Featured # Markets | 3 years ago

Saudi Arabia Prepares For End of Oil Era by Plotting $2 Trillion Wealth Fund

According to the Deputy Crown Prince of Saudi Arabia, Mohammed bin Salman, Saudi Arabia is preparing a $2 trillion megafund in preparation for the day oil is no longer used as an energy source. The exorbitant pool of money is large enough to be dubbed the most expensive sovereign wealth fund in the world. Mohammed bin Salman detailed his plan for the Public Investment Fund, as he stated it will eventually control greater than $2 trillion and will act as a means to keep the kingdom financially stable as oil’s popularity declines. Prince Mohammad continued adding that the kingdom will look to sell part of the equity it owns in Aramco’s (the Saudi Arabian Oil Company) parent company in an effort to transition Aramco into becoming more focused on industrial works than oil. According to the price, Saudi Arabia is aiming to sell off less than 5% of its ownership, and the IPO could potentially occur as soon as next year. Prince Mohammad clarified his vision for selling shares in Aramco, and for the nation of Saudi Arabia, “IPOing Aramco and transferring its shares to PIF will technically make investments the source of Saudi government revenue, not oil… What is left now is to diversify investments. So within 20 years, we will be an economy or state that doesn’t depend mainly on oil.”

Prince Mohammad states that the planned sale of equity in Aramco is slated to take place in either 2017 or 2018, and the capital raised from that sale will be transferred to the Public Investment Fund (PIF). The money transferred from that sale will swell the value of the fund to levels large enough to buy the world’s four largest companies that are publically traded. Currently, PIF’s proportion of foreign investments stands at 5%, yet Yasir Alrumayyan, secretary-general of PIF’s board, projects that number to rise to 50% by 2020.

The government of Saudi Arabia has announced a “National Transformation Plan” that is aimed to wean the nation off of oil. There are many measures included in the plan with the sole purpose of finding new revenue streams other than through the oil process. Prince Mohammad shared his thoughts on the plan and his general outlook on his nation’s economic health, “We are working on increasing the efficiency of spending… So I don’t believe that we have a real problem when it comes to low oil prices.” These statements come following the kingdom slashing its spending from 40% over the budget allocated amount to 12% over the budget in 2015.

However, there is a cloud of doubt surrounding Saudi Arabia’s decision to reduce its reliance on oil. In the past, many nations have failed when trying to transition away from a purely energy based economy, and Saudi Arabia is now looking at oil prices being $40 a barrel, when not too long ago they were over $100 a barrel. Paul Sullivan, a professor of security studies at Georgetown University, shared his opinion on the matter recently, “It is clear Saudi Arabia needs to reform, diversify, and re-energize its economy, but this will involve more than just increasing investments in non-oil industries. One cannot order economic reforms like a multiple course dinner.”

This is a tumultuous time for the kingdom of Saudi Arabia from a military standpoint. The Sunni-led kingdom is currently trying to suppress Shiite rebels in Yemen that they believe are being backed by Iran. In addition, there are increasing domestic security threats, including terror bombings from extremist groups such as Isis. Prince Mohammad is a prominent man in the kingdom, as he is the defense minister, and also oversees a multitude of ministries. In addition, he oversees the Council for Economic and Development Affairs, which is in charge of controlling the Public Investment Fund.

The plan for PIF is to increase its proportion of foreign investments, and according to the prince they are already thinking about, “two opportunities outside Saudi Arabia.” Prince Mohammad would not share details regarding the two targets, but he did clarify that they are in the financial sector and that, “I believe that we will conclude at least one of them.” That would not be the first international company PIF would have invested in, however. For example, PIF bought 38% of the South Korean company Posco Engineering & Construction Co. in July for $1.1 billion. In addition, PIF also agreed to a $10 billion agreement to invest in Russia through the Russian Direct Investment Fund.

PIF’s secretary-general and former chief of Credit Agricole SA-backed Saudi Fransi Capital, Yasir Alrumayyan, spoke on how the nation is backing PIF and their movements going forward, “We’re working now on different fronts, now the government is transferring some of its assets, lands, some of the companies to us. We have different projects in tourism and in new industries that are untapped in Saudi.” Prince Mohammad then declared that the investment plan for PIF in foreign assets could only be described as, “very aggressive.” Prince Mohammad then concluded his speech with confidence, “Undoubtedly, it will be the largest fund on Earth… This will happen as soon as Aramco goes public.”


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