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Tue 26 Apr 2016 01:52 PM

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Saudi reform plan pleases markets, doesn't reassure sceptics

Deputy Crown Prince Mohammed bin Salman promises to invest Saudi petrodollars more aggressively, sell stakes in state firms

Saudi reform plan pleases markets, doesn't reassure sceptics
Saudi Arabia Deputy Crown Prince Mohammed bin Salman (FAYEZ NURELDINE/AFP/Getty Images)

A sweeping economic reform plan announced by Saudi Arabia on Monday pleased the financial markets but fell short of convincing sceptics that the kingdom can prosper in an era of cheap oil.

Deputy Crown Prince Mohammed bin Salman promised to invest Saudi petrodollars more aggressively, sell stakes in state firms such as oil giant Saudi Aramco, restructure ministries to make them efficient, modernise the education system and even give foreigners long-term residency rights.

A 2.5 percent jump by the Saudi stock market in the heaviest trading volume for eight months showed many local investors liked what they heard.

Some foreign money managers also reacted positively. The Saudi riyal rose slightly versus the U.S. dollar in the forward market, while the yield on Saudi Electricity Co's Islamic bond due in 2023 fell 9 basis points.

A number of fund managers, including Shakeel Sarwar, head of asset management at Bahrain's Securities & Investment Co, said the pain of low oil prices seemed to be pushing the kingdom into change that would make its economy more dynamic in the long run.

"If these economic reforms and liberalisation can be successfully implemented over the next five to 10 years, future economic and political analysts may end up identifying this current oil price decline as a blessing in disguise for Saudi Arabia and rest of the Gulf region," he said.

Others, however, said they feared the reform drive, like others before it, could be stifled by the weight of Saudi bureaucracy. And while low oil prices may be pushing Riyadh towards reform, they are also cutting the resources it can use to manage the change.

"I hear the words but question how it will be translated into action. There has been a lack of delivery in Saudi Arabia in the past and people are sceptical," said a senior foreign banker in the kingdom, declining to be named because of commercial sensitivities.

"Where will the foreign money come from to invest in the Aramco IPO, especially with oil prices where they are now and given the muted foreign interest in the opening of the stock market?"

Large amounts of foreign money will be needed to absorb the assets which Riyadh aims to sell. Prince Mohammed said the government would sell less than 5 percent of Saudi Aramco, but he valued the firm at over $2 trillion; the Saudi bourse's capitalisation is just $423 billion.

Although the Saudi stock market opened up to direct foreign investment last June, total foreign ownership of the market remains tiny at less than 1 percent.

Much of the optimism over the reforms stems from the energy and ambition of Prince Mohammed, and the fact that after years of piecemeal efforts at change, the government has put together a broad plan that addresses many problems simultaneously.

The International Monetary Fund, which expressed concern about Saudi economic policy in the past, praised the plan hours before its public release.

The reform programme appears "ambitious and comprehensive", and its scale "measures up to the challenge facing the economy", Masood Ahmed, director of the IMF's Middle East and central Asia department, told Reuters.

Briefing the media, Prince Mohammed stressed the positive goals of the plan, including job creation and an effort to provide more recreational opportunities for Saudis.

"If you are an average Saudi citizen, why would you say no to a target to diversify the economy away from oil, to create jobs, to increase labour force participation. Those are all things any reasonable citizen would want their country to undergo," said fund manager Ali Al Nasser at London's Duet Group.

As the reforms progress, however, some of them may prove painful. For example, the government aims to cut its dependence on oil by boosting its non-oil revenues to 600 billion riyals ($160 billion) by 2020 and 1 trillion riyals by 2030, from 163.5 billion riyals in 2015.

That leap is to be accomplished partly by raising new revenues from initiatives such as a "green card" system giving expatriates more rights to live and work in the kingdom over the long term.

But more taxation will also be required, particularly a value-added tax due to be introduced around the region in 2018. This could boost inflation and erode living standards.

"There may be some hardships in the initial years. We will endure and then the economy will take off," Prince Mohammed said.

If the take-off does not happen, however, there could be a backlash by people whose interests have been harmed by the policy shake-up, said Jason Tuvey, Middle East economist at London-based Capital Economics.

"Given that the authorities will be coming up against significant vested interests within the royal family, the business elite and the religious establishment, we think that political concerns rather than oil prices are more likely to determine whether the government's plans come to fruition."