Capital Markets Corporate

June 10, 2016

What does the National Transformation Plan really mean for Saudi Arabia?


Written by Samantha Bartel Al Khalaf & George Allen

With the ‘new normal’ of crude oil prices expected to loiter around the $60/bbl. mark, Saudi Arabia’s gigantic hydrocarbon revenues are not what they were. While the government has said that the fiscal condition of the kingdom is stable, the oil price collapse has prompted deep budget cuts and renewed calls for reform.

Enter the newly announced National Transformation Plan (NTP) – an exhaustive list of policies and targets to be met by 2020. The NTP’s core goals are to boost non-oil revenues to $141 billion, while creating over 450,000 private sector jobs. The plan also aims to cut the oversized public sector wage bill to 40% of the state budget and boost non-oil commodity exports to $88 billion per year. Further highlights of the NTP include:

  • Private sector funding for at least 40% of projects between now and 2020
  • Cut electricity and water subsidies by $53 billion
  • Maintain oil production capacity at 12.5 million barrels per day (bpd); raise refining capacity to 3.3 million bpd (currently 2.9 million)
  • Raise gas output capacity to 17.8 billion standard cubic feet (scf) per day (currently 12 billion)
  • Install 3.5 gigawatts (GW) of renewable power capacity; spend $80 million on identifying and preparing locations for atomic electricity plant construction
  • Double the number of students in private schools; increase proportion of 3-6 year-olds at kindergarten to 27% (currently 13%); boost number of Saudi nationals in vocational/technical training to 950,000 (currently around 100,000)

So, the mood music in Riyadh is not as gloomy as one might expect. In April, Deputy Crown Prince Mohammed bin Salman announced ‘Vision 2030’, of which the NTP is a first phase. This is the long-term masterplan for easing the Kingdom away from its reliance on black gold. Friends and colleagues travelling to Riyadh in recent weeks have observed an atmosphere of optimism among Saudi and expat workers. The Vision’s stated themes – a Vibrant Society; a Thriving Economy; an Ambitious Nation – appear to have already received a strong level of buy-in. This buy-in is essential for the success of the Vision, as it aims to increase the contribution of the private sector to the economy, while dramatically reducing unemployment.

Saudi Arabia’s ambitions can only be described as ‘massive’. The programme for reform is being led by a mixture of the ruler’s inner circle and a small group of highly qualified Saudi experts and advisors. Among them are former partners of leading global law firms and senior executives of institutions including the World Bank and the Saudi Capital Markets Authority (CMA).  By most accounts, McKinsey and other top management consultancies have had hundreds of staff working on the plan for the last twelve months.

There is a great deal to do before the objectives of the NTP are realised, but the Kingdom is moving in the right direction. Saudi Arabia has never taken such a thoroughly planned approach to economic reform, and each of these targets represent significant progress. If all come to fruition, the Saudi economy is on the road to genuine transformation, and its people are right to be feeling optimistic. Only two questions stand out. Does the government have the will to drive and keep up the process of reform? And will this momentum be sustained if oil prices return to the $100/bbl. status quo?