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Wall Street’s Eyes on Riyadh Just as Wealth Fund Pivots Home

Prince unveils new goals ahead of flagship investment summit Funding PIF’s domestic growth will be a key challenge

January 27, 2021 Stu Turley Finance, International News

Aramco chief technical officer Ahmad al-Khowaiter -Energy News Beat

Saudi Arabia’s $400 billion sovereign wealth fund will find it tough to repeat its success of recent years when it made its mark globally as a source of cash for asset managers, tech entrepreneurs and tycoons.

Ahead of the kingdom’s flagship investment conference this week, Saudi Crown Prince Mohammed bin Salman laid out the fund’s strategy through 2025. It’ll spend at least $40 billion a year at home, creating new cities and industries, along with 1.8 million jobs. It plans to more than double assets it controls to over 4 trillion riyals ($1.1 trillion), putting it on par with the current size of Norway’s sovereign fund, the world’s biggest.

But as investors tune in Wednesday to the annual meeting — held as a hybrid virtual-physical event due to Covid-19 — many will recall that Saudi Arabia’s track record on ambitious projects is patchy.

Upward Trajectory

Saudi Arabia’s PIF aims to have its assets exceed $1.1 trillion by 2025

Source: Sovereign Wealth Fund Institute, Global SWF data

Note: Figure for Saudi Arabia is from Crown Prince’s statement.

Since the de facto ruler unveiled his sweeping economic transformation plan in 2016, Saudi Arabia has doubled non-oil revenue, opened up to tourists, created an entertainment industry and seen a jump in women joining the workforce. For the conservative Islamic country, those changes are monumental.

But Prince Mohammed’s also presided over two economic downturns, with unemployment rising to a record high and foreign direct investment 37% lower than in 2016 — partly due to coronavirus and lower oil prices.

What Bloomberg Economics Says…

“A chunk of the increase in Saudi non-oil revenue stems from one-off settlements following the government’s declared anti-corruption campaign. This process will conclude at some point, making this income unsustainable.” Ziad Daoud, chief emerging-markets economist.

“The main challenges for developing the local economy revolve around implementation and overambitious scale of change,” Eurasia Group wrote in a report. “Transforming economic structures in a quick amount of time is not simple, even if the political direction is clearly set.”

Once an understated local entity, PIF is becoming an economic engine, job creator, state developer and partner for foreign companies. Its next phase may see it enter almost every corner of the kingdom’s economy. The fund owns most of the mega-projects the crown prince has championed, including the futuristic city, Neom.

It has more than doubled its assets in the five years since Prince Mohammed has been chairman to about 1.5 trillion riyals, creating 331,000 jobs directly and indirectly, he said Sunday. Its returns on investment increased from about 3% between 2014 and 2016 to 8% from 2018 to 2020, according to the PIF website.

Riyadh-based investment bank NCB Capital estimates the wealth fund’s investments in 2021 will bring overall capital expenditure — including spending by government-related entities — to 8.8% of gross domestic product, compared with an average of 6.2% over the past five years.

Blackrock, Goldman

The PIF and its investment conference have drawn some of the biggest figures in global business. BlackRock Inc. has established a Saudi office, and banks including Goldman Sachs Group Inc. and Credit Suisse Group AG have expanded their presence, keen for a piece of the action.

Saudi Wealth Fund Is Upbeat on Deals for Local Manufacturing

Targets for the next decade are even loftier: new projects worth as much as 1 trillion riyals by 2025 — and an additional 2 trillion riyals by 2030.

Closing The Gap

Saudi reserves have declined over the past few years while PIF assets rose

Source: Saudi Arabian Monetary Agency and PIF figures

Note: Data for reserves are as of November 2020

With few details on how new ventures will be funded, though, analysts are cautious.

Bank of America Corp estimates PIF assets could rise to $500 billion by 2028, based on historical investment returns and Aramco disbursements for the Saudi Basic Industries Corp. purchase.

“The targets do look tight, in part due to the broad-based nature of the PIF’s various objectives,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank. “Foreign funding and investments will also be important for meeting these targets.”

The PIF said it will be financed from retained earnings from existing investments, asset transfers from the government, and borrowing. That includes a $40 billion transfer from central bank reserves last year, and nearly $30 billion in proceeds from Aramco’s initial public offering in 2019.

Saudi Arabia Returns to Dollar-Debt Market to Boost Finances

If the scale is ambitious, unrealistic even, it’s no accident. In an interview with Bloomberg in 2018, Prince Mohammed said he deliberately sets high targets to motivate officials to reach further.

“If we achieve 100%, great,” he said. “If we achieve 50%, great! Better than achieving nothing.”

(Updates with NCB Capital’s estimate in 10th paragraph)

About Stu Turley 4806 Articles

Stuart Turley is President and CEO of Sandstone Group, a top energy data, and finance consultancy working with companies all throughout the energy value chain. Sandstone helps both small and large-cap energy companies to develop customized applications and manage data workflows/integration throughout the entire business. With experience implementing enterprise networks, supercomputers, and cellular tower solutions, Sandstone has become a trusted source and advisor. He is also the Executive Publisher of www.energynewsbeat.com, the best source for 24/7 energy news coverage, and is the Co-Host of the energy news video and Podcast Energy News Beat. Energy should be used to elevate humanity out of poverty. Let's use all forms of energy with the least impact on the environment while being sustainable without printing money. Stu is also a co-host on the 3 Podcasters Walk into A Bar podcast with David Blackmon, and Rey Trevino. Stuart is guided by over 30 years of business management experience, having successfully built and help sell multiple small and medium businesses while consulting for numerous Fortune 500 companies. He holds a B.A in Business Administration from Oklahoma State and an MBA from Oklahoma City University.

Closing The Gap

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