Complex Made Simple

Saudi invests billions to make Vision 2030 a reality

For the casual observer, the recent sale of Saudi bonds might seem to indicate that the Kingdom is either facing a slight financial difficulty or is still recovering from the oil-price meltdown.

It appears clear that the current low oil price, trading in the $50 range compared to its peak at the historic highs of $144 in July 2008, is a big factor that has plunged many GCC economies into a deficit since oil prices plummeted a couple of years ago.

In December 2016, Saudi Arabia had forecast a budget deficit at $53 billion (AED194.5bn) this year. But the fact is, the end goal of raising finances through bond sales is the Kingdom’s attempts to realise the goals of Saudi Vision 2030.

Total borrowing

Bloomberg reports that Saudi Arabia has managed to raise $12.5bn (AED45.8bn) from its second dollar bond sale this year.

“The government sold $3bn of long five-year notes, $5bn of the ten-year tranche and $4.5bn of the 30-year offering,” the report said.

The first successful dollar bond sale for the kingdom took place last April, when $9bn worth of Sukuk (Islamic sovereign debt instrument) were purchased by investors.

These issues were offered to players on the international markets. Domestically, in the past few months, Saudi engaged local banks to raise another $10bn (AED36.7bn).

“Yields on the nation’s existing bonds rose on Wednesday (September 27, 2017), with the rate on its dollar securities due 2026 climbing six basis points, the most since July on a closing basis, to 3.47 per cent,” the report added.

Diversification strategy

On April 25, 2016, the Saudi Vision 2030 was introduced and it was quickly understood that a good portion of its aims were to reduce the kingdom’s dependence on oil and diversify its revenue sources.

One big move in this regard is the IPO of oil company Aramco, starting with the transfer of its assets to the Kingdom’s Public Investment Fund, similar to a sovereign wealth fund, and selling five per cent of the oil company’s $2 trillion (AED7.34trn) valuation, or $100bn (AED367bn).

The PIF plans to sell other types of assets, including stakes in the stock exchange, football clubs and others. The sale of bonds or of assets will eventually find its way into this non-oil economic diversification strategy that Saudi Vision 2030 is keen on making real.

Saudi Vision 2030 aims to boost the kingdom’s hospitality industry from a current number of tourists visiting the kingdom estimated at 200,000.

Reforms for visa issuance and development of historic heritage sites are designed to help achieve these goals.

Last week, the PIF announced that it is setting up a $2.7bn company to invest in entertainment.

AMEinfo reported on this, noting the venture is targeting more than 50 million visitors per year, more than 22,000 jobs and looking to contribute SAR8bn (AED7.92bn) to the kingdom’s GDP by end 2030.

Historic moves

In addition, in a landmark move, Saudi women will be allowed to drive from June 2018 and that will boost car sales, insurance premiums and investor confidence, especially as a new bankruptcy law in the works will ease fears that court case settlements are possible.

Saudi is poised to attract investments and business interests.

“The PIF will lead investment in a project to redevelop Jeddah’s waterfront corniche into a mixed-use area at a price tag of 18bn Saudi riyals (AED17.62bn),” the state-run Saudi Press Agency (SPA) reported.

“The New Jeddah Downtown, which will be developed over ten years, will help to create 36,000 jobs as part of kingdom’s Vision 2030 aimed at weaning the country off oil income by creating new revenue streams, develop tourism sites in accordance with the highest international standards and provide investment opportunities,” SPA added.

According to Reuters, the Saudi government boasts “ample borrowing capacity” and “low external leverage”, given that general government debt was only 13.1 per cent of GDP in 2016, while its gross sovereign external debt amounted to 4.3 per cent in 2016.