Commodities, Emerging Markets, Energy, Frontier Markets

Saudi Arabia And The Post-Oil Era: The Plan To Create A $2 Trillion Wealth Fund

Saudi Cash CrunchSaudi Arabia is planning to establish a $2tn (£1.4tn) sovereign wealth fund by selling off its state petroleum assets in preparation for a world beyond oil.

Greenpeace said it was a pivotal moment akin to Switzerland abandoning banking, but others claimed Riyadh had long wanted to diversify its economy and spread its wealth though it had failed to do so.

If the fund was built up to $2tn, it would be more than double Norway’s sovereign wealth fund, regarded as the largest in the world by assets.

The move was revealed by the country’s powerful deputy crown prince, Mohammad bin Salman, and would mean the desert kingdom using its public investment fund (PIF) to buy up strategic financial and industrial assets abroad.

Some will see the move as a highly symbolic shift away from fossil fuels for a country most associated in the public eye with oil, but critics question whether it is more about style than substance.

The sale of a first tranche of shares to private investors via an initial public offering (IPO) in the state-owned Saudi Aramco could start as soon as next year, with the eventual aim of being big enough to potentially buy some of the world’s largest companies such as Apple and Google’s parent, Alphabet.

“IPOing Aramco and transferring its shares to PIF will technically make investments the source of Saudi government revenue, not oil,” the 30-year-old son of King Salman said in an interview with Bloomberg in Riyadh.

“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.”

Saudi Arabia already has a PIF, but it remains small and currently has only 5% of its holdings abroad. Last July it spent $1.1bn on a 38% stake in South Korea’s Posco Engineering and signed off a $10bn deal in Russia.

Plans to allow foreign investors to buy shares in Saudi Aramco, the holder of the country’s oil wealth, were first revealed in January. Analysts have struggled to put a value on the entire business, but say it could be worth anything from $1tn to $10tn, the former being the combined value of Apple and Alphabet.

The latest interview with the modernising Saudi prince gives more detail about the wider strategic plan to use its sovereign wealth fund as a vehicle to turn the country – one of the world’s biggest and most influential oil exporters – into a major global investor.

Charlie Kronick, a senior climate adviser at Greenpeace UK, said it was a key moment when even Riyadh lost faith. “The image of Saudi Arabia is so inextricably linked to the oil age that this feels a bit like Switzerland quitting the banking sector,” he said.

“The fact that they’re trying to decouple the country’s wealth from oil revenues will be seen by many as yet another sign that the end of the oil age is approaching fast. If the oil titans are looking for an exit strategy, all cannot be well in the fossil fuel sector.”

Analysts at Capital Economics said the Saudi move was headline grabbing, but may be little more in the first instance than a balance sheet manoeuvre with the country’s oil reserves and assets being switched from Aramco to a separate sovereign wealth fund.

Courtesy of Guardian News & Media Ltd © 2016


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