Saudi Sticks To Its Guns and Ubers, too

(Bloomberg Gadfly) -- The powerful, oil-rich monarchy of Saudi Arabia has had its fair share of tumultuous transitions in the past, with examples of kings either murdered or forced out. That's why a whiff of palace intrigue fuels talk of big changes in policy. The appointment of a new crown prince looks more like a consolidation of power than an overhaul, but it still points to some big economic consequences for the country and beyond.

The upgrade of Mohammed bin Salman (known as MBS) from deputy crown prince to crown prince -- or first in line to the Saudi throne -- will cement in place the 31-year-old's plan to reform the public sector, diversify the economy away from oil and open the doors wider to foreign capital.

MBS is spearheading a new investor-friendly drive to privatize state assets and funnel more cash into defense, tourism, renewable energy and technology. The strategy also includes cuts to generous state subsidies and plans to generate $100 billion a year in extra non-oil revenue.

Doubling down on this program will bring more guns -- Saudi Arabia has one of the world's five biggest military budgets and wants to spend more at home. It will also mean more start-ups: the monarchy is already an investor in Uber and Softbank's technology fund. It will also bring more foreign capital, and add fresh momentum to the planned IPO of Saudi Aramco.

The country's capital markets are being reformed with new corporate-governance rules and a more open approach to foreign investment. Saudi Arabia is also on the path to classification as an emerging market by MSCI, which could bring in $9 billion in extra inflows, according to HSBC.

This won't be easy. Changing the country means shaking up society, not just ways of doing business. Calls for more female workers, sports clubs and entertainment are exposing tensions in a society where religion takes a uniquely central role, as Bloomberg has reported. Some decisions to cancel bonuses and allowances for state employees, which also is said to have set citizens grumbling, have been scaled back. The tricky transition, along with a need to keep cash flowing from energy assets, probably points to a more active need to prop up oil prices through output cuts. 

Investor confidence depends also on the politics of the region, which have proven more unpredictable as a bolder Saudi Arabia flexes its muscles. It's probably no accident that this royal reshuffle is happening in the middle of a Saudi-led blockade of Qatar, another commodity-rich monarchy seen as too soft on Iran and Islamic terrorism. But there might be a chance for a breakthrough in the political deadlock as MBS consolidates his power. An end to the crisis would be a positive step for the wider Gulf economy.

All told, investors will probably like the direction of travel Saudi Arabia is now taking, even if the destination still looks pretty far off. A boost to MBS's camp -- even amid the recent shows of geopolitical strength -- will be seen as a positive step for reform.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Lionel Laurent is a Bloomberg Gadfly columnist covering finance and markets. He previously worked at Reuters and Forbes.

To contact the author of this story: Lionel Laurent in London at llaurent2@bloomberg.net.

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net.