Written by: Ollie Watts
The Kingdom of Saudi Arabia (KSA) has become a global powerhouse in the world of oil. KSA has 20% of the world’s known oil reserve and produces 12.5 million barrels per day. Oil revenues account for 90% of the Saudi economy and with global demand in a downward spiral KSA has been looking to wean itself off oil income dependency. In December 2019, the Kingdom took an unprecedent step and launched its IPO (initial public offering) through its renowned Saudi Aramco (Aramco) – the world’s most profitable company. However, the launch was not a smooth one. Aramco has initially sought to launch abroad but issues over disclosure requirements meant these plans were scrapped. In the end it launched on the Saudi stock exchange and raising $25.6 billion, well short of the $100 billion originally planned. Although this was still the largest IPO in history, the venture had such high expectations – especially of immediate positive returns – but such results have struggled as of yet to come forth. Considering the IPO, will KSA’s bold move ever deliver its desired result: a diversified economy, less reliant on oil?
Saudi Arabia: A brief overview
KSA is a complex country steeped in tradition and fervently guided by religion. As noted, it is a strict observer of Sharia law, which forms the entire basis of its legal system. Its leadership structure is an absolute monarchy: The King – currently His Highness Salman bin Abdulaziz Al Saud – is head of state and government. Since 1972, religious guidance to the monarch – thus informing Islamic customs in KSA – has been provided through an array of appointed clerics who make up the Council of Senior Scholars. These clerics are some of the few bestowed the right to issue fatwas (non-binding legal opinions on Sharia law) within the Kingdom. There is another senior position within the Kingdom’s leadership: Crown Prince. The Crown Prince is second in command to the King, after being approved by the Allegiance Council (who control the line of succession), and answers directly to him. The Crown Prince conducts much of KSA’s state business and has a senior role in determining the Kingdom’s direction. Crown Prince Mohammad bin Salman (MBS) has been the incumbent since June 2017. MBS is a key catalyst in KSA’s journey to redefine its place in the world. He is skeptical of the role of clerics and seeks to partially curb their influence as he works to broaden KSA’s horizon beyond its staunchly conservative roots. He is seeking to make Saudi Arabia a tourist destination, pumping millions in PR and has even introduced open music festivals. Currently, the Kingdom heavily relies on oil exports, with 90% of Saudi’s revenue deriving from oil and Aramco itself generating $111 billion in profits in 2018. Despite these eyewatering figures, KSA recognized the need for diversification and the Saudi Aramco IPO forms part of its vision for this new diverse economy. But what exactly is this new path KSA seeks to forge itself?
Vision 2030: the blueprint for a new Kingdom
‘Vision 2030’ as it is termed, coexists alongside and is interlinked with the Aramco IPO venture. The latter is – to a large extent – the conduit by which the former will be developed and financed. Unveiled in 2016, Vision 2030 at its core consists of three themes: a vibrant society, a thriving economy, an ambitious nation. This article will focus on theme two: a thriving economy.
Whilst KSA continues to rely on oil for income, and there are no immediate signs that it soon cannot, this reliance is starting to prove a risk. Not a risk of economic calamity and collapse, but one of being left behind. With less oil demand, the Kingdom generates less revenue for investment and its place on the international stage becomes less significant. Particularly considering Covid-19 where oil demand hit historic lows, it more evident than ever that countries need to adapt to remain prosperous. Saudi officials are keen to emphasise that Vision 2030 will be financed through a sovereign wealth fund that itself is funded in part through the Saudi Aramco IPO, and that state-owned assets will continue to be privatized. Such financing, it is said, will lead to revamping the Saudi education curriculum so that by 2030, KSA will have 5 universities that rank in the top 200 worldwide. Crown Prince MBS particularly wishes that a futuristic technology-driven city called Neom is built on desert land in the province of Tabuk. These new educational facilities are designed in the hope of bringing the best minds to the country, contributing to the redefining of the economy.
Aramco’s IPO: can it deliver?
With the Aramco IPO earmarked as a key financier of Vision 2030, the venture needs something that will enable it to deliver on this. The funding from Saudi Aramco has been affected due to the current oil demand crisis – heightened by Covid-19. Saudi Arabia needs stability, but it is an all too ironic paradox: investors need some long-term certainty from an inherently uncertain market. There are, however, two key factors that could help provide some – or at least a higher degree of – certainty.
First, the improved geopolitical and international relations KSA continues to maintain and forge with the world will help provide some stability. The last couple of years have been a turbulent one for the Kingdom, with the Persian Gulf crisis in 2019 affecting the worldwide oil industry, and the assassination of Saudi journalist Jamal Khashoggi – reportedly carried out by Saudi agents on Crown Prince MBS’ orders – in 2018 raising diplomatic eyebrows about the Kingdom’s opposition to any criticism. Such events do not directly discredit Saudi Aramco’s reputation, but do impact the environment which it operates within, and thus its share profile. As with all business ventures, they are all too often impacted by crises beyond their control. If KSA and Crown Prince MBS can enjoy a pitfall-free remainder of 2020, there is reason for continued hope. Such circumstances cannot, obviously, cure the Covid-19 pandemic’s inflictions on the oil industry, but perhaps provide a buffer of support for the Kingdom.
Saudi Aramco’s direct actions with the business world will influence potential investors’ decisions to continue buying shares, and thus influence the certainty of its commitment to the sovereign wealth fund that will finance Vision 2030. KSA will need to be proactive and make decisions that will paint Aramco in a consistently positive light to potential investors.
Like the geopolitical actions of KSA, these actions can at least sure up some level of confidence that global pandemics aside – whose effects are to a large extent uncontrollable – the business is responsible and making steps forward. In other words, a form of buffer against the uncontrollable to ensure activity and progress does not collapse. As it happens, Saudi Aramco has been busy – oil supply commitments aside – during the Covid-19 pandemic. It acquired a 70% stake in struggling Saudi petrochemicals company Sabic. This was completed despite Aramco’s 25% plus drop in income caused by the pandemic, as the deal will in part help Saudi Arabia’s Public Investment Fund that will contribute to Vision 2030’s financing. KSA’s sovereign wealth fund will receive a 30% premium on Sabic’s current share price. Such business activity is testament to KSA’s positive business action and is bold move during such turbulent economic times. Whilst the Covid-19 pandemic’s impact on the oil industry may also be around for some time, business moves such as the Sabic acquisition will could dividends once the pandemic’s negative impact starts to decline.
KSA is keen to push forward and achieve Vision 2030 to showcase its international and domestic benefits beyond the world of oil provisions. It hopes this can continue to be funded through its Public Investment Fund and sovereign wealth fund – the latter backed up by the ongoing results of Saud Aramco’s IPO. There is no magic formula to ensure this, the business world is and will always be the abyss to anyone demanding concrete certainty of positive – and unobstructed – results. Saudi Arabia no doubt has a huge image problem but if can successfully navigate the post-Covid world and manage this, it can have its Vision 2030 – and its desire for a diversified economy – safely delivered.