Mohammed bin Salman is pictured at the 2017 Future Investment Initiative conference in Riyadh. Dozens of business leaders are dropping out of the 2018 edition. Photo: Getty Images.
Concerns have been mounting for some time about the actions of Crown Prince Mohammed bin Salman. Rash actions have led to war in Yemen, the boycott and standoff with Qatar, the Ritz Carlton detentions, holding the Lebanese prime minister against his will, the diplomatic spat with Canada, and the arrests of dozens of Saudi women and men, ostensibly for voicing mildly critical opinions.
For business, this has been balanced with a recognition of the financial muscle of Saudi Arabia and the business opportunities presented by the Vision 2030 project.
But the Khashoggi affair has tipped that balance, as dozens of business leaders drop out of what was supposed to be a showpiece investment conference in Riyadh later this month.
Mohammed bin Salman’s attraction for global business had three main elements:
- His fiscal policy, based on developing non-oil revenue and restraining public spending, seemed to reflect a hard-headed understanding of what was needed for economic sustainability as oil revenue declined;
- His domestic social reforms promised to create a host of new opportunities in sectors such as leisure and entertainment, and Vision 2030’s strong emphasis on housing would be a boon to the construction and retail sectors;
- The reorientation of the Public Investment Fund (PIF) towards ambitious futuristic sectors with funds leveraged from core state assets was an exciting prospect for both the targeted companies and financiers.
Of these three elements, the Khashoggi crisis has had the most severe impact on the third, as potential partners such as Richard Branson’s Virgin Galactic are backing away, and the chances of raising finance for the scaling up of the PIF have taken a knock.
The makeover of the PIF was one of Mohammed bin Salman’s first major initiatives. In March 2015 the fund, which had been under Ministry of Finance control since its launch in 1971, was taken under the wing of the future crown prince’s Council of Economic and Development Affairs, and Yasser al-Rumayyan, an investment banker, was put in charge.
The PIF’s portfolio had been based on major Saudi public companies and infrastructure, and the fund had delivered a significant flow of dividend revenue to the Saudi budget. Its funds under management were estimated to be worth $250 billion; Mohammed bin Salman wanted to build that up to $400 billion, and to increase the global component.
In an interview with Bloomberg on 3 October (the day after Khashoggi’s disappearance), the crown prince said that the fund was close to reaching the $400 billion target and he was aiming for $600 billion by 2020. Additions to the portfolio over the past three years have included a 45% stake in the $100 billion Vision Fund of Japan’s SoftBank, along with smaller investments in Virgin Galactic, the Accor hotels group, Blackstone fund management, the Uber ride-hailing app, the Tesla and Lucid electric vehicles ventures, and the Magic Leap virtual reality start-up.
Selling a 5% stake in Saudi Aramco through a public share offering had been part of the plan to scale up the PIF. That deal, which was supposed to raise $100 billion, has fallen by the wayside amid domestic controversy, complications over global listing and doubts about the valuation. In the meantime Mohammed bin Salman has proposed securing $70 billion through the sale of the PIF’s 70% stake in Saudi Basic Industries Corporation (Sabic) to Aramco.
The crown prince has argued that this merger would yield benefits through streamlining Saudi Arabia’s petrochemical industry and bolstering the downstream elements of the national oil company. He told Bloomberg that it would also enhance Aramco’s valuation as and when the share offering was revived.
The ambitious sweep of the PIF strategy has impressed many in the global business elite. However, there has been little room for debate in Saudi Arabia about the wisdom of a highly leveraged forced merger between two of the kingdom’s most important companies to raise funds to invest in high-risk foreign ventures.
The chill that has descended on the Future Investment Initiative conference also suggests that global CEOs are urgently re-appraising the risk of association with a political leader with a lengthening list of rash and unpalatable actions to his name.
The reservations about Mohammed bin Salman extend to Saudi Arabia’s own business community, on whom he is depending to produce a surge in non-oil private investment.
Saudi businesses have been labouring for some time under the burden of late payments from government clients and increased costs stemming from an array of new fees and hikes to energy and water prices. The recent rise in oil prices and the announcement of a looser fiscal stance are welcome news for Saudi business, but this is tempered by the uncertainty caused by the round-up of executives in late 2017.
According to Mohammed bin Salman these so-called Ritz Carlton cases have so far yielded $35 billion, of which 40% is cash that will go to the Saudi treasury and the remainder is in the form of assets that will be managed by a sustainability fund. Pressed by Bloomberg as to whether these arrests and other Saudi state actions might impair business confidence, he said: ‘I don’t believe this is a serious question.’
Nevertheless, since the Ritz Carlton episode there has been a significant increase in capital flight by Saudis seeking safe havens abroad for their wealth. The crisis over the Khashoggi affair will only add to the anxiety of the Saudi private sector.
Saudi Arabia’s fiscal position is more encouraging. The combination of higher oil prices and increased export volumes following the imposition of US sanctions on Iran has provided a boost to Saudi budget revenue. In its pre-budget report for 2019, the finance ministry said that it expected actual revenue in 2018 to be 12.6% higher than originally forecast, which will be more than enough to cover extra spending for cost of living allowances granted at the start of the year
The deficit is expected to be 5% of GDP in 2018, compared with a target of 8%. In 2019, the deficit is set to come down to 4.1% of GDP, despite a 7.3% rise in expenditure. The target date for balancing the budget has been put back to 2023, as the rise in oil prices has taken some of the urgency out of the case for fiscal retrenchment, with public debt estimated at just 20% of GDP in 2018.
But however the Khashoggi affair plays out, a return to business as usual – with Mohammed bin Salman in his previous role combining the attributes of an absolute ruler and the kingdom’s chief investment officer – appears unlikely.