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    The Prince – The Crackdown – and Saudi economy

    April 2019

    Crown Prince Mohammed bin Salman’s goal of replacing a corrupt feudal state in Saudi Arabia with a Western-orientated market economy is doomed to be elusive unless he stops acting like a despot and rules like a reformer. Now Saudi Arabian Authorities plan to take control of the Middle East’s largest media company as part of Crown Prince Mohammed bin Salman’s extraordinary anti-corruption crackdown. Officials have ordered Waleed bin Ibrahim al-Ibrahim, the founder of the Middle East Broadcasting Center (MBC), to hand over his controlling stake in the company to secure his release, according to people briefed on the matter. His case illustrates how the crackdown, lauded by many Saudis as an overdue attack on corruption, appears in part to be a shakedown of coveted assets and in leading to the nationalization of private sector powerhouses. It also hints at a desire by Prince Mohammed to tighten the government’s grip on the media as he pushes ahead with ambitious reforms and an increasingly assertive foreign policy.

    MBC is the largest free-to-air Arab TV network, enjoys 50% market share in the kingdom and attracts 140M viewers daily across the region. Mr. Ibrahim, who set up the multi-billion-dollar media company in London in 1991, is one of more than 150 princes, business tycoons and former ministers arrested and detained at Riyadh’s Ritz-Carlton hotel offer Prince Mohammed launched the anti-corruption purge in November. Many have been released in recent weeks, some reaching settlements in which they agreed to handover assets and cash to the authorities, while others have been cleared. Those detainees who do not make a settlement with the authorities will be transferred to prison to await trial, the government has mentioned. Prince Alwaleed bin Talal the billionaire investor and highest profile detainee, has yet to settle, even so he just got released. Mr. Ibrahim, who is allowed to make some phone calls, remains at the Ritz-Carlton as he waits for the authorities and their international consultants to finalize a settlement. The authorities earlier told MBC that he would have to hand over his shares in the broadcaster free of charge. Some government advisers suggest that the delay on a settlement may have been caused by lawyers seeking to ensure that any deal is drafted in a manner to prevent detainees suing the government after their release.

    One potential offer to Mr. Ibrahim is for him to continue having a role at MBC once Prince Mohammed or the state haven taken over the company. He would then report to a board that includes officials close to the prince. Such an outcome would mirror the fate of Saudi Binladin Group, one of the Kingdom’s biggest construction companies. Some of its share holders were released after agreeing to transfer shares to the government and report to a state appointed committee entrusted with “restructuring” the indebted contractor. Mohammed al Jadaan, the finance minister confirmed, that most of the 100 Billion USD Riyadh hoped to raise from corruption suspects would come from assets inside and outside the kingdom.

    When Prince Mohammed announced his highly ambitious national transformation plan in 2016, he promised to privatize state assets, create 1.2 million jobs in the private sector and cut unemployment to 3% by 2020. It was rehashing an old panacea weaning the Kingdom off its addiction to oil. Prince Mohammed has made progress. He has lowered obstacles to women’s participation in the work force, cut subsidies on utilities and raised indirect taxes. On January 1st, he increased fuel prices by over 80% and imposed a new 5% sales tax. But this outreach to the private sector, on which his plan depends, has been stymied by a lack of capacity and institutional experience and increasingly, his hubris. His oppressive conduct is alienating the very sources he should be trying to attract. Rather than plod on with austerity measures, he seems mesmerized by ambitious vanity projects and fattening his personal portfolio with the most expensive property in France for over 300m Euros near Paris and a super yacht exceeding 400m USD. The Public Investment Fund is supposed to be Saudi Arabia’s sovereign wealth fund, but the Prince, who heads its board, runs it like his own business. In April, it acquired 129 square miles of state land for a sports and entertainment city. In August, it announced plans for a tourist resort bigger than the country Belgium. And in October, Prince Mohammed unveiled “Neon”, his 500 Billion USD robot city, at an international conference. Once again the Public Investment Fund led the way.

    Few, if any, Saudi princes and businessmen were tempted to invest their largess-sometimes ill gotten- into these ventures. Many have learned from bitter experience. The prince’s uncle Abdullah, the previous king, planned six economic cities, including the King Abdullah Economic City on the Red Sea. But though the project’s cost, 27 Billion USD, was barely 5% of Neon’s, it is expected to be ready only in 2035. Saudis saw another herd or white elephants on the stampede and skied away. Undeterred, Prince Mohammed has resorted to arrest, asset seizure and shakedowns. In the process, he has turned the House of Saud whose various branches once shared wealth, power and decision making into a one-man state. Far from diversifying wealth, he seeks to centralize it in his hands. Scores of princes who were arrested in November have been transferred from imprisonment in the Ritz-Carlton Hotel to its high-security jail. An additional 11 princes were hauled in this month, dashing hopes that the November arrests were a one-off. Prince Mohammed expects to raise around 100 Billion USD from the purge. Yet that amount would cover only his budget deficit of 2015 or equal the sum he hoped to raise from selling 5% of the Saudi oil company, Aramco. His plans to turn the private sector into the driver of the kingdom’s post oil economy are in disarray. He might court headline investment from Amazon and Apple, but moneyed Saudis who should be first on board prefer to squirrel their savings away.

    According to the International Monetary Fund, the Saudi economy dropped into recession more sharply than predicted in the last quarter. The gross domestic product dipped 0.7% in 2017, substantially down on pre-purge predictions of growth of 0.1%, and worryingly below population growth of 2%. Saudi Arabia’s ranking on the World Bank’s ease of doing business index has fallen from 26 in 2014 to 92 in 2017. Unemployment continues to increase, in part because of the influx of woman into the job market. For decades the kingdom guaranteed public employment. No longer each year had hundreds of thousands of young adults joined the line for government jobs. The private sector is yet too undeveloped to pick up the slack. Prices are rising because of the reduced subsidies and new taxes. Economists expect the ranks of Saudis living in poverty around 20% to swell.

    Fearing perhaps Iranian-style protests over economic anxieties, the prince has delayed key performance indicators in his transformation plan until 2023, including a balanced budget. His reductions in perks and allowances for state employees were reversed after almost seven months. Grumbling over the new taxes and fuel price increase prompted the hurried rollout of an extra 13 Billion USD or more in handouts, particularly for students and soldiers.

    A fear of uncertainty, too, could dampen Prince Mohammed’s hopes of raising finance. Capital flight, which averaged on estimated 8 Billion USD per month when the purge began, has since fallen back, apparently because of worry of arousing the prince’s notice. But foreign interest in buying into Aramco might have been dented by the mercurial reputation of its chairman, the crown prince. Increasingly Saudi insiders speak of floating shares in the state oil company on the Tadawul, Riyadh’s stock exchange, rather than in London or New York, or of giving Saudi shareholders privileged access. A direct sale to Chinese state-owned oil companies is also being mentioned. To revive investor confidence, Prince Mohammed should consider several safeguards. He should replace the family checks and balances he swept away with a due process and rule of law, which applies to royals and commoners alike. The corruption commission he unveiled on the eve of his purge should be a regulator, upholding international standards of corporate governance, not his personal star chamber skewing the rules for his cronies.

    Investors and neighbors crave predictability, stability and the confidence that comes with a sound regulatory system. All three are what made Dubai. Property carried out, such a system would please bankers who might welcome the chance to retrieve debts or land from princes that act like robber barons.

    He also needs to be more transparent. Many of his investigations may be well founded. After all, over the three decades his father, King Salman, headed the family council, collecting copious evidence of his relatives’ misdemeanors. As the great medieval Arab historian Ibn Khaldun warned, if dynasties do not reform after three generations of rule, they risk going to pot.

    Prince Mohammed needs institutional heft. He cannot haul the kingdom out of its oil dependency and create a diverse economy alone. His teams of foreign management consultants lack a bureaucracy and a local base. Rather than alienate family elders with decades of experience raising international finance, he should harness their expertise.

    A new House of Lords would lessen the risk that wounded egos will spawn an opposition. Subject to his elders’ scrutiny, the crown prince might be more prudent about spending money, particularly on defense and security, which documents indicate was 43% percent over budget in 2016.

    For now Prince Mohammed is offering more personal liberty and relief from the scowls of the religious police as compensation for the introduction of taxes. But as Abdullah, the previous king, recognized more taxation whether direct or indirect-will stoke demands for broader representation. Greater accountability should be welcome. It might also ensure that the sums the prince accrued from the purge go into the country’s purse, not his personal account. And it would make for a more viable kingdom which would attract investors and entrepreneurs.