Saudi Arabia’s COVID-19 Spending Spree

17th June 2020

The COVID-19 pandemic has brought about the world’s worst recession since the Second World War with the global economy expected to shrink by 5.2% this year.1  Most countries have responded to this news with austerity measures and stimulus packages. However, contrary to perceived wisdom, the Saudi Arabian government has embarked on a spending spree to the tune of £6.2 billion, investing in more than 24 major companies.2 This article will attempt to explain the reasoning behind this spending by investigating the impact of the oil crisis on the country, as well as Crown Prince Mohammad bin Salman’s (MBS) Vision 2030 initiative and how it ties in with their sovereign wealth fund, and the Public Investment Fund.

The COVID-19 pandemic and resultant oil crisis have had a drastic impact on Saudi Arabia, with the latter being largely the Kingdom’s fault after entering a failed price war with Russia in April that saw the market flooded with oil and resulted in prices sinking.3 Of the two countries, Saudi Arabia have been hit hardest by the botched war with price per barrel standing at $25 and the country needing $83 a barrel to break even, comparatively Russia only needing $42 per barrel.4  Whilst talks with OPEC+ are currently underway to reduce oil production in order to inflate the price per barrel, the Saudi economy is largely dependent on their oil revenue, which accounts for 60% of the funding of projects and investments.5 6  The consequent spending deficit has resulted in the Kingdom’s rating by Moody’s being downgraded from ‘Stable’ to ‘Negative’ with the ratings agency citing fiscal risks due to the oil crisis and contributory pandemic that could see net debt reach 19% of GDP this year and gross borrowing hit 50%.7 8  Further measures to balance out the pandemic hit economy have also included the potentially controversial decision to triple the rate of VAT from 5% to 15% and cancel the cost of living subsidy provided to state workers.9 10  The pandemic has also presented Saudi Arabia with an opportunity to decrease its involvement in neighbouring Yemen which began in 2015 but soon turned into a costly quagmire, with Saudi Arabia currently rated  third in the world on military spending.11

Saudi Arabia’s dependence on oil revenues has intensified the economic effects of COVID-19 on the country with the enforcement of lockdowns worldwide drastically reducing the demand for oil. Despite an $8 billion cut, this has only served to highlight the importance of implementing MBS’s Vision 2030. Launched in 2016, Vision 2030 is an ambitious blueprint for a future Saudi Arabia which looks to modernise and diversify the Saudi economy through reducing its dependence on oil.12 13 The initiative aims to do this in a series of ways by encouraging the development of a private sector, a tourism sector (based around Islamic tourism and the countries location as a crossroads between Europe, the Middle East and Africa), and large scale investment both through the funding of in-country giga projects and the buying of stakes in international companies.14  One of the long-term economic objectives of the initiative is ‘to raise the share of non-oil exports in non-oil GDP from 16% to 50%’ of which the country’s sovereign wealth fund, the Public Investment Fund (PIF), plays an integral part in.15

Set up in 1971 and overseen by the Kingdom’s Finance Ministry, the PIF’s mandate was radically broadened in 2015 with international investments being included in its role.16 17 The fund later became the responsibility of the Council of Economic and Development Affairs, presided over by MBS, in order to ‘ensure greater synergy with Vision 2030’.18  In line with Vision 2030 the PIF pursues a two-pronged strategy its website stating its function is to ‘become a leading global impactful investor in line with the objective of Vision 2030 and to drive the economic transformation of Saudi Arabia, through active long- term investments’ and through ‘developing a portfolio of high quality domestic and international investments, diversified across sectors, geographies and asset classes’.19 It is hoped that, alongside diversifying the Saudi economy and reducing oil dependency, the PIF will be able to contribute 185 billion Saudi riyals to the country’s GDP and generate 20,000 Saudi jobs through its investments. 21

Whilst COVID-19 has resulted in austerity measures such as the aforementioned tripling of VAT rates and the deduction in Vision 2030 funding, conversely, the PIF have seen 150 Saudi riyals (equivalent to $40 billion) transferred to their budget from the Saudi central bank.22  Since the beginning of the COVID-19 pandemic the sovereign wealth fund has taken advantage of the turmoil which has seen stocks across numerous sectors plummet, with the Finance Minister, Mohammad Al-Jadden, acknowledging the need to capitalise on the ‘range of investment opportunities that presented themselves in light of the current circumstances global financial markets are passing through’.23 Already we have seen the PIF buy shares in multiple big companies and now have ‘$713.7 million holdings in Boeing, $521 million in Citigroup, $522 million in Facebook, $496 million in Disney, $488 million in Bank of America and $514 million in Marriott’.24 The fund has also bought stakes in the entertainment company Live Nation, after its shares fell by 50%, Carnival Cruise and a potential 80% stake in Newcastle United Football Club.25 26 Investments have also been made in big oil companies, with stakes bought in Royal Dutch Shell Plc, Total SA, Eni SpA, and Equinor ASA, as well as the Canadian oil sands firms Suncor Energy Inc. and Canadian Natural Resources Ltd; unusual choices when taking into account the country wants to diversify from oil money.27 28 It has become apparent that the Saudi’s are betting big that marquee names ‘will rebound as many facets of life return to normal’ with the head of the PIF, Yasir Al-Rumayyan, stating as much saying ‘if you look at different sectors, like airlines, oil and gas, entertainment; they are all put on hold by the stoppage of the economy… So we think once the economy is opening up we will see a lot of returns’.29 30  This image of ‘a patient investor with a long-term horizon’, which the PIF have described themselves as, appears to already have paid dividends with the announcement of their 8.2% stake in Carnival Cruises increasing its share price by almost 30% after it lost more than three-quarters of its shares due to the halting of operations as a result of COVID-19.31 32

Nomura Asset Management CEO, Tarek Fadallah, likened sovereign wealth funds to ‘rainy day funds’ and it would appear that this is how the PIF is being treated by Saudi Arabia.33  Whilst having to contend with their own COVID-19 issues domestically, Saudi Arabia’s foresight to take advantage of the global economic turmoil through international investments has the potential to produce post-pandemic gains which could fund the Kingdom’s Vision 2030 initiative and the continual transition to a modern and diverse economy.