Analysis: Saudi’s $2 trillion megafund is a sign of changing times

The government will be adding new companies to the stock market and easing the restrictions on foreign investors

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In an interview with US news outlet Bloomberg at the end of last month, Deputy Crown Prince Mohammed bin Salman announced that Saudi Arabia is planning a $2 trillion sovereign wealth fund to wean the country off its dependency on oil.

Currently around 80 percent of Saudi’s budget revenues come from the petroleum sector, and a priority of the government is to diversify its income.

According to the prince, if the plan succeeds, investments could be the primary source of Saudi government revenue within two decades. The fund would also be the largest sovereign wealth fund in the world, dwarfing Norway’s government pension fund, which currently has $825 billion worth of assets.

The news comes at a time when the Saudi economy is undergoing far reaching changes. Ever since the Economist broke the story of the “stunning revelation” that Aramco was considering an Initial Public Offering (IPO), things have felt different in the kingdom. The plans do not end there.

The government will be adding new companies to the stock market and easing the restrictions on foreign investors, in order to double the size of the stock market. Foreign investors are still relatively new, as the stock market was only opened to them in June last year.

Similarly, the government is planning on increasing non-oil revenue by $100 billion by 2020 through cutting subsidies and imposing new taxes in a country used to seeing heavily subsidies utilities and no tax. Gasoline prices in Saudi Arabia may still be the second-lowest in the world, but last year the government increased the price by around 50 percent and it is likely to increase it again.

But the $2 trillion fund is the most eye-catching of the new plans. Money for the fund will be raised with an IPO of Aramco, the state-owned oil company, which could occur as early as next year according to Prince Mohammed. Initially only around 5 percent of Aramco will be on offer, though many analysts suspect that if the IPO is successful the figure will rise.

Aramco dwarfs all other oil companies, pumping more than 10 billion barrels of oil a day, more than the entire US. Nevertheless, its precise value is hard to define. Estimates are often around $2.5 trillion, although other guesses reach $10 trillion.

Value estimations of state owned companies are notoriously difficult, and nobody knows exactly what 5 percent of Aramco is worth. A recent report by the Sovereign Wealth Fund Institute calculated that a 5 percent sale of Aramco would raise $106 billion, a substantial amount, but well short of the funds needed for the wealth fund. The two trillion fund will need a significantly larger portion of Aramco to go on sale, or seek additional sources of finance.

The fund is not new, having been set up in 1971. However, until a few years ago it was only worth several billion. Recently it has begun investing heavily, with a 38 percent share in South Korea’s Posco Engineering for $1.1 billion and another $10 billion deal in Russia both being concluded last year.

The Korean and Russian deals indicate the desire of the Saudi government to focus on foreign investments. At the moment foreign investments make up only 5 percent of the fund, with the rest being held in domestic companies. The government plans to increase foreign investments to 50 percent by 2020. Prince Mohammed has stated that they are examining “two opportunities outside Saudi Arabia” in the financial sector, though no specific details have been shared.

If the fund manages to come close to its ambitious targets, expect huge investments in the coming years. The world’s most valued publically listed companies Alphabet, the parent company of Google, Apple, and Microsoft all hover at valuations between $400-700 billion. If half of the $2 trillion is invested abroad the fund is large enough to fully acquire any of these companies.

This has led some headlines to speculate that the fund could be “buying Buffet and Gates.” The scenario unlikely however, as the investments will undoubtedly be diversified in order to minimize risk, rather than focused on one or two large acquisitions.

Unsurprisingly, not much has been revealed regarding where the government plans to invest, but the deals in Korea and Russia point to the start of an impressive and global investment spree.

The announcement of the kingdom’s $2 trillion megafund has made for catchy headlines, but it is still unclear how the Saudi government will raise the precise amount and what types of investments they are planning on.

What is clear, however, is that we should expect an assertive Saudi investment policy the coming years, and that Mohammed bin Salman is overseeing one of the most drastic changes to the Saudi economy since his grandfather allowed the Americans to prospect for oil in the late 1930s.

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