According to the Deputy Crown Prince of Saudi Arabia, Mohammed bin Salman, the world’s largest crude oil exporter will create a sovereign wealth fund in preparation for a post-oil era.

In an interview with Bloomberg the prince outlined plans for a Public Investment Fund (PIF) that will control $2 trillion. The kingdom is looking to move away from oil after falling prices hurt its finance.

Also see Andy Hall: Oil Prices Could Be Headed To $80 In Next 12 Months

As NCB Capital notes:

Saudi has a young population, with over 50% of the current population under the age of 30. With low labour market participation and further Saudisation programs such as “Balanced Nitaqat”, we believe the relative weakness in the spending lower from increased prices and VAT will be partially offset by higher average salaries and lower remittances over the medium-term.

Saudi Arabia Population

 

Saudi Arabia

Saudi Arabia planning biggest sovereign wealth fund in the world

The Prince said that the wealth fund already has stakes in companies such as the world’s second biggest chemicals manufacturer, Saudi Basic Industries, and the kingdom’s largest lender, National Commercial Bank.

“Undoubtedly, it will be the largest fund on Earth,” said the prince.“This will happen as soon as Aramco goes public.”

The new strategy will see Saudi Arabia sell shares in Saudi Aramco, the state-owned energy company, which will be turned into an industrial conglomerate. The IPO could go ahead in 2017 or 2018.

“IPOing Aramco and transferring its shares to PIF will technically make investment the source of Saudi government revenue, not oil,” the prince said in an interview on Thursday. “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.”

Earlier this year Morgan Stanley opined:

For illustrative purposes, if we were to capitalise that income stream by applying the 2015e consensus P/E multiples the listed oil majors (see Exhibit 1), it could imply a fair market value for Saudi Aramco ranging between US$1.2-3.5trn. However, we note that when other governments around the world have privatised national oil companies that were previously not subject to tax, in some cases they introduced oil taxation / royalty regimes before the IPO, which reduced the net income of the assets to be privatised, in some cases substantially. We also note that, as a domestic corporate, Saudi Aramco is not currently liable to pay corporate income tax.

Saudi Arabia

 

Saudi Arabia
Other reforms on the agenda

Fund secretary general Yasir Alrumayyan says that the PIF will increase the proportion of its foreign investments to 50% by 2020. It currently holds 5% of its investments in foreign companies.

As it stands Saudi Arabia is dependent on revenues from oil exports. The kingdom is suffering from a massive budget deficit due to low oil prices, which is forecast to reach $87 billion this year. Oil sales account for nearly 80% of the country’s revenue, and its foreign reserves fell to $640 billion last year from $737 billion in 2014.

In January the government revealed an economic plan designed to reduce its dependence on oil prices. Authorities will invest in healthcare, tourism, IT and other sectors in order to restructure the economy. The market will also be liberalized to attract foreign investors.

“It is clear Saudi Arabia needs to reform, diversify, and re-energize its economy, but this will involve more than just increasing investment in non-oil industries,” a professor of security studies at Georgetown University in Washington, Paul Sullivan told Bloomberg. “One cannot order economic reforms like a multiple course dinner.”

Saudi Arabia