Fitch says Saudi decision to name new crown prince is big plus for reforms

The decision by King Salman to name his son, Mohammed Bin Salman, as crown prince of Saudi Arabia, reduces the risk of the country’s Vision 2030 programme losing momentum, according to the ratings agency Fitch.

“Mohammed bin Salman was instrumental in setting up the Vision 2030 reform agenda and its implementation plans, including the National Transformation Programme 2020, the Fiscal Balance Programme and the plan to partly privatise Saudi Aramco,” Fitch said.

The agency said that under Mohammed bin Salman’s leadership of the Council for Economic and Development Affairs, the kingdom’s economic policy has surprised observers because of its boldness. It included early cuts in subsidies, which has given markets confidence in the government’s ability to rein in big fiscal deficits. When the kingdom then embarked on its debut bond issue last October, its offer was hugely oversubscribed despite the fact that the US$17.5 billion fundraising was a record amount for an emerging market economy.

Fitch said that Mohammed bin Salman’s elevation to crown prince would “entrench the reform agenda and makes it more likely that the main elements of Vision 2030, including the Saudi Aramco IPO, will go ahead”.

However, it warned that the prince’s interventionist tendencies on foreign policy, including military action in Yemen, the sanctions imposed on Qatar and a more confrontational stance taken against Iran, meant that further escalation in regional tensions could not be ruled out.

Chris Seymour, the regional development director for construction consultancy Mott McDonald, agreed that Mohammed Bin Salman’s promotion to crown prince, meant the National Transformation Programme would maintain its trajectory, which should mean a shifting of responsibilities for funding and building major infrastructure assets to the private sector.

“The momentum has definitely started and hasn’t let up. It’s good to see that this is something that is going to be maintained,” said Mr Seymour.

He said that although this may not yet have translated into more work for contracting companies working in Saudi Arabia, that would follow. He said activity in 2017 would be generated around the pre-planning work, which includes advisory work with ministries. Next year is likely to involve creating the private sector structures to deliver major infrastructure projects, with contract awards only likely once these are in place.

“But the point is that the investment is planned, it is there and the momentum has started. So for us, and I think most consultants, we would see this as a positive step.”

He said work had already begun in some sectors – most notably transport, where airport privatisation deals have already been announced and in a power and water sector that has already experienced private sector involvement.

However, he added that in both instances these assets can take a long time to deliver, so some of the first projects to be built could be in the social infrastructure market.

“We are seeing quite a bit of activity around health care. They are smaller assets, and they are easier and faster to deliver,” said Mr Seymour.

In a recent interview with The National, David Clifton, the regional development director of Faithful + Gould, said private sector schemes are already being brought forward for power and water projects, as capacity increases are necessary before the kingdom implements plans for up to 1 million new homes, tens of thousands of schools and thousands of healthcare facilities.

“All of these things require power and water, but [plants] take a lot of time to design and build. A desalination plant could take four or five years to deliver.

“These are the precursors to the other big plans that the government is trying to achieve, and they are moving towards alternative financing.”

A report on Saudi Arabia’s economy published by the Riyadh-based National Commercial Bank on Monday stated that the kingdom was likely to run a fiscal deficit in 2017 for the fourth year in succession, but added that it would be dramatically reduced, falling to 7.5 per cent of GDP this year from a “double digit” rate in 2016. Expenditure is likely to exceed revenue by about 190bn Saudi riyals (Dh186.04bn), NCB said.

mfahy@thenational.ae