Privatization necessary to boost Saudi economic growth: MUFG

Saudi Arabia needs to accelerate the privatization process as part of wider economic reforms, even in an environment of higher oil prices, MUFG Bank said in a report on Tuesday.

“As motivation for diversification is closely correlated with oil prices, and as oil prices are reaching close to the fiscal breakeven point, pressure for reforms dissolves, leading to slippage,” the report noted.

While a certain degree of reform fatigue is to be expected, the importance of privatisation as a means of reducing reliance on oil revenues, and enticing efficiency gains, cannot be overlooked, the report added.

The capability and readiness underpinning the privatization drive is present, but Saudi authorities now need to outline both a timeline and granular details of the privatisation plans. Meanwhile, the private sector needs to fully digest the strategy laid out before fully committing to various schemes and initiatives.

“Upon the privatization selection process, the first phase could target the easier, low hanging fruits, and less assets that are considered more core and strategic for the state, at the current juncture,” MUFG said.

Ongoing structural reforms in Saudi Arabia under the leadership of Crown Prince Mohammed bin Salman  will enhance the Kingdom’s potential growth rate.

“On the whole, unlike in previous years, the authorities have shown a willingness to adjust policies in line with changing oil market dynamics. These changes, which signal recognition of the limits of the rentier state model, could usher a gradual move away from handouts to more of a sustainable growth model,” the report said.

However, the bank noted that while the ambition is evident, the biggest challenges will be implementation.

“We believe that diversification will be slow and will take years to deliver on the pledges set out in Vision 2030. It is likely that some of the delivery of reform may fall short of ambitious targets set,” it said.