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1/ The Saudi economy is in a pickle, and how this unwinds over the next decade or so is likely to have major economic and political repercussions in the region. I'll try to highlight the fundamental challenges and how they may play out.
2/ Oil is on a collision course with technology. Alternative energy is reaching inflection point. Soon it will make economic sense to dump combustion engines in favor of alternatives.
Here's a nice summary by @GregorMacdonald on this:
Here's a nice summary by @GregorMacdonald on this:
3/ Prices are forward-looking, so the impending technological switch to alternatives will hit oil prices sooner. SA needs $90+ oil price to continue spending and transfer at current levels. This is unlikely to be sustainable. So what gives?
4/ SA has large reserves to buy time. But it also has a pegged exchange rate, which makes things worse (i'll explain below), and opens up possibility of an eventual speculative attack on currency given persistent fiscal gap.
Can the economy find non-oil sources of revenue?
Can the economy find non-oil sources of revenue?
5/ This is clearly where SA needs to go, but there are serious hurdles. Labor productivity of Saudi workers is quite low and it is not competitive globally. The fixed exchange rate makes this problem worse as labor could be more competitive if currency were to devalue.
6/ The labor productivity issue can be seen from the attempted "Saudization" of labor force: Firms are finding it difficult to replace foreign workers with local ones as penalty for having foreign workers rises. ft.com/content/c710cf…:
7/ Basically, the problems faced by the Saudi economy are fundamental and structural. It will take real political guts to make the kind of decisions needed to re-orient the economy. I will mention two steps here that i feel will help (a lot more to say obviously)
8/ First, plan a move to a flexible exchange rate. I have already mentioned some of the reasons a fixed exchange rate hurts.
9/ Second, SA's most valuable resource to help with economic transition is its foreign workers. Open up the path to citizenship for foreign workers like most countries in the west. These workers with then invest in SA, start companies, raise families and train other Saudi workers
10/ Opening up immigration rules is probably the quickest and most effective path to resolving saudi arabia's labor productivity problem. The current policy of "Saudization" is doing the opposite.
11/ These were just some starting thoughts ... I am sure others will have more intelligent things to say here.
