- The Saudi Government has been keeping to their promise of the Saudi Vision 2030.
- Key financial reforms include the shift away from oil exports, partial privatisation of Saudi Aramco, and the restructuring of the Saudi Public Investment Fund.
- Transparent governance still an issue with foreign investors, but is due to change according to the roadmap of Vision 2030.
In 2016, the Saudi government announced their intention to reform the country’s economy through multiple initiatives. Touted as ‘Vision 2030’, the goal is to essentially wean off their reliance on oil and to diversify their private sectors.
At the heart of the Islamic world, Saudi Arabia is a land famously rich in oil. Up until recently, the country has had a heavy reliance on their oil exports. While this single commodity has proven to be lucrative in the past, declining oil prices in the recent years have shaken the country’s faith in its number 1 export. In order to achieve economic sustainability, the Saudi government announced the details of the ‘Saudi Vision 2030’, which introduced over 80 government-backed projects. We take a look at a few of the key initiatives and how they will affect the global financial sector.
Boosting the non-oil private sector
Just last year, oil exports were responsible for 42% of the nation’s Gross Domestic Products (GDP), 90% of exports, and 87% of the government’s revenue. Currently, the public sector makes up 60% of the nation’s GDP. In Vision 2030, they hope to reduce this number to around 35%. To achieve this, the Saudi government will be privatising some of their public businesses, as well as improve the regulatory environment concerning the incorporation of private companies. According to Borys Dackiw, managing partner of the Baker & McKenzie Habib Al-Mulla law firm, companies can now expect to take 2 months to register in Saudi Arabia – 4 times less than what it used to be.
The industries that will enjoy increased opportunities include banking & finance, tourism & hospitality, industrial manufacturing, and information and communication technology (ICT). Saudi Arabia will be required to create 2.5 million additional jobs in the private sector by 2030 in order to realise their goal. In a study conducted by Oxford Strategic Consulting, the goal is achievable if Saudi Arabia hires 250,000 human resource specialists and leverage technology to minimise the need for employees to acquire new skills.
The Transformation of Saudi Aramco
The biggest company in Saudi Arabia, Saudi Aramco, has been responsible for a huge bulk of the country’s economy. In early 2016, the Saudi Government announced a partial privatisation of 5% of the company. This was swiftly followed by a number of big changes in Aramco.
The biggest announcement that followed the partial privatisation of the company was their announcement of their plans to IPO in 2018. To prepare for the upcoming IPO, Aramco budgeted US$50 million to double oil production in the Shaybah oil field, as well as consolidated ownership of the US’ largest oil refinery, Port Arthur. We can expect to see even more plans for the company to materialise before what has been touted as the biggest public listing since Alibaba.
Restructuring of the Saudi Public Investment Fund
The Saudi Public Investment Fund (PIF) is a sovereign wealth fund that was set up in 1971. Previously, the PIF mainly invested in local enterprises, specifically in the oil refining, fertilizer, petrochemical and electricity sectors within the Kingdom. Recently, they have restructured the PIF by moving it away from the Saudi Ministry of Finance to come under the control of a subcabinet, The Saudi Council of Economic and Development Affairs (CEDA). Under CEDA, they have expanded their investment portfolio to include investments outside of the Kingdom, and in varying industries.
Since 2015, they have been making high profile investments that include the purchase of a 5% stake in American ride-sharing company, Uber, acquiring 38% of South Korea’s Posco Engineering & Construction Company, and contributing US$45 billion to a joint technology fund with SoftBank. We can expect even more huge investments from the PIF, which aims to become the world’s largest sovereign fund worth US$2 trillion dollars.
The global finance industry has picked up on the huge waves emanating from Saudi Arabia, and the Gulf nation could very well become one of the major players in the global economy in time to come. However, analysts have noted that the transparency of the regulatory governance within the nation still poses a threat to the Saudi Vision 2030. Amidst falling oil prices and geopolitical turmoil, investors are still wary of Saudi Arabia despite their notable attempts to reinvigorate their economy. These concerns can be assuaged if the Saudi government can materialise clear laws and regulations concerning the movement and governance of funds within the country.