As oil prices tumble, Saudi Arabia considering plans to privatize state-owned entities

As global oil prices tumble, Saudi officials are considering plans to sell shares in state-owned entities and companies, according to two people with knowledge of the discussions, in an attempt to find alternative sources of revenue.

The government may sell stakes in ports, railways, utilities and airports, the two people said. Hospitals may also be privatized, one person said. Saudi officials weren’t immediately available for comment.

With oil prices down to an 11-year low, Saudi officials are accelerating efforts to reduce the economy’s reliance on revenue from crude exports. They may have missed their best chance when prices were higher, according to economists and an International Monetary Fund study that highlighted how successful attempts depended on policies put in place before the slump.

Deputy Crown Prince Mohammed Bin Salman, the king’s son, is overseeing the push to transform the economy. In remarks published last month, he said that the kingdom may raise domestic energy prices, privatize and tax mines and consider taxing cigarettes. Like other Gulf Cooperation Council members, it’s also plans to implement a value-added-tax.

Efficiency Gains

The plan to privatize companies “could be efficiency gains if the private sector gets some management control,” said Raza Agha, chief Middle East and Africa economist at VTB Capital Plc in London. “For revenues though, stake sales may not be a sustainable strategy.”

Oil prices have dropped about 35 percent this year. The kingdom, which relies on oil for at least 80 percent of its revenue, is on course to post a budget deficit equal to 20 percent of economic output this year, according to the International Monetary Fund.

Rather than draw down further on its foreign-currency reserves, Saudi Arabia is expected to cut spending when it unveils its budget this month. The government this year issued bonds for the first time since 2007, and has raised fees for international air travel passengers.

The benchmark Tadawl All Share Index for stocks was little changed at the close in Riyadh. The index has declined 17 percent this year.

Prince Mohammed “is very keen on expanding the Saudi economy by getting the private sector involved,” said Mohammed Alsuwayed, the Riyadh-based head of capital and money markets at Adeem Capital, referring to the stake-sale plan. This is also “an attempt to reduce government spending,” he said.

Meeting Citizens

The Economic and Development Affairs Council headed by Prince Mohammed held meetings last week with 350 citizens to discuss plans to strengthen the economy and improve the government’s transparency and accountability, al-Watan newspaper reported on Thursday.

Yet attempts under previous monarchs to reduce the kingdom’s dependency on oil have had limited success.

In November 2013, the Arab world’s biggest economy took action against illegal workers as it pushed to create more private-sector jobs for its citizens. At that time, unemployment was about 12 percent. The official data show joblessness at 11.6 percent for the first half of this year. Youth unemployment is almost 30 percent, according to World Bank data.

Saudi Arabia can’t afford to wait for oil prices to recover and needs to accelerate economic measures to avoid rising unemployment, deficits and debt, McKinsey & Co. Inc. said in a report this month. The country requires public and private investments of as much as $4 trillion as part of a strategy to boost productivity and create jobs, it said.

Based on current trends, Saudi Arabia “could face a rapid economic deterioration over the next 15 years,” McKinsey said. Even a public spending freeze and halt to hiring foreign workers would still leave the country facing falling household incomes, rising unemployment and weakening finances.

BLOOMBERG