In 2016, the Saudi Arabian government, led by Prince Mohammed Bin Salman,
launched an ambitious economic and social transformation plan with a very clear objective:
To overcome its enormous dependence on crude oil once and for all.
The problem is that this is one of those things that is much easier to
announce with great fanfare than it is to execute at a nuts and bolts level.
And that is exactly what happened in this case: The inability to list the national oil company
Aramco on international stock exchanges – a topic that we covered in a past video
made with Value School –, a succession of megalomaniacal projects with no clear purpose
and the collapse of oil prices in 2020 put the Saudi kingdom's finances and the very viability
of the Vision 2030 strategy on the ropes. At least as far as it was initially planned.
Between 2015 and 2020 alone, the Saudi government's public debt rose from 5.8%
of GDP to over 30%. In nominal terms it multiplied by more than 6 times in just 5 years.
And, yes, 32.5% public debt may seem like a very small figure to you, even an enviable figure.
However, in the specific case of Saudi Arabia, this could be very misleading,
especially if we take into account that during the same period of time, the government's cash
and gold reserves plummeted by almost 40%. This amounted to losing almost $300 billion.
Furthermore, we are talking about a country that, beyond the boastful presentations of great
empire building projects, continues to be terribly dependent on crude oil and has
serious economic and political problems. For instance, it is a very young country,
with 70% of its 34 million inhabitants under 30 years of age, and with very little private
sector employment generation. The vast majority of economic
activity depends on the government and on oil. And this is a problem, because VisualPolitik fans,
keep in mind one thing: the combination of youth, unemployment and religion is one of
the most explosive cocktails in the world. So you could say that in this case,
the alarming thing is the trend. Hold on just a moment, however,
because now suddenly the picture has changed almost completely.
The lack of investment in the oil sector and the war in Ukraine have triggered a
rebound in crude oil prices that has breathed life into the Saudi economy and substantially
improved its forecasts for the coming years. For example, estimates suggest that the current
account surplus will exceed 12% of GDP in 2022 meaning public finances will take a breather.
As you can see, according to calculations made by the International Monetary Fund,
the Saudi government needs the price of crude oil to exceed
$72.4 dollars to balance its budget.So, of course, with barrel prices above $100,
the Saudi government is expected to achieve a budget surplus of over $60 billion while its
flagship asset, Aramco, is also set to make record profits. Probably in excess of $150 billion.
All of this is giving the government leeway to accelerate the implementation
of the Vision 2030 strategy. As an example, in October 2021, the
Saudi government launched the National Investment Strategy. The objective? We have already told
you about it. To attract enough investment to diversify the kingdom's economy once and for all.
That is, to turn the country into an important international
investment center. Or when you think about it, to replicate something that already exists: Dubai.
But VisualPolitik fans, this is a Value School video, so the question is: How do
they hope to achieve this and what role could financial markets play in this whole adventure?
Well, let's take a look. (A PLAN TO CHANGE A COUNTRY)
It turns out 2021 was a good year for the Saudi economy. And we are not just talking
about oil. Net foreign direct investment inflows increased by more than 250%.
And now, with the approval of the National Investment Strategy, the kingdom wants to go
much further. The objective is that by 2030, this strategy will allow a
20-fold increase in foreign investment and a 2.5-fold increase in domestic investment,
so that the investment rate will be 30% of GDP. To achieve this goal, the Saudi economy
will have to invest more than $3.3 trillion over the next eight years.
Now, logically, the question we are all wondering is:
How do they hope to achieve this? What changes will this new strategy entail?
Well, if you like, let's highlight some of its key aspects.
Firstly, Saudi Arabia is liberalizing capital inflows. International investors
can now have full ownership of Saudi companies in most economic sectors.
Secondly, five new special economic zones will be created with regulatory,
fiscal and financial benefits and, very importantly, a great deal of legal certainty.
Thirdly, the government will accelerate the construction of critical infrastructure
that will allow various stages of the global production chain to be located in the country.
We are talking about ports, airports, advanced communications networks, and so on and so forth.
Fourthly, the country will change its economic policy to try to sign free trade agreements
with the major international economies. Then, fifthly, and this measure is more
controversial, the country has established a new procurement rule: only companies with their
regional headquarters located in Saudi Arabia will be able to work with the Saudi government.
Sixth, the privatization of large public enterprises will also be promoted.
The money obtained from the partial or total sale of public companies will go
to the well-known Public Investment Fund, which invests in non-oil companies around the world.
The idea is that this fund will go from managing about $500 billion to more than $1.1
trillion. Yes, I did say trillion.. You could say it is a way of exchanging
investments in oil for investments in companies such as Alphabet,
Apple or Amazon among many others. In addition, once it has positioned itself as
a major shareholder, the Saudi government will try to reach agreements with these companies
so that they invest and install productive activity in the country.
[You know the drill, money is usually a pretty good ambassador].
(Google partners with oil giant Aramco to access Saudi Arabia's $10 billion cloud market. CNBC)
And eighth, the government wants to front large amounts of participatory financing
to support the creation of new start-ups and the launch of new investment projects.
Particularly in fields such as technology, digital, clean energy, finance and health,
but not only those fields. The idea is to take advantage of its huge dollar
reserves to compensate for all the country's weaknesses with abundant and cheap capital.
("The National Investment Strategy is about empowering investors,
offering investment opportunities, providing financing solutions
and improving competitiveness. It also clarifies the partnership between the public and private
sectors, as our mission is now to open the door to the private sector and allow it
to grow and prosper." Mohammad bin Salman ) But let’s not forget about natural resources.
Beyond oil, Saudi Arabia wants to start exploring its vast natural gas and mineral reserves. For
example, in early December, the first contracts were awarded to exploit the largest shale-gas
field outside the United States in the world. Well, all this is in terms of direct investment,
investment in the field. However, woven throughout this whole plan, turning the
Saudi stock exchange into a major international center is another of Riyadh's major objectives.
(ACHIEVING A NEW FINANCIAL CENTER) Let me ask you a question:
have you ever considered investing in the Saudi stock market, in Tadawul?
Probably not, not least because it is practically impossible for a retail investor to do so.
And we are talking about the largest stock market in the Arab world and one of the 10
largest stock exchanges in the world. Well, this isolation is precisely what
they now want to change. To this end, the Saudi government is determined to implement significant
changes and to boost the connectivity of this stock exchange with the major financial centers.
We are talking about changes that, for instance, have moved Saudi Arabia's position in the World
Bank's retail investor protection ranking from 83rd to the top 3 in just five years.
And for the time being, Clearstream, a subsidiary of Deutsche Borse that handles
services such as securities settlement and custody, has connected the Saudi capital
markets to its network. This will make it easier for many investors to invest in the
Saudi market through bonds or ETFs for example. In addition, as part of the privatization plan,
the government will accelerate the IPO of new packages of
shares from the large national companies. With all these changes, VisualPolitik community,
the Saudi Arabian government hopes that in the coming years many investment opportunities will
arise in the country and that they will be able to attract large amounts of international capital.
The question is, will Saudi Arabia be able to take advantage of this new opportunity
provided by oil prices and will Riyadh become an important international financial center? Leave
us your impressions below and if you found this video interesting don't forget to like
and subscribe to Visual Politik. Take care and see you next time.