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Saudi’s local economy to get a 2-year $80 bn boost while pushing ahead with mega projects

Saudi’s Public Investment Fund (PIF) believes it’s time to do some international divesting and more local investing. Where is the money going?

The $347 billion PIF intends to play a leading role in refocusing the economy toward industries like tourism The Saudi government remains on track to reduce unemployment to 7% by 2030. PIF is now one of the key sponsors/managers of projects totaling almost $1 trn

Saudi’s Public Investment Fund (PIF) is doing its job and more. It’s investing abroad successfully and growing its return-generating assets. But now it believes it’s time to do some international divesting and more local investing. 

Saudi Arabia’s sovereign wealth fund is turning homeward.

The PIF cut its holdings of U.S. equities in the third quarter by $3 billion to $7 billion, mainly by selling stakes in exchange-traded funds (ETFs) that track the real estate and materials sectors.

Handed $40 billion earlier this year to buy global stocks, the PIF will plow the same amount into the domestic economy next year and again in 2022. Some of the local investments could be funded by liquidating existing assets, according to Saudi Crown Prince Mohammed bin Salman (MBS).

The $347 billion PIF intends to play a leading role in refocusing the economy toward industries like tourism and diversifying away from oil. The amount it’s set to invest is equivalent to more than 10% of government expenditure in 2021 and nearly equal to what the PIF spent locally in the previous two years combined.

The fund had shifted investment priorities over the past five years away from holdings in state-owned companies to investing $45 billion in SoftBank Vision Fund, building up stakes in Uber Technologies Inc. and Jio Platforms, the digital services business controlled by Indian billionaire Mukesh Ambani, also buying shares in companies including Facebook Inc., Citigroup Inc., and Walt Disney Co. in March at the height of the pandemic-driven sell-off. 

As markets rebounded, the PIF largely exited those positions and bought into exchange-traded funds focused on utilities and materials sectors.

The fund managed to create higher return on investments at a minimum of 7%, from 2% since its establishment, with some investments exceeding 70% and others making a return of more than 140%, he added.

Saudi Arabia’s economy shrank by 7% in the second quarter, a sign of how deeply the new coronavirus hit both the oil and non-oil sectors, while unemployment hit a record high of 15.4%.

Saudi Crown Prince MBS said that despite the COVID-19 induced spike in unemployment levels, the Saudi government is embarking on three years of spending cutbacks to bring the budget deficit to near zero by 2023.

Investment bank EFG Hermes has estimated that the PIF was planning some $542 bn of projects during the coming two decades, accounting for around 60% of the total in Saudi Arabia. It’s a program dominated by a planned high-tech city NEOM, to be built from scratch on the Red Sea coast.

Mohamed Abu Basha, head of macroeconomic research at Cairo-based EFG Hermes said: “The government is tightening its left pocket and spending with its right pocket.”

Read: Saudi NEOM: Let the billions in construction funds begin

The PIF and what’s next

The PIF is currently the 10th largest sovereign wealth fund (SWF) globally. Its capital is expected to increase dramatically, targeting $2 trillion by 2030.

The fund has a multi-sector investment approach in six key areas: Saudi equity holdings, Saudi sector development, Saudi real estate & infrastructure development, Saudi giga-projects, internationally-diversified pools, and international strategic investments. 

The fund will invest $55 bn in advanced technology sectors and R&D, both locally and internationally, creating 11,000 new direct high-skilled jobs.

Looking forward, PIF is now one of the key sponsors/managers of projects totaling almost $1 trn, including Amaala, Qiddiya, The Red Sea Project, and largest of all, NEOM. The idea behind such large investments in the tourism and hospitality sector is to attract a share of the $20 bn that Saudi nationals spend outside Saudi.

The PIF currently invests 25% to 30% of its assets into overseas opportunities, whilst a significant portion of the remainder is invested in strategic domestic projects; these assets have included a significant portion of the monies raised from the listing of Saudi Aramco.

Read: Saudi campaign to encourage staycations is keeping tourism funds flowing

PIF-led projects

NEOM is expected to contribute yearly over $100 bn to the Saudi GDP based on 1 million residents. The approximate project budget is $540 bn.

The Red Sea Project, a luxury tourism resort, anticipates one million tourists per annum by 2035. By the end of phase two, it is expected to contribute $6bn annually to the GDP.  The approximate project budget is $13.5 bn.

The Qiddiya project is a new city close to Riyadh likely to see 17 million visitors per year by 2030 and is projected to contribute $5 bn to the GDP and 57,000 new jobs. The approximate project budget is $12 bn.

AMAALA, a high-end luxury resort, is focused on culture and well-being, with 2500 hotel rooms to be completed by 2028. The approximate project budget is $3.24 bn.

King Abdullah Financial District (KAFD) is a new mixed-use development, which on completion will house 45,000 people in a live-work environment. The estimated project cost is $9.45 bn.

Local investments made by PIF reached $15.66 bn in 2019 and it aims to invest $26 bn locally in 2020. It managed over the past few years to create 190,000 jobs, the Saudi crown prince said.

As part of its strategy, the PIF has increased its stake in Saudi-based developer, investor, and operator of power generation and desalinated water plants ACWA Power from 33.4% to 50%.

The investment will strengthen ACWA Power’s role in the development of PIF’s renewable energy program.