"No explanation was offered as to how any of these targets could be realistically achieved within their timeframe."
Or any explanation at all really. The quote excerpted above from Foreign Policy references Saudi Arabia and the kingdom's "Vision 2030" which, if you’ve closely followed Ryadh's descent into the red ink budget abyss, you know it reads like something The Wizard might have dreamed up in the Emerald City of Oz. In other words: fanciful, but likely implausible (although given the Saudi Royal family's penchant for gold, we suppose the yellow brick road analogy is indeed appropriate.)
Of all the "Vision's" stipulations, the plan to sell a 5% stake in Saudi Aramco and the subsequent transfer of the remainder of the oil behemoth into a $2 Trillion sovereign wealth fund has received the most attention.
How that fund eventually chooses to deploy its vast store of oil wealth will have serious implications for global capital flows (see here for more). So far this year, we've learned that the kingdom "officially" owns around $117 billion in USTs. Put simply: no one believes that for a second. Lord only knows how much is stashed away in custodial accounts. We also discovered that the Saudis are sitting on around $52 billion in US stocks and around $10 billion in ABS.
Or at least they are for now, but the recent sharp divergence between onshore and offshore riyal forwards shows the market has very nearly lost its patience.
(Chat: Bloomberg)
You can read the full account of where the Saudis stand here. Now, with crude back above $50, it's possible that some idled US production may come back online. And then what? Another Merry-go-round of crude brinksmanship, an even longer wait for prices to return to budget breakevens for the Saudis and thus even more painful subsidy cuts.
But it's not clear that the general public comprehends what may be about to happen here. There's a similar risk brewing in China. Let's look at a few more excerpts from Foreign Policy:
"The Saudi template for reform titled “Vision 2030” mirrors an earlier report that appeared in December on the website of McKinsey & Co., a global consulting company that provides neoliberal solutions for real-world problems. Salman has admitted that the Saudi government works closely with the company. Saudi critics — and there are many — sneer that the Planning Ministry should be renamed the “McKinsey Ministry.”
"In recent years, McKinsey has cultivated a generation of young Arab princelings enamored with Western-style economic reforms, and with thoroughly mixed results. As one of the company’s more trenchant critics recently pointed out, ‘Many of the countries who drank the McKinsey Kool-Aid became epicenters of the Arab Spring. Bahrain, Egypt, Libya, Yemen — each was convulsed by demonstrations, often animated by economic grievances.’”
Clearly this dynamic has enormous consequences for crude and thus for risk appetite. Transplanted democracies don't work and attempting to turn a family of wealthy oil barons into technocrats tasked with transitioning the economy away from hydrocarbons likely won’t be too successful either.
The question now, is whether the deputy crown prince ends up making the same mistake. "Vision 2030" may indeed be a step in the right direction economically, but the Saudis don't need to walk, they need to run. Recall the following IMF projection from last year:
"In, contrast, CCA oil exporters have at least 15 years’ worth of available financial savings,1 while GCC countries are split evenly between countries with relatively large buffers (Kuwait, Qatar, and the United Arab Emirates—more than 20 years remaining) and countries with relatively smaller buffers (Bahrain, Oman, and Saudi Arabia—less than five years.”
Just to reiterate: the kingdom could be completely out of money in less that five years. Hence “Vision 2030” and hence the international bond offering.
The following interesting graphic from Barclays compares likely Saudi debt issues during 2016 to the rest of the GCC and also shows (right pane) that despite the move higher in crude, Saudi CDS hasn’t tightened up.
(Chart: Barclays)
And here’s what BoFAML has to say about the details of the deputy crown prince’ “solution” thus far:
“The sequencing and details of the fiscal measures are however still left nebulous. In our view, implementation of growth-boosting initiatives will require a challenging crowding in of private sector investment, particularly from domestic sources. While fiscal consolidation measures are unprecedented in scope, they may still fall short if oil prices do not stabilize, which suggests a potentially less aggressive energy policy going forward.”
You may be tempted to view this next excerpt from CNN as little more than an amusing anecdote, but it does speak to the inherent desperation in the kingdom:
"Saudi Arabia will introduce new taxes on products such as tobacco and sugary drinks in an attempt to increase government revenue and wean its economy off oil.”
Riyadh should go the New York route and try a Big Gulp ban.
All sarcasm aside, the House of Saud needs to think long and hard about how to execute this transition. After all, the impetus for extremism is certainly there - and so is all the oil. If ISIS can do as much damage as they’ve done pumping 45,000 barrels per day, one shudders to think what the combination of deeply entrenched Wahhabism and 11/m bpd in capacity would spawn in the absence of the monarchy.
We’ll leave you with a table outlining the kingdom’ budget plan and let readers decide for themselves how realistic it is:
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