Deputy Crown Prince Mohammad bin Salman has been shaking up Saudi Arabia with efforts to reform the economy and his goal of turning it into a force in the world economy — beyond oil. As the favorite son of King Salman, he has responsibility for the economy and with that the most powerful pieces of the Saudi portfolio — the military and the energy sector.
On Monday, the prince is expected to lay out his "vision" to move Saudi Arabia to a diversified economy, less dependent on oil and better able to employ its citizens. As part of that, details are expected on his proposal to sell a stake in Saudi Aramco and the creation of a monster $2 trillion sovereign wealth fund. Bin Salman also wants to move the country off a system of giveaways and has already pared back subsidies for electricity, fuel and water.
"I think he's smart to be talking about these things," said Bruce Riedel, director of the intelligence project at Brookings and former CIA national intelligence officer for the Middle East.
About 70 percent of the population of Saudi Arabia is under 30, and more than 30 percent of that is unemployed. Five million new jobs would mean one new job for roughly every six people in the country.
Riedel said he expects to see just the outline of a plan. "They will announce a cautious series of reforms, including opening up Aramco a little bit. They will announce probably some cutbacks in subsidies." He said it's unclear whether there will be any further detail on the sovereign wealth fund yet.
"They're talking about 5 percent of Aramco. That's modest. ... There's the problem: transparency in the Saudi oil industry. Immediately that's going to start raising questions about where do the profits go. We know the profits go to the king and other senior royals."
Riedel noted that the late King Abdullah was one of the richest men in the world. "How much of the reality of how Saudi oil works does the family want to put out? And if you are going to encourage foreign investors, and you get the truth out about how this works, are you going to encourage investment or discourage investment? The family is well aware that the welfare state is what builds support for the kingdom."
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Investors are interested in seeing what pieces of Aramco will be sold to the public and how the offering will be structured. But details are expected to remain sketchy for now.
"They're waiting to see if Saudi Arabia has the capacity to execute this grand vision," said Helima Croft, global head of commodities strategy at RBC Capital Markets.
Croft described Aramco as the best run of the world's national oil companies. "If Saudi was like Aramco, it would function well. It is seen as a center of technocratic excellence for the country," she said.
Since the sharp drop in oil prices, Saudi Arabia has been running deficits and has dipped into its foreign reserves to cover shortfalls. It has also floated debt, and this week it borrowed $10 billion from a consortium of global banks in its first international loan deal in a quarter century. The bank deal was seen as a step toward an international bond deal. Prior to the oil price collapse, Saudi Arabia needed about $100 a barrel to meet its budget, and that number has only dipped slightly.
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Bin Salman has a great deal invested in the plan to broaden the kingdom's revenue base while reducing unemployment and curbing subsidies. Second in line to the throne, he has been seen as a rival to his cousin, Crown Prince Muhammad bin Nayef, the heir apparent to 80-year-old King Salman.
"I think about this transformation plan. It makes him the center of everything. It really does make him the most powerful person in that country," Croft said.
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Bin Salman has been seen as acquiring more power than his cousin, but he's viewed as unpredictable.
"I think the longer this goes on, the more time he has to entrench himself, the more power he amasses, the more he becomes inevitable. I find his political skill craft genius. Just the sheer ability to consolidate power with tremendous speed. He's like Frank Underwood on steroids," said Croft, referring to the central figure in Netflix's "House of Cards," who schemed his way into the presidency.
Bin Salman is different than other Saudi leaders in that he was educated in the kingdom. He wears traditional dress and is popular with young Saudis.
"They see in Mohammad bin Salman someone of their own generation moving up the ladder very quickly. He has a certain degree of popularity. He's also grated a lot of people in the family who see him as abrasive, inexperienced, undisciplined, impulsive," said Riedel. "In the long run, the way Saudi Arabia works is it's more important to be important in the family than it is in the street. This is an absolute monarchy."
The Aramco sale is reportedly expected to raise about $100 billion, making it the largest public offering ever. Bin Salman, interviewed at length by Bloomberg, said Saudi Arabia is considering a dual listing for the oil giant. The prince was reported as saying Aramco would become a holding company with stakes in its subsidiaries, but it would not manage them. The remaining Aramco stake would be transferred to the country's sovereign wealth fund, making it the largest with an estimated $2 trillion in assets.
"You may not even see numbers. You may just get a broad description," said Anthony Cordesman of the Center for Strategic and International Studies. "I think again until you see the specifics, diversifying the economy is fine, but can you do it at the numbers, the rate and the profitability assumed?…What are the details and how will it actually work? A lot of these announcements could be very broad and vague."
Cordesman said the phrasing of the prince's message will be very important. "He's had a very good group of advisors. These plans are as much political as financial," said Cordesman.
While some view Saudi Arabia as desperate, Cordesman said its actions have been deliberate.
"Desperate is very different from taking preventative measures that run down assets and can incur debt," said Cordesman. "Saudi Arabia has actively supported counter-cyclical budgeting. They try to anticipate risks in bad years. You have people projecting numbers out and the official Saudi numbers aren't that bad. The cut in ratings was negligible but it was a cutback. I think you are watching a vast amount of financial pressure on oil exporters. Saudi Arabia is probably less badly impacted than most."
Oppenheimer energy analyst Fadel Gheit said he is skeptical that investors will see the transparency they would like when Aramco ultimately comes to market. "It's going to be an enigma surrounded by secrecy," he said. "Why would I invest in Aramco, if I could buy Shell, BP where there's democracy, transparency." Gheit said he doubts much information on Aramco compensation or capital spending authorization would become public.
"The reason they want to do this IPO is it will give them another window in the global capital markets," he said. "I do not take this as a sign of a healthy economy."
The kingdom has named JP Morgan and Michael Klein as advisors on the Aramco deal.
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