In 2015 King Salman has took the reign, appointing his son Mohammed Bin Salman first as Deputy Crown Prince, and several months ago as Crown Prince. The symbiosis between the King and his son has led to a new economic drive, changing the face of the desert Kingdom forever. Last month Future Investment Initiative (FII 2017), officially organized by the Saudi Public Investment Fund (PIF), the country’s main sovereign wealth fund, has pushed the Kingdom into the spotlights. Presented as a pioneering new global investment event that will connect the world’s most powerful investors, business leaders, thought leaders and public officials with the pathbreaking innovations that are defining the future, participants already have been dubbing it as “Davos in the Desert”. In contrast to the yearly gathering of politicians and business leaders in the Swiss mountains around Davos, FII2017 has been not a high profile Hollywood party but a functional and rationally organized get-together of like-minded people and interested investors to get an overview and insight in the programs and projects linked to Saudi’s main economic plans, called Saudi Vision 2030. During a three-day well organized conference and workshops, the forum brought together global CEOs and investors with world-leading experts and visionaries from a range of industries, to explore the evolving role of sovereign wealth (PIF) in driving the next wave of business, innovation, technology and investment.
As stated by the PIF and Saudi Ministry of Economy, discussions were based on three pillars currently supporting the Kingdom’s drive to become a new emerging market, holding regional and global economic and political powers. The PIF stated that the three pillars were:
- shifting centers of power
- a new investment paradigm
- innovation for a better world.
During and just before the FII2017 investors and operators have been dazzled by multibillion dollar projects, such as the plans to build NEOM, a mega project billed as a regional Silicon Valley, in addition to an entertainment city in Riyadh that would rival Walt Disney and the Red Sea project, a reef-fringed resort destination. During the conference attendees have been introduced to a Saudi “Dream”, as Crown Prince Mohammed Bin Salman stated, which now will become reality. Talking to robots, flying taxis, and holographic lion, have introduced investors to a new kind of Kingdom, willing to wean itself from its oil addiction, and targeting high-tech giga projects. In several halls in Riyadh’s Ritz Carlton, which was fully booked by the organizers and blocked from the outside world, the blueprints for the projects were on display to 3,500 CEOs, former presidents and media. The main purpose of FII2017, presenting the former insular kingdom as a hotspot business destination has been done remarkably well. Building on the fact that the overwhelming majority of the participants, holding a multitude of trillion of dollars in managed assets worldwide, has never set a foot on Saudi soil, the message was clear and received by most of them. Skepticism about progress made in the Kingdom or the position of Crown Prince Mohammed Bin Salman were removed largely, but still some critical analysis is needed. The “dream” could come true, but a lot of work and effort is needed, supported by MBS and the Saudi government and business elite, but also by fully opening up to global investors and operators its books. Optimism will be partly based on the Saudi willingness to become more transparent and open, as the financial world will be critical and comparing other opportunities worldwide with the Saudi opportunities.
Still, putting optimism and dreams aside, there are still serious questions to be answered. Looking at the Kingdom, there are existing s doubts about Saudi Arabia's ability to execute the long list of projects, funded in part by its sovereign wealth fund, as it scrambles to diversify its economy amid a protracted oil slump. Some analysts have openly stated, when asked to comment on the media-genic NEOM project, that "the initiative is overambitious, involves immense execution risks, and will not help effectively address employment challenges". The main risk at present for the Saudi economic diversification is the fact that the government lacks still part of the capacity to carry out multiple ambitious programs. With the exemption of Saudi’s leading companies Saudi Aramco (the national oil), SABIC (petrochemical company), Bahri (National Shipping Company of Saudi Arabia) and several of its energy and water utilities (ACWA ao), the overwhelming majority of Saudi owned companies are not fit to support or executive grand-scale projects in the coming years. As the proposed “Giga-Projects” are unprecedented in scale and ambition, funding and management pressure will exist. Possible solutions to the financial issues are available, looking at the Aramco IPO and the growing cooperation between PIF and international sovereign wealth funds and investors. However, if not all will materialize on time, the Saudi government will be confronted by a situation in which it will need to provide an increased amount of the funding itself. The latter will be an issue, if its revenue base, which is currently based on hydrocarbon revenues and international investments of its sovereign wealth fund, are still constrained. Since the collapse of crude oil prices, resulting in a staggering drop in revenues, the Saudi government is faced with a still existing budget deficit. The latter is not only putting pressure on the economy, as part of the Kingdom’s non-oil economy has come to a halt, but also socio-economic issues, as Riyadh needed to cut subsidies and salary schemes.
Still, Saudi’s defacto leader MBS could be partly saved by the bell. OPEC’s production cut agreement with Russia and other non-OPEC producers, which was introduced by MBS, is showing its first real results. Global oil prices are recovering, currently hovering above $60 per barrel, with an upward potential of $4-10 per barrel more on the short term. Increased oil (and petroleum product prices) will relieve partly the financial pressure on the Saudi government. It also will reduce international worries about the financing of the future projects and the internal stability of the country.
As the English say, “the proof is in the eating of the pudding”. The main driver for the current strategy is Crown Prince Mohammed bin Salman, who holds the power and the keys to the Kingdom. On his bequest the former fledgling Saudi sovereign wealth fund Public Investment Fund (PIF) has been elevated to become one of the world’s leading SWFs, dwarfing in theory its main rivals Qatar Investment Authority (QIA) and Abu Dhabi Investment Authority (ADIA). The latter is not only being done via a strategy build on streamlining all IPO revenues, in addition to Aramco IPO another list of 100 IPOs is circulating, via the PIF but also making the SWF the engine behind the economic diversification of Saudi Arabia. All in light of reaching part or all of the objectives of Vision 2030, the brain child of MBS.
As presented during the FII2017, where the PIF as initiator and backer had a leading role, the SWF’s program is meant to prepare the economy for a post-oil era through economic and public sector investments, encouraging private sector and foreign participation. With a link to history, where countries going through a economic transformation process all introduced 5 or 10 Year Plans, the PIF program has been split up in phases. The first one (2018-2020) includes 30 new initiatives, with an aim to increase the assets to $400 billion by 2020 (from the $224 billion Sep 2017).
These new financial streams will be targeted by unlocking the potential in several new sectors, such as military (SAMI), industrial (Dussur), ecommerce platform (Noon.com), entertainment, real estate/infrastructure and recycling/waste management. In addition to this, the PIF, under control of MBS, will be aiming to localize the technology and knowledge-knowhow by creating 11,000 high –skilled direct jobs by 2020. The latter will be partly be enabled by the set-up of strategic economic partnerships, such as already is shown in the growing economic, financial and commercial cooperation between the PIF and its Russian counterpart Russian Direct Investment Fund (RDIF). All this is expected to attract $5.3 billion in foreign direct investments in the next three years. Additionally, the program also includes investments in Giga- projects namely NEOM ($500 billion investment; and potential market listing), the Red Sea project and the Qiddiya Project. As presented in all plans, the key source of funding will come from capital injections from the government, government assets transferred to PIF, loans and debt instruments and retained earnings from investments.
To support the above mentioned economic diversification and dreams of a “New Saudi Arabia”, the PIF has structured its investment plans in around six different streams:
- Saudi Equity Holdings
- Saudi Sector Development
- Saudi Real Estate and Infrastructure development
- Saudi Giga-Projects
- International Strategic Investments
- International Diversified Pool.
For all streams, a very aggressive annual return percentage has been set, ranging between 6.5 - 9.0 per cent. In addition to these direct investment targets, the PIF is, supported by the Saudi government and MBS, targeting global ties through strategic partnerships, such as Softbank Vision Fund (Technology focus), US Infrastructure Investment Program (in collaboration with Blackstone) and Russian Direct Investment Fund (RDIF). The list will become longer, as the Kingdom has embarked on a global scale of investments and cooperation discussions, plans for China, India, Ukraine, Egypt, but also Africa and specific countries in the EU are on the list. The PIF also reports that it holds plans to diversify its international investments through Saudi Arabian Investment Co. (Sanabil), which is an entity expected to play a major role in PIF’s plans for international investments.
At present the PIF already is heavily involved in a wide range of sectors in the Kingdom, investing in Saudi listed companies, such as Petrochemicals (SABIC), Banks (NCB/SAMBA/RIYAD/ALINMA), Telecom (STC), Utilities (SEC/GASCO), Mining (Maa’den), Consumers (Almarai, Savola, NADEC/SFICO), Cement (SPPC/Qassim/Yanbu/Saudi Cement/EPCC) and Transport (SAPTCO). Of more interest is the fact that as a state-owned entity, PIF has also major stakes in non-listed companies, which are expected to be offloaded soon, such as Flour Mills, SALIC/MARAFIQ etc. For the coming years, PIF’s stakes in the Saudi stock exchange, Tadawul, are very interesting and a major policy instrument at the same time. Tadawul is already in an IPO process, but also is a major stakeholder in any ongoing discussion with regards to Aramco’s IPO, regulation and foreign investment opportunities in Saudi companies, holdings and its own stock exchange. Tadawul holds a pivotal position, as was shown during FII2017, of the Saudi government, playing a key role in all privatization initiatives of KSA. For analysts and foreign investors is noteworthy to understand that most PIF investments currently are mainly in the non-oil sector of KSA, which is in line with KSA’s vision 2030 of developing its non-oil economy. All in all, it is envisioned that these new investments will directly contribute to 6.3 per cent of total GDP by 2020 (4.4 per cent as of 2016).
Short Term Opportunities and Risks
At present, without looking at the ongoing efforts to crack down on corruption within the Kingdom, the Saudi economy is being transformed from a purely hydrocarbon based rentier-state to a possibly diversified high-tech focused regional power. Some have already dubbed the coming decades a possible ‘Golden Era’ of Saudi Arabia, based on profitable business models and a largely open economy. This optimism is still however to be considered to be based on the immense changes currently visible inside the country, business and governmental players. Still, the implementation of media-genic policy measures, such as women driving, the call for a more moderate Islam or the introduction of tourism visas, are not going to be the base on which the future projects need to be build. The crucial junction the Kingdom currently has arrived at is still covered in a fog of existing power structures, economic and political interlinkage, which was based on a hierarchal tribe and religion based society. The three decades before King Salman have been constraining the development of a vibrant liberal economy, which should have been supported by a vibrant educational sector in which young Saudis should have been prepared for a new era. The latter has not been done, so a dramatic change of the Saudi economy will need additional investments in education and schooling of the young business and political leaders of the future.
To implement the multibillion projects currently being discussed and put in front of thousands of institutional and fund managers is a risk. A timely execution of these projects, managed and coordinated in the right way will make all a success. The Saudi government also will need to keep to its current economic diversification strategy, which is not only build on immense spending budgets but also will only succeed if existing, sometimes dormant, subsidy systems and Wasta arrangements are being removed. As has been proven in the rest of the world, to change for the better is not going to happen without a period of pain and the confrontation of cultural, religious and power systems. For the Saudi government, and MBS, it will be a long road, full with stumble-blocks and unforeseen challenges around every corner. Still, to embark on such a huge and far reaching initiative, which is built on dreams and foresights unknown in the Arab world, is not without a real and imminent challenge. Without stakeholders management, bringing in specialists to manage the expectations of the 60-70% of the Saudi population, the young, currently putting their hopes for a better future, as presented in MBS’ plans, a situation without quick wins could be deadly.
The current approach is very successful, at least in the local and regional media. The interest of a vast group of sovereign wealth funds, hedge-funds and other institutional investors, is currently there. FII2017 has opened the eyes of a growing part of the financial world that Saudi Arabia could be “the next thing”. If MBS, supported by his ministries, is also able to implement the more low hanging fruits, the support of the young is there. With some of his masterstrokes, MBS has been able to quell the possible opposition under young women, while not stepping on the feet of the young male population. Whatever people are thinking about any of the so-called Giga Projects, if they will create new highly sought after jobs, MBS’ future is secured. The need for change has been recognized, not only by expats or advisors, it is now in the heads and hearts of the young on the street. Now the streets need to be changed to show to the young drivers or pedestrians that the road to success is being prepared.