The Kingdom Ballroom at the Four Seasons hotel in Riyadh is home to some of the Saudi capital’s most elite weddings, top-notch corporate events, and international conference gatherings. On a chilly day in early December, however, the ballroom served as the setting for a seemingly more mundane purpose: a brainstorming workshop for Saudi government ministries. The goal, however, was anything but mundane: a major transformation of the Saudi economy and a substantive reordering of the goals, methods, and practices of government ministries.
“The entire system needs an upgrade,” a senior Saudi official involved in the process told me, “and what you see before you is the first steps in that upgrade.” What I saw was a large ballroom transformed into an open air workshop of every ministry in the Kingdom. Men in white thobes (and yes, alas, they were virtually all men) huddled around tables and spread sheets, talking about key performance indicators (KPIs), deliverables, benchmarks, and management systems.
It’s good timing for such substantive re-thinking as Saudi Arabia’s economy faces the challenge of falling oil prices, sluggish growth, regional geopolitical instability, and a large youth population entering the labor force. The initiative is the brainchild of the newly formed Council on Economic and Development Affairs (CEDA), a body composed of twenty-two ministers involved in economy matters and headed by the Deputy Crown Prince Mohammad bin Salman.
“This is ultimately about promises from the government to the people,” the senior official said. “We are exposing ourselves in a way by setting clear goals, and people will expect those goals to be met. It’s certainly not business as usual in Saudi Arabia.”
Saudi Arabia’s economy is the largest in the Middle East – at $746 billion GDP – and oil and gas accounts for about 50% of GDP. Oil sales also account for about 80% of government budget revenues. The Kingdom spends robustly on infrastructure, defense, healthcare, and education, while government procurement and spending plays a large role in private sector growth. So, the fall in the oil price by more than 60% since November 2014 has inevitably dampened prospects.
Saudi Arabia faces some substantive challenges, most notably the issue of jobs. The demographics skew young. Some two-thirds of Saudi Arabia’s population are under the age of 30. Nearly two million people will enter the job market over the next decade, and youth unemployment currently stands near 30%. Discussions in CEDA meetings early on focused on the jobs issue, officials with knowledge of those discussions told me.
The issue was urgent enough to merit its own dedicated agency, created in October 2015 as the Commission for Job Generation and Anti-Unemployment. The creation of a separate agency won’t solve the problem, of course, but it underscores the urgency of the matter in the eyes of policy-makers.
According to the IMF, Saudi Arabia’s economy will demonstrate modest growth in 2015, at 3.4%, and fall to 2.2% in 2016. The 2016 growth forecasts will rank the Kingdom among the lowest performers in the region. What’s more, in 2015, Saudi Arabia’s deficit looks to hit 21.7% of GDP, the IMF forecasts, and 19.6% of GDP in 2016. The Kingdom’s fiscal break-even oil price for 2016 is $95.8, according to the IMF – a number that seems like a distant memory in today’s world of oversupply.
These numbers have partly fueled the argument that the Kingdom’s spending is out of control. Projected outward, and going by current spending, the IMF suggests that Saudi Arabia could run out of cash reserves by the year 2020.
But that forecast assumes, as one Saudi businessman put it to me, “that we are reckless teenagers with the family car and jewels going on a holiday with friends.” Saudi Arabia’s economic planners have been notoriously cautious and conservative. Senior officials in the Saudi Arabian Monetary Agency, the Finance Ministry, and the Economy and Planning Ministry are among the most seasoned and able technocrats in the region. Petroleum Minister Ali Al-Naimi is among the most highly regarded oil ministers of the modern era.
A minister who sits on the Council on Economic and Development Affairs told me that “the level of seriousness and the purpose and energy in the discussions in the Council is inspiring.” Others have said a new fire has been lit for underperforming ministries. Before the creation of CEDA, there was an alphabet soup of eleven councils and committees such as the Supreme Economic Council, Higher Committee for Administrative Organization, Higher Committee for Education Policy, and on and on. These multiple councils and committees created layers of bureaucracy that slowed down development initiatives. What’s more, ministries often failed to coordinate policies.
Everything is on the table, from subsidy reform to VAT taxes. And these discussions are taking place far removed from a real fiscal crisis. By every macro standard, the economy remains healthy – a very low debt-GDP ratio (the lowest in the world as of end 2014) and some $650 billion in cash reserves. Such numbers “would be the envy of any developed economy,” as economist and Saudi Arabia specialist John Sfakianakis wrote in a fine piece in Foreign Policy magazine. And Saudi Arabia is no stranger to deficits – it ran one for about 15 years straight since 1986.
What has been alarming to observers, however, has been the speed at which cash reserves have declined over the past year – down about $100 billion – partly fueled by counter cyclical spending (a good thing) and the Saudi-led war in Yemen. Still, as the IMF noted, Saudi Arabia has “fiscal space similar to that of Norway.” And no one is suggesting that Norway is doomed, as have a recent spate of articles about Saudi Arabia’s economy.
So, how is the private sector faring amid declining oil prices?
For entrepreneur Nawaf Fouzan, it’s business as usual – in fact, he is growing his business. His fast casual burger concept is expanding rapidly in the Kingdom. Fouzan launched Hamburghini in 2013, and now has 7 branches. The concept has caught on, and he is set to open one store per month until the end of December 2016. “The market is still good for attractive brands,” Fouzan said when I met him in Riyadh.
Fouzan faces stiff competition. He points out that there are some 100 burger brands in the Kingdom. Riyadh, it seems, is Burger City.
On a walk in the tony Olaya district in Riyadh, I spotted Shake Shack, Johnny Rockets, Elevation Burger, to name just a few. They also compete with local powerhouses such as Kudu, recently acquired by US private equity firm Texas Pacific Group and Dubai-based global emerging markets investor Abraaj, and also Herfy, a Saudi fast food brand listed on the local stock exchange with 300 stores across the country. McDonalds, Burger King and the like also dot the Kingdom.
But what about larger companies? How are they faring? I recently visited the Riyadh headquarters of Al-Marai, a major regional dairy and foodstuffs company that fills refrigerators with yogurts, cheeses, and milk from Cairo to Dubai to Saudi Arabia. While the company is a growing exporter, its home market is by far its largest. On the day I visited, the sales floor was buzzing with Filipinos, Indians, Pakistanis, and Saudis pecking at computers, taking calls, troubleshooting, and pitching.
Saudi Arabia is a major consumer market, the biggest and most lucrative market in the region for retailers, restaurants, and others. I met one of Al-Marai’s sales managers, who had the harried look of fast moving consumer goods sales managers everywhere. As we talked, he pecked at his computer, watching for any glitches in delivery.
“Our business is less sensitive to cycles,” the sales manager noted. “People need milk and yogurt.” He was more concerned with geopolitical instability in markets that he would like to expand to such as Libya and Iraq. He also outlined a major expansion plan to markets in Asia and Sub-Saharan Africa. He particularly was keen on Malaysia, Indonesia, and Pakistan.
Al-Marai is a fine-tuned machine. It’s the world’s largest vertically integrated dairy company and the region’s largest food and beverage manufacturing and distribution company. They have operations in Saudi Arabia, Jordan, Argentina, and the U.S, and Their dairy farm, two-three hours outside of Riyadh, is so notable in its scale and efficiency that National Geographic produced a documentary about it.
The company is looking to spend up to $5.6 billion from 2016-2020 to expand its business, local newspapers have reported. There is little sense of slowdown in Al-Marai.
To get a better sense of what the market looks like today, I reached out to a senior banker I have known for a decade. He was less sanguine. “There is growing uncertainty,” he told me. “I haven’t seen a significant slowdown in activity, but the feeling of boom times we had over the past couple of years no longer exists. There is a sentiment of concern.”
It’s inevitable that an economy and a private sector that grew accustomed to $100 oil would face a slowdown. Government officials have long talked of building a knowledge economy. At this point, it’s a mere buzzword, but I saw a piece of it on display at ArabNet, a digital economy conference held annually Riyadh. Like all tech entrepreneur conferences, buzzwords abounded: ecosystems, disruption, innovation, and my new favorite, “Uber-ization.” But it went far beyond that. These were not government officials making plans; these were real companies with real profits doing real business in the digital economy space.
Saudis are addicted to social media. On a per capita basis, Saudis are among the highest users of Twitter and YouTube in the world, and Snapchat is rising. The entire country seems to be sending messages on WhatsApp. On a visit last April, I was seen as a bumpkin for not using WhatsApp (I do now). Local economies are sprouting to meet the digital needs of companies and citizens, and many of them were in attendance, pitching apps or selling services.
The ArabNet conference was also striking for the active participation of women. In conservative Riyadh, a place where it’s still common to see women covered in full face-covering, the young Saudi women I met were engaging and highly competent digital economy professionals. In striking blue abayas, a group of four women manned a booth for a digital marketing company, eager to pitch their services to conference attendees. Others mingled casually among the other attendees.
One young Saudi woman brushed aside my questions about the recent historic municipal elections that allowed women to run for office and vote, and instead focused on my social media needs. “How can we help Johns Hopkins grow its presence in Saudi Arabia?” She asked. “Take my card. Let’s be in touch.” And she quickly moved on, pitching the next customer.
Afshin Molavi is a Senior Fellow at the Johns Hopkins Foreign Policy Institute, where he writes broadly on emerging markets, particularly on themes related to "The New Silk Road," South-South trade, global hub cities, new emerging market multinationals, global aviation, the geopolitics of energy, and the intersection of Middle East states and the global economy.