Saudi Arabia to create $2 trillion megafund to wean it off oil

Issuing shares of Aramco, the kingdom's oil company, and transferring them to the Public Investment Fund will technically make investments the source of Saudi government revenue, not oil, Deputy Crown Prince Mohammed bin Salman says.

Saudi Arabia's Deputy Crown Prince Mohammed bin Salman said the Public Investment Fund would help to wean his country off oil. Mohammed Al Hammadi / Crown Prince Court

RIYADH // Saudi Arabia is preparing for the twilight of the oil age by creating the world’s largest sovereign wealth fund for the kingdom’s most prized assets, Deputy Crown Prince Mohammed bin Salman said.

The Public Investment Fund will eventually control more than US$2 trillion (Dh7.35 trillion) and help wean the kingdom off oil, Prince Mohammed said. As part of that strategy, Saudi Arabia will sell shares in Aramco’s parent company and transform the oil giant into an industrial conglomerate, the prince said. The initial public offering could happen as soon as next year, with the country currently planning to sell less than 5 per cent.

Issuing shares of Aramco and transferring them to the PIF will technically make investments the source of Saudi government revenue, not oil, Prince Mohammed said in an interview at the royal compound 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 has been affected along with other oil producers by the steep drop in prices since 2014. Opec and other big oil producers are meeting in Qatar this month to discuss measures to boost prices, including caps on production.

Prince Salman said Saudi Arabia will only freeze its oil output if Iran and other major producers do so, challenging the country’s main regional rival to take an active role in stabilising the over-supplied global crude market. Iran has already said it plans to boost its production after the lifting of sanctions following a deal to curb the country’s nuclear programme.

“If all countries agree to freeze production, we’re ready,” the prince said. “If there is anyone that decides to raise their production, then we will not reject any opportunity that knocks on our door.”

In London, Brent crude oil fell below $40 a barrel after his comments, declining as much as 2.1 per cent to $39.50 a barrel.

Almost eight decades after Saudi oil was discovered, King Salman’s 30-year-old son is aiming to transform the world’s biggest crude exporter into an economy fit for the next era.

The sale of Aramco, or Saudi Arabian Oil Co, is planned for 2018 or even a year earlier, according to the prince. The fund will then play a major role in the economy, investing at home and abroad. It would be big enough to buy Apple, Google parent Alphabet, Microsoft and Berkshire Hathaway – the world’s four largest publicly traded companies.

The PIF plans to increase the proportion of foreign investments to 50 per cent of the fund by 2020, said Yasir Al Rumayyan, secretary general of the fund’s board.

The blueprint for structural change follows a series of measures last year to curb spending and prevent the Saudi budget deficit from exceeding 15 per cent of gross domestic product. At the end of December, authorities raised the prices of fuel and electricity and pledged to end wasteful budget spending after oil prices plunged.

More will follow those “quick fixes” as part of a “national transformation plan” to be announced within a month, including steps to raise non-oil revenue steadily through various measures including fees and value-added taxes.

“We are working on increasing the efficiency of spending,” said Prince Mohammed, who is second-in-line to the throne. The government used to spend up to 40 per cent more than allocated in its budget and that was whittled to 12 per cent in 2015, he said. “So I don’t believe that we have a real problem when it comes to low oil prices.”

Prince Mohammed’s attempt to shake up the economy comes against the backdrop of mounting domestic security threats and regional turmoil, with the Sunni-ruled kingdom fighting a war in Yemen against Shiite Houthi rebels backed by Iran.

As Saudi defence minister, Prince Mohammed 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.

He said the wealth fund already holds stakes in companies including Saudi Basic Industries, the world’s second-biggest chemicals manufacturer, and National Commercial Bank, the kingdom’s largest lender.

The fund is looking at “two opportunities outside Saudi Arabia” in the financial industry, the prince said, declining to name the possible acquisition targets. “I believe that we will conclude at least one of them.”

It has already started to become more active abroad. In July, PIF acquired a 38 per cent stake in South Korea’s Posco Engineering & Construction for $1.1 billion and the same month agreed to a $10bn partnership to invest in Russia with the Russian Direct Investment Fund.

The fund has been hiring specialists for markets, private equity and risk management, said Mr Al Rumayyan, a former chief of Credit Agricole-backed Saudi Fransi Capital.

“We’re working now on different fronts,” he said. “Now the government is transferring some of its assets, lands, some of the companies to us. We have different projects in tourism and in new industries that are untapped in Saudi.”

Mr Al Rumayyan described the overseas investment plan as “very aggressive”, though PIF would initially be skewed toward domestic assets by the addition of Aramco.

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

* Bloomberg