Saudi Deputy Crown Prince Mohammed bin Salman recently announced an ambitious 14-year plan, “Vision 2030,” to transform Saudi Arabia’s economy in a mass shake-up. His plan involves converting the oil-dependent kingdom into a modern, efficient and diversified economy that relies on multiple sources of income to support and advance the national population. The vision articulates impressive reform in tourism, health care, education, industry, mining and culture, among other sectors. The current low oil-price environment has accelerated the country’s growing fiscal deficit, which is one of the main issues the ambitious Vision 2030 tackles. We feel the plan addresses a number of issues that have been at the forefront of investors’ minds for some time.
Saudi’s proposal of increased transparency, clear key performance indicators (KPIs) and increased reliance on investment activity and income is a clear message that the country wants to mobilise foreign and private capital and further integrate with the global financial system. Zero tolerance for corruption and an emphasis on international levels of transparency and accountability underpin the drive for greater efficiency and less wastefulness.
Key takeaways from Vision 2030:
- Transform the state-owned oil company, Aramco, from an oil-producing establishment into a global industrial conglomerate
- Turn the Public Investment Fund (PIF) into the world’s largest sovereign wealth fund (with over US$2 trillion in assets)
- Increase non-oil government revenue from 163 billion riyals (US$43 billion) to 1 trillion riyals (US$266 billion)
- Raise the share of non-oil exports in non-oil gross domestic product (GDP) from 16% to 50%
- Increase foreign direct investment to 5.7% from 3.8% of GDP
- Lower the rate of unemployment from 11.6% to 7%
- Increase small-and-medium enterprise (SME) contribution to GDP from 20% to 35%
- Increase women’s participation in workforce from 22% to 30%
- Increase private sector’s contribution from 40% to 65% of GDP
One of the main proposals is to transform the state-owned oil company Aramco into a global industrial conglomerate. Its scale of production means that the firm produces 10 million barrels a day, equating to roughly one-in-nine barrels of the world’s oil supply, powered by a global workforce of 61,000 from 77 different countries.1 Ownership would be transferred to the PIF, the country’s sovereign investment fund. The profits from the fully integrated global petroleum and chemicals enterprise will be used to back capital-intensive sectors and contribute to establishing durable national corporations. The aim is to attract foreign direct investment in key sectors. The PIF will finance commercial projects that support the development of the Saudi Arabian economy, something that the private sector is unable to do alone.
For investors, we think Vision 2030 sets out ambitious long-term targets for the country. However, the key challenges the Saudi authorities face, in our view, are implementing these reform objectives, while maintaining economic growth in the kingdom. It is a significant and bold departure from the Saudi Arabia of the past, and we need to acknowledge that it’s a vision from a young leader trying to reposition a nation in the 21st century, giving the country a chance to compete on a global level. The United Arab Emirates (UAE), in particular Dubai, in addition to Singapore and Hong Kong, have all embarked down the road of reform. We have seen generally positive reactions when both the public and private sectors rally behind a vision, and transform cities into bustling city states, or countries into developed economies.
The Vision That Was Left Behind
Vision 2030 calls on Saudi Arabia to improve and grow industries to attract additional foreign investment and form stronger ties through cross-border projects. The policies surrounding this aim have yet to be announced, but one thing we feel rarely gets much media attention is that most of the Gulf Cooperation Council (GCC) countries, especially Saudi Arabia, already have significant expatriate communities. In many cases, these expats repatriate earnings back to their own home countries. This represents not just a massive drain but a missed opportunity to channel funds back into the local economy, through pensions, investments or taxation. A newly announced “green card” system—a permit allowing certain nationalities of foreigners to live and work permanently in the country—is envisaged to stimulate expatriate investments and potentially generate at least $10 billion in annual revenue through fees.
The mooted green card system would also seek to align the interests of expats with the local economy, potentially changing long-standing social contracts and granting additional rights. Although this is not part of the Vision proposal, we think it possibly suggests that the regime is considering a private pension system and may present another significant opportunity for the development of non-bank financial services in the kingdom.
A Period of Adjustment
Further evidence of the pace at which reform may happen came with confirmation that the head of oil giant Aramco, Khalid al-Falih, had been named the country’s oil minister, replacing the incumbent, Ali al-Naimi, who had been in post for 21 years. The oil ministry was broadened and renamed the Ministry of Energy, Industry and Mineral Resources in a recent government reshuffle which also saw the appointment of Ahmed Al Kholifey, former Deputy Governor for Research, as the new governor of the Saudi Arabian Monetary Agency (SAMA), the country’s central bank. These changes form part of 51 royal decrees announced last week in preparation for the National Transformation Plan, a five-year plan that will be announced in June.
New laws and regulations have also been tabled in support of the real estate sector. The government’s objective is to increase home ownership from 47% to 52% of the population by 2020 by encouraging the private sector to build housing, and provide funding, mortgage solutions and ownership schemes for citizens.
In a similar vein, a new company and bankruptcy law is expected to be announced in the next seven weeks. The law, which will have 400 articles, will give priority to reconciliation procedures and debt restructuring of financially troubled institutions to help them meet their obligations to creditors. This represents a meaningful step forward in establishing a clear and transparent conflict-resolution mechanism.
Saudi Arabia’s Inclusion in a Global Emerging Market Index
The range of capital-market reforms outlined by the Saudi Capital Markets Authority (CMA) was also comprehensive and encouraging. The substantial infrastructure modifications will include the elimination of the cash pre-funding requirement by the exchange, enhanced custody controls and the introduction of delivery versus payment (DVP)—a type of security settlement that ensures delivery occurs if and only if payment occurs. Such changes form part of a broader strategy to upgrade the post-trade infrastructure in Saudi Arabia, in order to bring it in line with international standards. Moreover, these measures will allow for greater effectiveness of post-trade processes whilst also reducing the market’s systemic risk. In addition, the introduction of covered short selling is critical to the development of a wider range of sophisticated financial products that investors can benefit from. In line with our expectations, stringent foreign ownership restrictions for Qualified Foreign Investors (QFIs) have also been eased. This move highlights Saudi Arabia’s seriousness in attracting a broader range of international investors that bring with them technical expertise as well as improved governance and transparency standards.
By any measure, the series of stock market reforms tabled by Saudi Arabia are a big deal. These important steps play a crucial role in paving the way for the future inclusion of Saudi Arabia into the MSCI Emerging Markets Index, as a result of which Saudi Arabia should potentially amass a respectable share of flows into emerging-market equities.
Meanwhile, the massive fiscal deficit accelerated by the decline in the price of crude oil will be lessened, but not addressed, by the partial privatisation of Aramco of less than 5% by 2017 or 2018, valued at US$2 trillion or more. A substantial percentage of the reforms articulated in Vision 2030 will be needed to place Saudi Arabia on the sustainable footings it seeks. In the interim, we think a sizeable portion of funding needs to be financed from external sources to avoid crowding out local credit markets. In our view, the development of a sizeable debt market, with domestic and international issuance, represents an exciting opportunity for us and investors alike.
The vision for the Saudi Arabia of the future is a significant departure from the Saudi Arabia of the past and today. Saudi Arabia is showing strong commitment to fiscal and structural reforms. All in all, we are very optimistic about the changes Vision 2030 may bring, and we think that the Saudi authorities are very much on the right track, but we are aware of the implementation and execution risks. It’s a very welcome and bold step forward in Saudi Arabia, tackling many of the inefficiencies and taboo subjects that hadn’t been previously addressed, and comes at an important time when the country, and the wider region, are seeking change and opportunities for their young populations.
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