markets. That, however, is easier said than done. In this episode of the Stratfor Podcast, we discuss Saudi Arabia’s ambitious Vision 2030 plan, the motivations for reform and the challenges ahead with Stratfor Vice President of Global Analysis Reva Goujon, Senior Global Analyst Matthew Bey and Middle East and North Africa Analyst Emily Hawthorne.
Then in part two of the podcast, Evan Rees and John Gennace sit down to highlight several books included on Stratfor’s 2018 summer reading list.
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Emily Hawthorne [00:00:00] I'm Emily Hawthorne, a Middle East and North Africa analyst at Stratfor and this podcast is brought to you by Stratfor Worldview, the world's leading geopolitical intelligence platform. Individual, team, and enterprise memberships are available at worldview.stratfor.com/subscribe. Over half the population is under 30. There's a huge amount of young people in Saudi Arabia that are clamoring for jobs and the government is scrambling for ways to make sure they are employed and that they're satisfied and that they're on board with what Mohammed Bin Salman is proposing for the kingdom moving forward.
Ben Sheen [00:00:53] Welcome to the Stratfor podcast, focused on geopolitics and world affairs from stratfor.com. I'm your host, Ben Sheen. From dramatically fluctuating oil prices to pressing demographic realities, Saudi Arabia, like much of the Middle East, is working to imagine a future beyond reliance on oil markets. However, that's easier said than done. In this episode of the Stratfor podcast, we'll share an excerpt from a recent webcast discussion about Saudi Arabia's ambitious Vision 2030 plan, the motivations for reform, and the challenges ahead, and we'll be talking about that with Vice President of Global Analysis, Reva Goujon; Senior Global Analyst, Matthew Bey; and Middle East and North Africa analyst, Emily Hawthorne. Then, in part two of the podcast, we sit down with analysts Evan Rees and John Gennace to highlight a few selections from Stratfor's 2018 summer reading list. Thanks for joining us.
Reva Goujon [00:01:48] As you all know, the Saudi kingdom is in the hands of a very ambitious millennial, 32 year old Muhammed Bin Salman, also known as MBS. Now this is a man dripping with ambition and on a mission to sell to the world and his own citizenry a vision of Saudi Arabia, a vision of a Saudi Arabia that's more moderate, technologically advanced, and geopolitically powerful and we see that vision come through in these incredibly ambitious reform plans. Now, will everything go according to plan? Of course not. Lofty vision goals come inherently with a lot of constraints, a lot of impediments, and that's really what we're here to talk about, but is MBS a man that you should take seriously and his reform ideas seriously? Absolutely. This is what we're going to get into over the next few minutes, beginning with the why now. Why should you take the Saudi reform proposal seriously and what is the urgency behind those reforms? And so for that, we have to take a look at, of course, the fiscal picture and the pressure just weighing down on Saudi Arabia as the clock is ticking on these reforms. Matthew, how do you see the real urgency driving?
Matthew Bey [00:03:05] If you look back at around where Saudi Arabia was say around the early 2014 period, Saudi Arabia had spent basically the previous decade just spending money, basically whatever it could. Oil prices were around $110 for a barrel. They could spend on whatever they wanted to. They could have a giant expenditure that was around $300 billion at one point, and still have a surplus, actually. However, oil prices collapsed. They went down to as low as $26 per barrel within a couple years. All the sudden they had to put in place an austerity program, their expenditure went down to as low as to now around $250 billion, so that's a 16% drop, that's not small and then they had a $100 billion deficit at one point. Think about Saudi Arabia having at one point, $750 billion in the exchange. That's down by a third. You can see a real sense of urgency, saying, okay we have to do something because the old model, it was broken.
Reva Goujon [00:03:53] When we look at, for example, the reserve picture for Saudi Arabia, and what they have to gauge just because, of course, they're still very dependent on oil revenues and so that has to be a driving factor to determine how much cushion do they actually have in their spending and to drive forward these reforms. How do you look at that reserves outlook?
Matthew Bey [00:04:16] The reserves now are actually somewhat positive, so they have been able to put in a huge, the austerity budget. They're actually coming out of austerity measures to a certain degree this year, they're still going to have a small budget, that's just it. But, because oil prices are no longer around $30 to $40 per barrel, or even below 50, they're more around 65 to 70, Saudi Arabia is actually in a decent position where they're actually seeing their reserves finally starting to go up, so they're not declining anymore. They've been able to stop the bleeding, so to speak. They're at least in a better place where they're more confident and more willing to actually not only implement the reforms that they've been trying to do, but they're in a place where they're not as concerned about the immediate risks. They can take a more of a long term objective when they look at their reserves at least.
Reva Goujon [00:04:54] Okay and that's what we can see in this chart, can see that at $40 a barrel, they were clearly in the danger zone. Around $60 a barrel, which is really within the band we see now, you have the urgency defined in the reform, but they have a little bit of room. $80 is the much more cushiony bit, but—
Matthew Bey [00:05:12] And Saudi would love for that to happen.
Reva Goujon [00:05:14] Can they count on it?
Matthew Bey [00:05:14] Well that's the question, but if it does happen, Saudi Arabia becomes a question about the sustainability of whatever they're trying to do, because oil prices have been low before. They've gone off on these kind of different reform agendas before and like the 1990s they had a very similar one, however once oil prices started to rise again in the early 2000s, they stopped it. They just weren't willing to put through the political crunch or the political consequences, face them, actually, in order to move forward, so they rolled back. The question here is if prices go back, they probably won't go back to where they were, do they slow down the reforms and at what amount do they slow them down but we haven't seen that thus far.
Reva Goujon [00:05:46] And when we look at, Emily, in the demographic picture in Saudi Arabia, that's another huge driver right behind.
Emily Hawthorne [00:05:51] Right and what Matthew brings up, that right now when we look at the history of Saudi Arabia and what they've done before, they've run after reform drives before, but there are different pressures on Saudi Arabia right now that there haven't been in the past. We have, by some counts, over half the population is under 30 and there's a huge amount of young people in Saudi Arabia that are clamoring for jobs and that are looking for new opportunities. They are very connected to social media, they are very connected to technology and they're looking for ways in which they can work in Saudi Arabia. The government is scrambling for ways to make sure that they are employed and that they are satisfied and that they are on board with what Muhammed Bin Salman is proposing for the kingdom moving forward. That's another driver for how the economy has to structurally change in order to allow for that to happen.
Matthew Bey [00:06:35] These are all linked. One of the things to really think about is that in the long term, population is growing, when you think about where oil production is right now for Saudi Arabia, it's not really conceivable for them to be able to double oil production to match population growth, so the amount of revenue, even if oil prices go up, per person it's going to go down. Then if you think about also the longer term challenges due to the oil market in general, electric vehicles, all of these things, they're coming and if you look at Muhammed Bin Salman, he's very youthful, these are going to be challenges that if he becomes the king, it's likely going to be, he's going to be the king for a very long time, it's going to be his challenges regardless of the short-term oil dynamics, so this longer term reform it's a good idea actually to put it under somebody who can take that long view because it's his long view, it's his life.
Reva Goujon [00:07:16] This is a key point, because when we look at, for example, the large youth population. Half of the population, roughly, under the age of 25, that can be a asset or a liability. An asset, especially if you're looking at this from the foreign investment perspective of a large consumer class, and a very technologically connected population, but also, the potential for liability if you can't get that youth into real jobs and into a more dynamic economy. Same thing that we look at for MBS, right? His youth can be an asset in the sense that, as you said. He has a longer time horizon where he is going to be inheriting this giant inflection point for Saudi Arabia, where it could go one of two very different ways. Because he has that long-term view, he can also plan early and start now to try to affect that change as opposed to a leader who's going to be way, way up in their years. Liability of course, if his youth does end up causing more, he's going to make mistakes along the way, will money be spent in the right places?
Emily Hawthorne [00:08:27] Is he trying too many things at one time?
Reva Goujon [00:08:29] Absolutely, so let's go into the how. We understand the why of why this is a real reform effort compared to the past. Where do you start?
Emily Hawthorne [00:08:37] I was just going to say, we should probably just start by defining what is Vision 2030 overall. And that is the program that Muhammed Bin Salman proposed in April 2016 that entails diversification, escalating non-oil revenue, amplifying and really bringing in Saudis into the job force and increasing taxes, all sorts of measures, but the oil sector is a huge part of that.
Matthew Bey [00:09:02] They kind of want the oil sector to be the leading edge in a lot of these charges. They are trying an actual diversification for in the oil sector, so they are going into any industry that is tangential to the oil sector, that touches it in some way. They're trying to basically go into that place first, so we're seeing it in petrochemicals, we're seeing it in oil trading, we're even seeing them now taking Saudi Aramco, who's historically only been looking at downstream opportunities overseas, looking very closely at upstream opportunities, whether that be the United States, Russia, et cetera. That's reflexive of this shift that now they need to squeeze everything they can get out of Saudi Aramco because then they can IPO it and when they IPO it, they can then be able to use that money to then funnel into the public investment fund, which then helps them basically funnel money into the rest of the development program, which is the diversification of raw oil, so it's all linked.
Reva Goujon [00:09:46] Let's break that down a little bit more because this is obviously an issue that a lot of people are watching and waiting for more details. The idea is to transfer ownership of Saudi Aramco to Saudi Arabia's sovereign wealth fund, the public investment fund. That would in turn virtually create the largest sovereign wealth fund in the world overnight. There are, of course, figures and estimates out there that will depend on the ultimate valuation of Saudi Aramco, but still this would be massive. Now where would they channel that money and it what kinds of investments. That's one big question but the idea is to raise what they're currently getting in returns of 3-5% and try to get more up in the 7, 8, to 9% range.
Matthew Bey [00:10:27] Right, so historically what they've done is they've basically had anything that comes extra, or revenue coming from Saudi Aramco, funneling it into treasuries, things like that, through the central bank.
Reva Goujon [00:10:36] The safe investments.
Matthew Bey [00:10:37] Right, now then want all of that to basically go to the PIF, as revenue to the PIF which then basically takes more risks, riskier investments, so we're seeing all kinds of investments with the PIF. We're seeing things into like the Softbank vision, excuse me, the Softbank fund, which is a tech fund where it's a $45 billion investment, it's a $100 billion fund and they're getting an agreement to have $25 billion of that fund reinvested back into Saudi Arabia, so it's all interconnected, it's all about making big investments that can actually drive a revenue overseas, but also then new investments at home.
Reva Goujon [00:11:07] That $45 billion investment in Softbank is massive. We've seen a $20 billion investment in infrastructure fund with Blackstone. Even $1.5 billion in Virgin Galactic for commercial space exploration, $3.5 billion in Uber, obviously a big tech focus overall in this investment fund. When we get into the sovereign wealth fund game, how does Saudi compare, Emily, to its Gulf neighbors when it comes to their strategy?
Emily Hawthorne [00:11:39] When you look at Saudi Arabia's neighbors and the GCC on the Arabian Peninsula, Kuwait, Qatar, the United Arab Emirates, these states are famous for having ample sovereign wealth funds that they have funneled oil revenue into for years, decades, on the part of Kuwait and the UAE, Qatar's is a little bit newer, but they have these huge cushions that they can use that they have a degree of separation between the government and between the way that the sovereign wealth fund invests as well. They bring in a lot of external talent to help them invest aggressively across global projects and that model is what Saudi Arabia is trying to emulate and we've seen the value of the PIF move up in the list, so they are increasing the size of that sovereign wealth fund to give them a way to aggressively invest and also ways for international companies to invest within the kingdom.
Matthew Bey [00:12:30] One thing to think about is that they're going through this entire reform program but they're also doing the austerity package. The austerity package is actually causing a lot of pain back at home. You're seeing funneling money that used to go to state projects or treasuries, US treasuries, things like that, now they're wanting it to go in the PIF. The PIF, then, is going to be investing largely in private companies and private sector, things like that. They also had a huge reduction in public employment, so you put those together, you have a lot of pain, or a lot of riding on the private sector entirely at Saudi Arabia. They're putting into place a lot of measures, kind of separate from the diversification effort to build up that infrastructure to actually allow for the private sector to invest.
Emily Hawthorne [00:13:07] Well and that's part of one of the major questions of Vision 2030. Vision 2030 sees building up the private sector as one of these major engines for the future for Saudi Arabia, but Saudi Arabia is still a very state-led economy. They're trying to use state funds to really engage in public-private partnerships, to engage in privatization projects, so that eventually they will take off on their own and that there will be a more healthy and diversified private sector, but we're in this phase right now where they're investing in those projects and we still have to wait to see how they're going to go.
Matthew Bey [00:13:39] Also we know that, typically when you have a state-led economy and one that is historically quite corrupt, the question is how efficient is that kind of a model? Is it something that Saudi Arabia can actually succeed at?
Reva Goujon [00:13:48] And with that 52% labor participation rate, there is obviously a big effort to bring more people into the work force, legitimately so, but as you said, this has to happen in phases, that you can't just start cutting down a bloated public sector and risk higher unemployment and the social complications that come with that. You have to build up the private sector first, but to do so, you need to spend more up front.
Emily Hawthorne [00:14:11] That's what we're seeing. The 2018 budget was a very expansionary budget and that was intended to be that way. It was part of Vision 2030 and the smaller Vision 2020, the national transformation plan. They were going to spend a lot right now so that they can reap later and part of that was making sure that the state was investing in public-private partnerships, so that they will flourish eventually on their own with less state-led support, but right now we're in that phase where we're seeing a lot of heavy spending.
Reva Goujon [00:14:39] Within the private sector, and of course there was a McKinsey report that really laid out, okay Saudi, here is your long-term plan of where to invest and Saudi did follow a lot of the recommendations, so where are the sectors that we're seeing Saudi Arabia really trying to channel most of that foreign investment for private sector growth?
Emily Hawthorne [00:14:59] We're seeing a lot into construction, finance, also, as Matthew mentioned, using Aramco, using Saudi's oil wealth and oil assets to really broaden petrochemicals, ways that you can use hydrocarbons well in manufacturing. We're also seeing retail, healthcare, and a lot of these sectors are being reformed in a way that they can employ more Saudis. We're seeing that a lot in retail and in healthcare but a lot of them, something that we've talked about a lot, is you're still going to need a lot of foreign involvement in these sectors in order for them to grow to the extent that Saudi Arabia wants them to. That's a point of tension for Saudi Arabia moving forward is there are ways that they are actively working to make sure that Saudis have a place in sectors like healthcare, finance, but in order to prepare them and in order to prepare Saudis, they still need foreign help from across the world.
Ben Sheen [00:15:53] This was an excerpt from our live one-hour video webcast, exploring Saudi Arabia and its Vision 2030 reform plan. If you would like to catch the whole presentation, including the extended Q and A, we'll include a link in the show notes. Now for part two of the podcast, we're joined by Evan Rees and John Gennace for a few highlights from Stratfor's 2018 Summer Reading List.
Evan Rees [00:16:21] Hi my name is Evan Rees. I'm an Asia-Pacific Analyst at Stratfor and I'm here with John Gennace, who is a Threat Analyst at Stratfor and we're here to talk about Stratfor's Summer Reading List. We've put together a list of nine books that we recommend. Some of them are pretty dense and related to what we do, some of them are a little bit more light and easier to read. Thank you for joining us at the podcast, John.
John Gennace [00:16:44] It's a pleasure to be here, Evan.
Evan Rees [00:16:46] The first one up is a book called Last Days of Night by Graham Moore and this is actually a novel. It's a fictionalized account of the competition between Edison and Westinghouse over a patent related to electrification that determined the path of technology as we know it. It's a really interesting look, because at Stratfor we cover a lot of these nitty-gritty technical details, tech innovation in China, and we talk about how those have huge geopolitical repercussions. This is a really interesting look back at a much earlier advancement that really changed our lives as we know it. Another one is a book called Bride and Groom, which is also a novel. It's translated from the Russian. It's published by Deep Vellum Publishing and this is a novel that's about the Russian Republic of Dagestan which is near Chechnya and it's interesting because this is a region that we've been tracking at Stratfor as a source of a lot of jihadists fueling Islamic State and the sort of growing friction in Russia between the regions, between the Christian majority and the Muslim minority, so this looks very interesting as well.
John Gennace [00:17:52] Next on the list, which I thought was really interesting was the Condaleezza Rice and Amy Zegart book, Political Risk: How Businesses and Organizations Can Anticipate Global Insecurity. What's really striking, one of the most striking things with this book is simply the timing of it. Just by virtue of what is going on in the geopolitical landscape and the way it is really impacting business and industry, the timeliness is really appropriate here, so Rice and Zegart cover a spectrum of political risks that businesses really need to think about and prepare for. What the book doesn't do is necessarily equip business leaders to implement risk mitigation if you will and that's where companies like Stratfor come in to play, where we would provide the expertise to perform those types of analysis but it is definitely worth reading from a political risk standpoint.
Evan Rees [00:18:51] It sounds interesting just in terms of the history of political risk. Another one we have on the list is a book called the Death of Expertise: The Campaign Against Established Knowledge and Why It Matters by Tom Nichols. Now you actually picked this one, John. What did you find interesting about this and how do you think this relates to our work at Stratfor?
John Gennace [00:19:07] The first thing that attracted me to the book is that Tom Nichols was a professor of mine in undergrad. I had a number of classes with him which I really enjoyed, but what Professor Nichols touches on here is kind of a phenomenon that is taking root in, not just in the United States, but around the world in that there is increasing doubt surrounding areas of expertise ranging from medicine to science to even the things that we study here at Stratfor, geopolitics. Basically, what he does is he really pushes back hard on that notion of the attack on expertise and he defends it, recognizing that experts are subject to error, but without experts as a society, we are going to, ultimately, be lost.
Evan Rees [00:19:59] Right and the key is to get people to listen to those experts and be able to approach them in a way that's understandable for them as well.
John Gennace [00:20:05] Right. One of the things he touches on is, or mentions, he uses the term intellectual egalitarianism, which is a really good way to describe this faulty notion of trying to level the playing field, if you will.
Evan Rees [00:20:20] It's a really cool one. One that I picked, and this might seem a little bit obscure. It's a book called The War of Thousand Deserts. This book is by Brian DeLay and it was published in 2009. What it does is actually kind of flips the way that we think about American history in the West on its head. We're here in Texas, so I think about the way that America formed in terms of where Texas fits into that story and the Mexican War was a huge part of that that brought in half of Mexico's territory into the United States. It was as important as something like the Louisiana Purchase, and what this book does is it looks at the Native American component of that, how powerful the Comanches and the Apaches were around this time and how much they, how huge of a role they played in bringing all of these lands into the United States by devastating huge parts of northern Mexico. It's a really interesting book. It looks at some really interesting landscapes. It tells some kind of strange and obscure history and I learned a lot more about what it means to be an American, particularly somebody who lives in the West. Another really interesting one is On Grand Strategy by John Lewis Gaddis. Last time we put a list together, I put his Short History of the Cold War, it was sort of a primer that I found really interesting as somebody who grew up in the post-Cold War period and On Grand Strategy kind of summarizes a lot of his thinking throughout his career. You had some interesting thoughts about this one.
John Gennace [00:21:39] I do. It's very interesting in that John Gaddis basically goes through the book showing good and bad examples of strategic thinking, going back to Thucydides and the Peloponnesian War through to the King Henry the Eighth, Queen Mary, Queen Elizabeth, and just showing examples of how strategic thinking was done properly and how, when it wasn't done properly, how it created massive problems, whether it's in kingdoms or on the battle field, so it's a very interesting compilation of those strategic stories. If I had one criticism of it though, it would be that people who don't have a reasonably good foundation in strategic studies or history of all the different things, subjects, that he covers, it may be difficult for those folks to read, but nevertheless, it's still worth picking up.
Evan Rees [00:22:37] Yeah this is one that's been passed around the office for the last few weeks and it's a really interesting book. One more that I want to highlight is the book called Imperial Twilight and it's actually about the Opium War and this is conflict that didn't get a lot of attention until recently when China started to rise into global prominence again, but the Opium War changed the way that China saw itself in the world. It was the start of the Century of Humiliation that China's always talking about and it's only in the last 20 years or so that we've seen China come out again onto the world stage and show that it can be an assertive power and it's interesting, not to draw too much of a parallel, but I mean, the Opium War is essentially a trade war that turned into a shooting war, so it's kind of interesting to look at how these trade wars played out in a very different international environment in the 19th century. This is one I would definitely recommend reading. Those are just a few of the books that we picked for our summer reading list. You can find the full list at Stratfor Worldview and thank you so much for joining me, John.
John Gennace [00:23:34] My pleasure.
Ben Sheen [00:23:47] Thanks again for joining us. We'll include a link to the full summer reading list, available on Stratfor Worldview in the show notes, along with a link to our full video webcast looking at Saudi Arabia's road to Vision 2030. If you'd like to go even more in-depth on any of these topics, be sure to visit us at Stratfor Worldview for our latest geopolitical analysis and forecasting on the underlying trends driving the global system. If you're not already a Stratfor Worldview member, you can sign up for our free newsletter or learn more about complete access to our analysts through our individual, team, and enterprise subscriptions at worldview.stratfor.com/subscribe. For more geopolitical intelligence, analysis, and forecasting that reveal the underlying significants and future implications of emerging world events, follow us on Twitter @Stratfor.