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What Saudi Vision 2030 Means for Investors

by Feb 19, 2018

The Kingdom of Saudi Arabia, one of the world’s most repressive and isolated countries, is on the verge of its biggest social transformation since declaring itself a sovereign state in 1932.

Saudi Arabia has been one of the world’s wealthiest countries for decades. The dominance of its state-owned oil sector, however, kept it closed to the outside world. It has also kept it closed to investors—Saudi Arabia has only one small stock exchange—which lists 171 companies—and its giant oil company, Saudi Aramco, is still wholly owned by the government.

Led by Crown Prince Mohammed Bin Salman and a group of trusted economic advisors, the Saudi government is attempting to reform the country’s economy to make it less dependent on oil. In 2016 these reformers rolled out “Saudi Vision 2030”—an ambitious plan to transform the country from an isolated desert kingdom into a dynamic global economic power.

The Saudi Aramco IPO

Unsurprisingly, Saudi Vision 2030 starts with privatizing part of the country’s largest company—Saudi Aramco. The Saudi Aramco IPO will make roughly 5% of the company available for purchase on the stock market. While that’s a relatively small stake, Aramco is massive. According to the Saudi government, the company is worth $2 trillion.

It might be worth even more, given that oil prices have recovered over the past year. Brent Crude is currently trading at $65.40 on the spot market—and topped $70 in late January.

According to Aramco CEO Amin Nasser, the company is fully prepared for the IPO:

"In terms of readiness, we are ready. As we always said, the company by the second half of 2018 will be ready," Nasser told CNBC in an interview during the World Economic Forum in Davos, Switzerland.

All Aramco needs now is government approval. One of the big hang ups, according to numerous reports, is where to list the company. It will definitely be listed on the Tadawul, the country’s Riyadh-based stock exchange, but the government wants to have it listed on a major international exchange as well. London and New York are the most obvious—and most eager—candidates.

Economic Diversification

With the proceeds from the IPO, the government has pledged to create a sovereign wealth fund it could then invest in other industries. That’s where the economic diversification aspect of the initiative comes into play. The sovereign wealth fund—which Crown Prince Salman hopes will eventually amount to $2 trillion—would benefit the country’s small-but-growing stock market sector.

The industries that have been talked about the most include mining and weapons manufacturing. The first—because Saudi Arabia has massive mineral wealth; and the second—because it’s currently highly dependent on American arms imports, an imbalance the government would like to redress.

Further to realizing Saudi Vision 2030, the government has made real steps toward creating a functioning market economy. In 2016 it launched the National Transformation Program, which promises the slash public sector employment by 20% by the end of the 2018. That same year it launched the Fiscal Balance Program, which is intended to reduce lavish government spending on social programs—which is absolutely necessary, given that nearly 90% of the government budget currently comes from oil exports.

It has also made reforms to slash red tape, make bankruptcies and business visas easier to obtain, and make it easier to get access to commercial credit. If implemented in full, these less-dazzling reforms might prove just as important as the Saudi Aramco IPO in spurring private-sector growth.

Reasons for Skepticism

Given the highly repressive and corrupt nature of the Saudi monarchy, the potential downsides are more political than economic. Are Crown Prince Salman and his gang of reformers really committed to reforming the economy and (potentially) weakening its own stranglehold over the country’s tremendous natural resources?

Recent Saudi history suggests that when push comes to shove, they won’t be. The country launched nine successive five-year development plans between 1970 and 2015 with little to show for it.

Will Saudi Vision 2030 bring better results? Maybe. Salman and other senior leaders seem sincere in believing overdependence on oil will become a problem in the long-term. But going against the country’s vested interests in opening up its economy to foreign investment and competition? That’s a whole different animal.