Saudi prepares for its ‘biggest economic shake-up’

Saudi Arabia is preparing for its biggest economic shake-up since its founding 84 years ago, as officials there prepare to implement radical plans detailed recently to Western journalists by a key member of its ruling family.

In comments to Bloomberg News last week, deputy crown prince Prince Mohammed bin Salman unveiled his “National Transformation Plan”, the first phases of which he said would be launched “within a month”.

The plans include new measures that are hoped to raise at least an extra US$100bn a year by 2020; the creation of what is planned to be the world’s largest sovereign wealth fund; a more-than-trebling of the country’s income that is derived from non-oil sources; and a balancing of the country’s the budget.

Saudi Arabia has been built on petrodollars since oil was first discovered there eight decades ago. Recently, though, fluctuating prices have brought about a greater need for stability. The prince said that the country navigated plunging oil prices last year through a series of “quick fixes”. But future policy changes would bring the kingdom closer to the rest of the world, where governments rely on charges to fund spending.

The strategy will complement a plan to sell a stake in Saudi Aramco on the stock exchange and create the world’s largest sovereign wealth funds dubbed the Public Investment Fund.  The move aims to make the kingdom more reliant on investment income than oil within 20 years.

More relaxed visa bureaucracy

Last week International Investment reported on Saudi officials plans to relax of visa bureaucracy in a bid to increase foreign investment. In addition to these changes authorities are weighing up measures that include more steps to restructure subsidies, imposing a value-added tax and a levy on energy and sugary drinks as well as luxury items.

We will first launch the vision for the Kingdom of Saudi Arabia within a month under which there will be a number of programmes, one of which is the National Transformation Program,” Prince Mohammed told Bloomberg.

Public Investment Fund

The Public Investment Fund is one of the programmes that will fall under the vision of the kingdom. It will be launched after the National Transformation Program. We aim to increase the size of the Public Investment Fund by restructuring the funds, and some of the companies and assets owned by the fund today.

“We believe there’s a great opportunity to increase profitability through introducing new assets, most important of which are Aramco and some huge real estate assets.”

VAT plans

Plans to introduce VAT along with other countries in the GCC, as outlined here in February, will bring in about $10 billion a year by 2020, while the “restructuring of subsidies” will generate more than $30 billion a year, said Prince Mohammed. The green card-like visa program and a plan to allow employers to hire more foreign workers above their official quotas for a fee could also generate $10 billion a year each, he said.

On the Armco IPO timescales, Prince Mohammed said: “I’m trying to push for it to be in 2017. Aramco will greatly benefit, not only the fund, but also the Saudi economy as a whole.

“By simply transferring the shares of Saudi Aramco to PIF will make PIF the largest fund on Earth. Aramco has other benefits to the economy. Many were saying that the idea of IPOing Aramco was just an attempt to get liquidity to cover Saudi financial needs, but that’s far from the truth. The objective is to diversify income. This is the main objective. Therefore, IPOing Aramco and transferring its shares to PIF will technically make investments the source of Saudi government revenue, not oil.

“However, investments are mostly in 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, whether from profits of the PIF or other sources of income that we target.

Second-in-line to the throne

Prince Mohammed is King Salman’s son and second-in-line to the throne and Bloomberg warned that his drive faces similar risks to those encountered by royals before him.

Prince Mohammed has, perhaps, consolidated more authority than anyone in his position since the kingdom was established in 1932. As defense minister, he leads the military effort. He also oversees ministries including finance, oil and the economy through the Council for Economic and Development Affairs. The council, which was established after his father became king, also controls the Public Investment Fund.

The prince added that measures taken by the council last year succeeded in lowering the budget deficit “which could have reached $250 billion to less than $100 billion.”

Bloomberg’s editor-in-chief John Micklethwait and five other Bloomberg journalists spoke to Saudi deputy crown prince Mohammed bin Salman in his palace compound in Riyadh. A transcript of the interview may be found on the UAE news website by clicking here.



Gary Robinson
Head of Video and Ezines at Open Door Media Publishing. Deputy Editor, International Investment. An experienced journalist and filmmaker with more than 20 years' financial services experience, both as journalist and originally as a fully qualified IFA, Gary works across both International Investment and InvestmentEurope titles. Previous video production credits include projects on BBC, C4 and SKY.

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