The Saudi Economy Blossoms in the Desert — Joe Lonsdale

Crown Prince Mohammed Bin Salman’s ascension to power may prove to be one of the most pivotal events in the modern history of Saudi Arabia and the Middle Eastern region. Under the banner of the recently announced “Vision 2030” project, bin Salman, or “MbS”, brings progressive ideas, youthful energy, and bold leadership to a country that desperately needs them. If durable, MbS’s reforms will transform the Saudi economy into a diverse powerhouse, and liberate the Saudi people from some of the intolerable strictures they face today.

Like Venezuela and the Congo, Saudi Arabia suffers from what economists call a “resource curse”. For the past 79 years, the Saudi Arabian economy has been almost completely dependent upon the sale of its oil reserves, which represent 1/5th of global supply and account for 87% of Saudi government revenues.[1] The desert kingdom’s immense natural resources have cannibalized real economic growth to sustain petro-state welfarism. Historically the Saudi government has employed 70% of Saudi citizens and poured oil money into a radical religious establishment.

Vision 2030 introduces the bold new ideas necessary to disrupt this conventional stasis. Already, Saudi Arabia has inaugurated major social reforms such as granting women the right to drive, which will encourage more women to participate in the Saudi economy. Although Saudi women are more highly educated than Saudi men, archaic gender norms mean that women are a tiny fraction of the overall workforce.[2]

A centerpiece of Vision 2030 is a smart-city called “Neom” that will feature cutting edge infrastructure and a completely free market. Neom is an example of political experimentation on a par with Deng Xiaoping’s Special Economic Zones. It will allow Saudi Arabia to test the effect of a liberal legal regime and protections for multinational investors on economic growth, and to introduce energy and transportation infrastructure decades more advanced than most Western cities. Imagine travelling several hundred miles per hour by Hyperloop or electric VTOL vehicles to see friends or conduct business anywhere in a city in minutes, rather than navigating congested traffic. Of course, in its very conception Neom tempts excessive central planning, and MbS must avoid this risk. Bottom-up innovation with widespread participation by diverse investors and entrepreneurs is the foundation for economic prosperity, and if Neom can display these virtues, it will become a model city in the region.

MbS’s corruption purge in November 2017 elicited some skepticism, but it may have been an actual strike against corruption, not primarily an attack on political enemies (whom he had already displaced).[3],[4] If this interpretation is correct, the Saudi state has sent a strong signal that corruption will not be tolerated, even for top insiders. MbS’s confiscation of embezzled assets is immensely popular with Saudi millennials and is seen as a move towards the kind of transparency and legalism that make private sector growth possible.[5] In this vein, MbS recently introduced regulatory and statutory reforms including updated competition, company, insolvency, and franchise laws, expedited business visa applications, and a commercial mortgages law.[6]

Finally, MbS’s regime seems to be seizing its opportunity to strategically realign with Western and regional partners [although the dynamics of the terrible regional conflicts and various alliances and motivations are beyond the scope of this author’s expertise]. Hopefully the Arabian religious establishment — ulema — will move towards moderance of their own accord. I am heartened by the Grand Mufti’s recent fatwa against killing Jews, for instance.[7]

Despite these positive trends, Saudi equities remain substantially undervalued. Saudi Arabia attracts one of the lowest foreign ownership levels in the world, or roughly 1% of Saudi equities. Today, the kingdom’s equities are only trading at a 3% premium to global emerging markets, compared with a historical premium of over 30%.[8] The Tadawul index — which comprises 178 public companies — has returned over 11% since January 1, 2018, with certain equities performing extraordinarily well. To take one example, the AlAhli bank has returned over 61% over the past year, and is currently trading with a 3.3% dividend and a P/E ratio of 13. Great investors, such as John Burbank and Suhaib Jamjoom at Passport Capital in SF, have taken note of this dynamic and begun to invest heavily over the last year. They have convinced me and others we respect to support their efforts with our own investments.

Saudi Arabia is about to experience even more substantial foreign investment. It is likely that Saudi Arabia will be listed on a major index in the next 1–2 years, and a 4% weighting on the MSCI index, for example, would translate into roughly $40B in foreign inflows. [9] In addition, the kingdom has pledged to reinvest half of revenues raised from foreign capital in the Aramco IPO back into the Saudi economy. However this will be the largest IPO of all time, and will require a new level of market transparency which some argue that the company may be unwilling to permit. These investments would expand Saudi infrastructure, help diversify a one-trick economy, and drive up the value of Saudi assets.

Of course, Saudi Arabia faces many lingering challenges, products of its unique history. To mention a few:

1. Saudi Arabia remains one of the most gender-segregated countries on the planet. Male guardianship is a humiliating affront to moral equality. Not only is this custodial system oppressive, it keeps Saudi women — the kingdom’s largest untapped asset — from participating in the economy. Saudi Arabia’s women were recently granted suffrage for municipal council elections, which is a strong step in the right direction, and hopefully many social reforms are coming. Many will not be comfortable investing into the country until the custodial system is reformed, and I empathize with this view.
2. A relatively thin rule of law makes foreign investors uncertain of how they will be treated by the Saudi government. To attract foreign capital and expertise, Saudi Arabia must persuasively guarantee legal protections for investors, both foreign and domestic, and build a reputable court system that ties their hands from siding with the better-connected party in the future in business and contract disputes.
3. Given his leadership thus far, one imagines MbS has big plans for expanding access to STEM subjects, vocational training, and other modern skills rather than theological training at Saudi madrasas. Two thirds of the Saudi population is under the age of 30, and Saudi Arabia has an enormous opportunity to channel this group towards productive activity. In addition, I hope Saudi Arabia will foster the academic freedom and the culture of free thinking necessary to generate new insights and scientific breakthroughs by the younger generation.

Societies that solve problems with secular, market-driven models realize economic growth in a way that theocratic, welfare states cannot. If MbS enables his people to build social institutions such as schools and businesses from the bottom-up, the Saudi private sector will expand organically.

Women’s rights, a shift towards representative government, open markets and constant rule of law will ward off corruption, promote creativity and innovation, and secure prosperity for the Saudi Arabian people. Combined with a firm grip on security, these reforms will allow MbS to maintain stability and catalyze the Arabian economy.

For now, the command-and-control model employed by Saudi Arabia enables the state to swiftly disrupt the economy and rush forward with new policy. Democracies, constitutional democracies in particular, move far more slowly, requiring lengthy deliberative processes and compromise. There may be better solutions than our often sclerotic modern states — but I do hope that a series of economic successes will enable MbS to become the kind of legendary leader who can shift the Desert Kingdom towards popular participation in an efficient democratic or parliamentary government, perhaps ultimately setting the example of choosing to limit his own power to found a new model for his people. Either way, if he hues to the basic principles outlined in Vision 2030, and is able to continue his bold leadership over the coming years, Saudi Arabia will transform itself into an economic powerhouse, creating enormous prosperity and pride for the Saudi people as they take their rightful place as a modern nation amongst the free peoples of the world.

‍

Appendix

[1] Ghafar, Adel Abdel. “A New Kingdom of Saud?” Brookings, February 14, 2018.

[2] Wright, Robin. “Why Saudi Women Driving is a Small Step Forward, Not a Great One.” New Yorker, September 26, 2017.

[3] Leber, Andrew and Cristopher Carothers. “Is the Saudi Purge Really About Corruption?” Foreign Affairs, November 15, 2017.

[4] Friedman, Thomas. “Saudi Arabia’s Arab Spring, at Last.” New York Times, November 23, 2017.

[5] Ignatius, David. “Are Saudi Arabia’s Reforms for Real? A Recent Visit Says Yes.” Washington Post, March 1, 2018.

[6] Ghafar, ibid.

[7] “Israel welcomes Saudi mufti’s pro-Israel remarks, invites him to visit the country.” Daily Sabah, November 14, 2017.

[8] Saadi, Dania. “Saudi Arabia’s Equity Market is Trading at Attractive Valuations.” The National, February 15, 2018.

[9] Torchia, Andrew. “MSCI to Consider Adding Saudi Arabia to Key Index During 2019.” Reuters, June 20, 2017.

‍