Since the 1970s, Saudi Arabia has declared a desire to decrease its dependence on oil resources, which account for over half of its gross domestic product. With the ascension to power of the now Crown Prince Mohammad Bin Salman, these desires became concrete plans when he unveiled Vision 2030 in April 2016.

The blueprint sets out plans to diversify the economy, develop public sector services such as infrastructure, education and health, and reduce the kingdom’s dependence on oil. In the nearly three years since the plan was announced, Saudi Arabia has repeatedly asserted its commitment to reforming its economy. Yet to market participants, it appears like little material progress has been made thus far.

Diversifying from oil

Like nearly every other Middle Eastern country, Saudi Arabia depends heavily on the price of oil to fund itself. If oil prices fall, the kingdom has to seek alternative sources of financing to fund spending. The current environment of low oil prices is a testing one for Saudi Arabia, which needs oil prices to be at least $75 (Dh275.47) per barrel to fund its budget and large-scale transformation programme.

Saudi’s oil strategy is still clearly focused on supporting prices and sacrificing market share, rather than trying to ride out the shale industry through a period of lower revenues, brought around by raising production. Having experienced lows of $29 per barrel in January 2016, which led to the economy contracting for the first time in eight years, Saudi Arabia is in no mood to follow a similar path this time around.

However, while Saudi Arabia and the wider Opec+ group may consider its recent decision to remove 1.2 million barrels per day from the market enough to prop up prices in the near term, shale is continuing to grow at a healthy rate. This presents Opec+ with a conundrum as the more they act to support prices, the more challenging it is to gain market share.

The discipline and patience of the group’s producers will be tested, given that endless production cuts will only make way for increasingly efficient US shale producers.

The privatisation push

Oil prices are not the only restraint on the speed of reform. Saudi authorities have repeatedly sought to generate capital by privatising state assets, but to no avail thus far. Plans to conduct an initial public offer of Aramco shares were temporarily shelved in 2018, thanks partly to the complexity of the transaction and the work required to separate Aramco from the rest of the state.

Delayed privatisation won’t wound the economy in the short term. Neither is it a fully tried and tested model for the region. Laws are being drafted to offer credible guidance and clarity, to satisfy any concerns among the investment community.

But privatisation is viewed internationally as the single most effective means of diversifying the economy and therefore its role in enticing foreign investment should not be underestimated. The credibility of the reform programme will be bought into question if the authorities fail to deliver on their privatisation plans.

Another challenge to Vision 2030 is the state of the labour market, which continues to shed more expatriate workers than it is adding while unemployment rises among Saudi nationals. The problems afflicting the labour market need to be addressed if Vision 2030 is to be realised.

The Crown Prince also has to contend with the large bureaucracy, which may prefer a slower pace of reform implementation. Reform fatigue presents another hurdle, particularly due to the socioeconomic impact of reducing government deficits, as does the fact that there is less financial pressure at the moment to proceed with structural changes thanks to high oil prices.

Ushering in change

However, the speed of reform should not be considered as an indicator of a lack of political appetite for change. Unlike in previous years, the authorities have shown a willingness to adjust government policies in line with changing oil market dynamics. These changes, which signal a recognition of the limits of the traditional state model, could usher a gradual move away from handouts to more of a sustainable growth model.

Policy recalibration, albeit slowly, is underway with amendments to several laws aimed at boosting the business operating environment. Recent actions, such as reduced subsidies, raised municipal fees, various taxations, cuts in government salaries, supportive banking measures, as well as governmental reshuffles, signal the intention to reform the business environment and make it more attractive to foreign investors.

All major transformation plans experience challenges. Diversification will be slow, and it will take years for the kingdom to deliver on the pledges set out in Vision 2030. In all likelihood, some of the reforms may fall short of the ambitious targets set.

Nevertheless, it appears that this time is genuinely different. There is a strong argument to believe that, under the new leadership, the country is moving towards a period of meaningful structural change and away from a reliance on hydrocarbons.

The reform agenda will boost Saudi Arabia’s potential growth rate as long-standing impediments to investment and productivity are reversed. At that point, Vision 2030 will be within reach.

Ehsan Khoman is head of Mena Research and Strategy at MUFG.