ARAMCO: Center to plan

ARAMCO: Center to plan

Today's Plan Tomorrow's Promise

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Oil

Syed Rashid Husain

THE Kingdom is embarking upon a non-oil era. “Within 20 years, we will be an economy or state that doesn’t depend mainly on oil,” declared Deputy Crown Prince Muhammad Bin Salman, second deputy premier and minister of defense, while unveiling the ‘Vision 2030’. But to him, the deadline for the transformation has to be still nearer. “I think by 2020 if oil stops we can survive,” he emphasized. “We need it, we need it, but I think in 2020 we can live without oil.”

This is starkly different from the past. In recent years, Saudi Arabia has relied on oil revenues for about 90% of its budget. But with the weakening of the oil markets and revenues from oil getting lower and lower, there had been a worsening impact on oil-dependent economies. Saudi Arabia was no exception. The government ran a deficit of 367 billion riyals ($98 billion) or 15 percent of gross domestic product in 2015, and this year’s budget plan aimed to cut that to 326 billion riyals ($87 billion).

In order to meet its expenses, Riyadh had to depend on its foreign exchange reserves. And they were dwindling fast too. In the meantime, Saudi Arabia’s holdings of US debt also went down to $116.8 billion in March. That was almost 6 percent down from a record in January, US Treasury revealed last Monday. In order to cope with the scenario, earlier this month Riyadh had to take a $10 billion five-year loan from a consortium of global banks — its first sovereign loan since 1991.

This could not go on forever. Saudi Arabia needed to change its direction and get off the oil addiction. The process envisaged a major restructuring to generate income from sources other than oil. ‘Vision 2030’ unveiled on April 25 by Prince Muhammad Bin Salman specifically addresses that, aiming to diversify Saudi revenues away from oil.

As per the plan, the government aims to cut its dependence on oil by boosting non-oil revenues to SR600 billion ($160 billion) by 2020 and SR1 trillion by 2030, from SR163.5 billion in 2015. In order to achieve this, the vision has set ambitious, yet achievable, targets. It plans to raise the share of private sector in the national economy to 60 percent from the current 40 percent, reducing unemployment to 7.6 percent from 11 percent and growing non-oil income to SR1 trillion ($267 billion) from SR163 billion ($44 billion).

The plan aims at raising $100 billion in annual non-oil revenue by 2020.
Major initiatives are being undertaken to achieve this gigantic objective. The government is planning to introduce taxes, reduce or end some subsidies, generate much higher income from religious tourism, issuing green cards to expats and bringing in more foreign direct investment.

However, the other major plank to generate funds is by investing in foreign lands courtesy a massive Sovereign Wealth Fund to be set up for the purpose. “Saudi Arabia wants to create the world’s largest sovereign wealth fund, which would be built up with $2 trillion in assets, to be used to help diversify the Saudi economy away from oil dependence.” It would be more than double the Norway’s sovereign wealth fund, regarded as the largest in the world by assets. Prince Muhammad hence feels, “Within 20 years, we will be an economy or state that doesn’t depend mainly on oil.”

At the center of the plan is the restructuring of the Public Investment Fund (PIF), which Prince Mohammed said would become a hub for Saudi investment abroad, partly by raising money through selling shares in Aramco. Money for this $2 trillion dollar fund is to come partly from transferring the ownership of Aramco to the PIF, Prince Muhammad elucidated during a recent interview. “We are speaking about more than $2 trillion. We expect the valuation to be more than this. In addition to that, there are other assets that will be added to the fund, and part of it is already added. This could ‘turn the fund into a global investment fund’ with a size of up to $3 trillion dollars.”

Spinning off, parts of Aramco could generate hundreds of billions of dollars — to say the least. Taking about 5 percent of Saudi Aramco public — mostly downstream assets — will provide a lot of cash that can be used for non-oil investments, asserted Prince Muhammad.

Because of its rights to the Kingdom’s crude reserves, so big is Saudi Aramco that selling even 1 percent of its value would create the biggest initial public offering (IPO) on earth, he said.

He said other Aramco subsidiary companies would also be listed along with other publicly held companies. Not only there are talks of downstream assets of Saudi Aramco being transferred to the PIF to generate the required funds, but assets such as the Riyadh financial district are also being transferred to the PIF. One major obstacle to Aramco IPO could be a lack of transparency, most analysts have been arguing. Prince Muhammad believes the move could address that concern too, saying it will increase transparency and help limit corruption.

“People used to be unhappy that files and data of Aramco are undeclared, unclear and not transparent. Today they will be transparent. If Aramco gets IPO-ed that means it has to announce its statements of accounts,” he conceded.

Most analysts have largely welcomed the plan. Timothy Ash, the head of emerging markets at Standard Bank, believes the vision creates huge potential for foreign companies to help with the transition. “The key question is can Saudi society cope with such an ambitious plan/ambition which could strain society to the core?” he said in a note in April, shortly after the announcements.

Shakeel Sarwar, head of asset management at Bahrain’s Securities & Investment Co, was of the view that the pain of low oil prices seemed to push the Kingdom into change that would make its economy more dynamic in the longer run. The Saudi stock market’s depth and breadth will improve considerably with the listing of assets such as Aramco, he emphasized.

Speaking to Reuters, he said, the market capitalization and traded values will rise substantially and in terms of importance, the Saudi market may end up becoming valuable and critical to international fund managers based in New York, London Hong Kong, and China. If these economic reforms and liberalization plan can be successfully implemented over the next five to 10 years, future economic and political analysts may end up identifying this current oil price decline as a blessing in disguise for Saudi Arabia and rest of the Gulf region, he asserted.

However, there is no dearth of skeptics too. “The Kingdom would need to be a much more transparent place to encourage greater US investment,” Bruce Riedel, a senior analyst at the Brookings Institution, told Washington Post.

“Where will the foreign money come from to invest in the Aramco IPO, especially with oil prices where they are now and given the muted foreign interest in the opening of the stock market,” Reuters quoted a senior banker as asking?

The taste of the pudding is in tasting. Proper implementation of the plan remains crucial. Yet for the country to move ahead, it needed to change its direction. Vision 2030 exactly provides that!

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