[Low crude prices and the war in Yemen have
sent a shock through the kingdom’s budget and forced it to revise its social
contract even as it seeks to diversify its businesses.]
By
Nicholas Kulish
None other than the Saudi king’s favored son,
Deputy Crown Prince Mohammed bin Salman, has held up the dairy, Almarai, as a
model for a country trying to wean itself from oil dependence. But even
companies like Almarai, with no apparent connection to petroleum, rely on the
cheap energy provided by the kingdom.
That is coming to an end. Low oil prices and
an increasingly costly war in Yemen have torn a yawning hole in the Saudi
budget and created a crisis that has led to cuts in public spending, reductions
in take-home pay and benefits for government workers and a host of new fees and
fines. Huge subsidies for fuel, water and electricity that encourage
overconsumption are being curtailed. For Almarai, one of the top brands in the
Middle East, that will mean $133 million from the bottom line this year,
company officials said.
Prince Mohammed’s economic reform plan has
sent tremors through a nation whose citizens have long enjoyed a cosseted
lifestyle underwritten by the state. “The government is moving very fast at
reforming things in Saudi Arabia while the people are finding themselves left
behind,” said Lama Alsulaiman, a businesswoman and board member of the Jidda
Chamber of Commerce and Industry. “Life as usual and business as usual can no
longer continue.”
Rewriting the social contract carries high
risks for the 31-year-old deputy crown prince, who has staked his reputation on
transforming the economy. “People are looking to see if he can do it,” said
Ibrahim Alnahas, a political-science professor at King Saud University in
Riyadh, the capital. “If so, his future would be king. If not, his future would
be lost.”
The vast subterranean seas of petroleum here
have seeped into almost every part of the Saudi economy. Crude oil does more
than deliver billions of dollars in profits to Saudi Aramco, the state oil
company, and Sabic, the chemical giant; it also buttresses energy-intensive
sectors such as cement production and aluminum smelting.
Saudi Arabia burns barrel after barrel of
crude oil for electricity, one of the few countries to do so in large
quantities. Commercial air-conditioners cool shopping malls as temperatures
outside soar past 100 degrees in the summer, and children go sledding at Snow
City, a frigid new recreation center in the capital. Much of the drinking water
needed to keep this desert nation alive comes from energy-draining
desalination. And the S.U.V.s idling in Riyadh’s enormous traffic snarls drain
gasoline.
“It is striking the extent to which every
major industry relies on cheap energy, whether directly or indirectly,” said
Glada Lahn, co-author of a study for Chatham House, a London think tank, that
warned that the kingdom could become a net importer of oil within a few decades
if it did not make significant changes.
Saudi Arabia’s about-face last month at a
meeting of the Organization of the Petroleum Exporting Countries in Algeria,
agreeing to cut production to raise the price of crude, showed the urgency
policy makers here are feeling. Prince Mohammed announced plans this year to sell
off a small piece of the country’s economic crown jewel, Saudi Aramco, to free
up money for investment.
The budget deficit was nearly $100 billion
last year. The country’s foreign reserves have dropped by a quarter since oil
prices started falling in 2014. The government has taken loans from foreign
banks and will try to borrow more from the global bond market.
Hedge funds are wagering that the Saudi
central bank will be forced to revalue its currency, the riyal. Zach Schreiber,
the head of PointState Capital, which made $1 billion betting that oil would
fall, told investors in May that the Saudi riyal was “massively overvalued” and
that the country had only “two to three years of runway before it hits a wall.”
The government has abruptly cut construction
projects, forcing contractors to lay off workers. This year, foreign laborers
set fire to buses in protests demanding months of back pay. The sudden jump in
water bills this spring led to such an outcry on social media that the minister
for water and electricity was fired after telling customers to dig their own
wells if they were unhappy with prices.
“If you’re a Saudi, you’ve grown up with that
expectation of the financial largess that’s dished out,” said Adel Hamaizia,
the vice chairman of the Oxford Gulf and Arabian Peninsula Studies Forum.
“Things are likely to get more difficult for the government in terms of
managing frustration from the everyday people.”
Adding to the pressure, the kingdom’s
population has nearly doubled since 1990. With half of all Saudis younger than
25, the private sector does not offer enough good opportunities for the
estimated 300,000 young people entering the work force each year, especially
women. Fewer of the public sinecures that have sustained earlier generations
are available, with plans for deeper cuts.
Despite Saudi Arabia’s image as a haven for
Ferrari-driving sheikhs with stables full of racehorses, oil revenue is much
lower per capita than in small states like Qatar or Kuwait. There is poverty in
the kingdom as well as an increasingly anxious middle class.
One evening last month, it was a stifling 99
degrees in Riyadh after sunset, with dust hanging in the air. Um Rashed
Al-Rashed was selling jewelry and baskets of seeds at a small souk, hoping to
supplement her husband’s modest pension.
“The prices are increasing for everything,”
Ms. Rashed said. The couple’s electricity bill after the Ramadan holidays was
so high they could no longer afford it, so the power was shut off. “Only a
camel can live without electricity,” she said.
On billboards across the country, the king,
crown prince and Prince Mohammed appear, eyes toward the horizon, with a purple
2030 logo with the national emblem — a palm tree and crossed swords — above
them. The Vision 2030 plan calls for a steady diversification of the economy
over the next 14 years.
That would include expanding the country’s
mining industries to exploit gold, phosphate and uranium deposits, and building
up the financial, technology and entertainment sectors. And while many
countries declare that they will generate added revenue through tourism, only
Saudi Arabia has Mecca, which more than 1.6 billion Muslims worldwide are
instructed to visit on a pilgrimage before they die.
Prince Mohammed gathered business leaders,
government officials and even athletes and artists at the palatial Ritz-Carlton
in Riyadh late last year to discuss the economic targets his team was
developing. Consultants with tablet computers fanned out across the country,
surveying Saudis to determine how far the government could pare back subsidies
without sparking protests.
After decades of rule by octogenarian kings,
some young Saudis said in interviews that they felt energized by the role
played by a prince from their generation. “Subsidies should have been done a
long time ago. Things are still so cheap,” said Salman M. Al Suhaibaney, a
Saudi entrepreneur, holding up his drink to demonstrate. “This bottle of water
is more expensive than the same amount of gas.”
Mr. Al Suhaibaney founded an app for tow
trucks called Morni, like an Uber for roadside assistance, including fixing
flat tires, delivering gas and jumping batteries. His business is in a
government-supported start-up incubator in a Riyadh office building. Staffed by
20 young Saudis, Morni is a model for the kind of business the government, and
in particular the tech-savvy young deputy crown prince, hopes will buoy the
work force.
But more public funds are needed right now to
close the budget gap. The government has announced plans to more than triple
non-oil revenue by 2020, starting with rising fees for visas, higher fines for
traffic violations, along with a sin tax on sugary drinks.
Officials have seized on every opportunity to
squeeze costs. After cutting pay for ministers, freezing hiring and curtailing
regular bonuses and overtime for the entire public sector work force, the
government announced last week that workers would be paid according to the
Gregorian calendar (as in the United States and Europe), instead of the
slightly shorter Islamic Hijri calendar, adding roughly one unpaid workday a
month.
“If your salary is going down and your costs
are going up, something’s got to give,” said Mr. Hamaizia of the Oxford Gulf
and Arabian Peninsula Studies Forum.
Less spending by government, businesses and
increasingly strapped consumers means less growth and fewer jobs. The only way
to create more jobs for Saudis in such an environment may be by getting rid of
foreign workers and replacing them with locals. That policy, known as
Saudization, has been pursued at least since the early 1980s and always failed,
with the number of foreign laborers ballooning from roughly one million to 10
million.
Now, though, the government is pressing
companies harder. Foreign workers cost less, but the government levies fines
and refuses to renew visas for foreign workers if business rosters dip below a
certain percentage of Saudis. The kingdom’s targets for increasing employment
include more than 450,000 new private-sector jobs by 2020.
The Almarai dairy employs 8,000 Saudis among
its work force of more than 40,000. On a recent morning, 150 Holsteins moseyed
into the milking parlor where workers from Kenya, the Philippines and elsewhere
hooked them up to automated pumps. The business — which also produces yogurt
and cheese and includes a bakery — has its own training academy for Saudis,
drawing 15,000 applicants annually for just 400 slots.
Prince Sultan bin Mohammed bin Saud Al
Kabeer, a member of the extended Al Saud royal family and one of those rich
Saudis with a stable of thoroughbreds, founded Almarai in 1977 with the help of
Irish dairy farmers.
“We try to keep it to a standard that if the
prince wants to come in tomorrow with his friends, he’s welcome,” said Tony
Gavin, the Irish manager of the largest Almarai dairy farm, in Al Kharj,
southeast of Riyadh. Wearing brown shorts and Ray-Ban sunglasses, Mr. Gavin
gave a tour of the sprawling farm.
The cows rest under a cooling mist scattered
by large fans, the temperature and quantity of water computer controlled. A
nutritionist optimizes the cows’ diet with cottonseed from Greece, sugar beet
pellets from the Netherlands and locally grown alfalfa.
But the government has dictated that dairies
must phase out local feed production because water is so scarce. Despite its
arid environment, Saudi Arabia once pursued large-scale farming, even becoming
a wheat exporter before all but abandoning cultivation to save water. Almarai
has bought farmland in Argentina, California and Arizona to produce alfalfa to
ship here.
Still, the business is getting squeezed.
While utility and feed prices are rising, the dairy has not been allowed to
raise the price of milk.
“We’ve tried in the past, and the king sort
of tapped us on the shoulder and said, ‘What are you doing?’” said Stuart Gouk,
manufacturing manager at the plant here. Higher milk prices could have
political repercussions.
The kingdom’s subsidy cutbacks are expected
to deepen. There may well come a point where, as with wheat farming, policy
makers will have to decide whether it really makes sense to produce milk in the
desert.
“People who visit can’t believe there are cow
herds here,” Mr. Gavin said, “but they never thought about where the milk comes
from.”
Sheikha al-Dosary contributed reporting from
Riyadh.
Follow Nicholas Kulish on Twitter.
