It’s not just about China…

As recently volatility in the world’s capital and trading markets has shown, China matters. Concerns about a “hard landing”, currency manipulation, a credit crisis, or geopolitical “frictions” are there for all to see.

Similarly, the impact of low oil prices, the decline of the US coal industry, and dislocations in the NG and LNG markets all matter. And one could go on listing many other examples, both economic and political.

But what if the abilities and authority of one, hitherto obscure, 30-year-old could have a major impact on a broad range of markets and issues? Such is the case with Prince Mohammed bin Salman al-Saud, son of Saudi Arabia’s current monarch, King Salman, who is now widely regarded as the centre of power within the Kingdom.

With a fiscal break-even level estimated at somewhere close to USD 70/barrel of crude oil, and a revenue base almost entirely dependent upon exports of hydrocarbons and petrochemicals, the Kingdom’s finances are severely strained; and it is rapidly eroding its investment balances and reserves at a rate that is unsustainable in the absence of a significant further rise in the price of oil.

So far, so conventional and obvious.

Now, however, the prince has unveiled a plan, entitled “Vision 2030” (bearing the hallmarks of McKinsey’s management consultants) which is premised on weaning the country off what is described as its “addiction to oil”, creating a regional logistics, services and tourism hub (think a larger version of Dubai, with oil) and raising the contribution of the private sector to 65% from 40% by 2030. More startlingly, the prince said that he wants the Kingdom “to live without oil by 2020”. Equally radical is the potential creation of a USD 2 to 3TN sovereign wealth fund, underpinned by an IPO of Saudi Aramco, the source of the Kingdom’s wealth. Bear in mind that the largest existing SWF is currently Norway’s, at less than USD 1TN equivalent.

Think about it: for decades Saudi Arabia has managed to survive the cyclical nature of its resources base; being in a “bad neighbourhod”; and periodic expectations of the fall of the House of Saud; muddling through, suppressing dissent and avoiding any radical changes.

And consider the issues faced:

– A growing, relatively young population, most of whom are under- or mis-educated because of the nature of the educational system
– The constraints imposed across society by the influence of the Wahhabist doctrine
– The scale and complexity of the membership of the House of Saud
– The focus of much employment on government make-work
– An Islamic equivalent of the old Maoist “iron rice bowl”
– The essentially inward-looking and narrow definitions of what is considered acceptable
– Addressing dissent within the Shia minority; and the border war in the Yemen
– The influence of the military-security complex
– The continuing proxy wars and rivalry with Iran

There seems little doubt that the prince is sincere in his aims. However, he is one man- admittedly powerful and largely unchallenged (at least publicly)- and vulnerable.

The irony is that his actions and intentions may well bring about the very thing which he is most assuredly trying to avoid- the fall of the House of Saud- because the brittle nature of Saudi society and culture, and the relatively short time frame in which significant changes are envisaged, are likely to set up tensions and conflicts that could tear that society apart.

Of course, another irony would be that any conflagration within the Kingdom, and interruption in its ability to pump and export crude oil are likely to cause the prices to spike, with significant consequences far beyond the borders of Saudi Arabia.

At Awbury, we shall be keeping a close eye on developments within the Kingdom as part of our constant risk monitoring and assessment.

The Awbury Team


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