EconoMatters, Global Pairings

When the Saudis Need Cash

Crown Prince Mohammed bin Salman wants to sell shares in state-owned oil giant Aramco to fund the grandiose reinvention of Saudi Arabia.

Credit: Natanael Ginting Shutterstock.com

Takeaways


  • To finance a productive post-oil economy, the Saudis want to raise staggering sums of cash in international markets.
  • Saudi Arabia’s budget deficit could reach $80 billion this year. That is unsustainable even by Saudi standards.
  • While international finance today knows no borders and (almost) no real limits, it can also be fickle.
  • The Saudis want to raise cash by selling shares in the state-owned oil company Aramco – they value it at $2 trillion.

What a letdown for the Saudis. They are no longer at the commanding heights of the global economy. Instead, they find themselves annoyed by the Norwegians, anxious about potential international investors, uncertain about Chinese intentions – and worried about cash.

To finance the grandiose reinvention of Saudi Arabia and attempt to shape a productive, prosperous and peaceful post-oil economy, the Saudis want to raise staggering sums in coming years in international markets.

The presumed public listing of Saudi Aramco is the linchpin in that regard. Success in that venture will demand extraordinary political and financial skills by Saudi Crown Prince Mohammed bin Salman and his advisors.

But “MBS” – as he is often referred to – really has no choice. Declines in world oil prices have put a dent in Saudi government finances in recent years. The country’s budget deficit could reach $80 billion this year. Even by Saudi standards, this is unsustainable in the long term.

Vision 2030

In addition, the Crown Price’s Vision 2030 plan, among its many elements to modernize and diversify the kingdom, calls for a new city, Neom, that has an estimated cost of $500 billion. In late October, MBS presented the plans to more than 3,000 potential investors who were invited to Riyadh for the “Future Investment Initiative.”

While international finance today knows no borders and (almost) no real limits, it can also be fickle. One day investors may love a prospective deal; the next day they may just walk away.

Their minds and their actions are driven by their perceptions of confidence and uncertainty. And, in this game, the Saudi Crown Prince is a novice and prone to making major errors.

Against that backdrop, the Crown Prince recklessly arrested dozens of Saudi tycoons on charges of corruption. The Financial Times reported that the detained billionaires are being forced to make deals, said to involve giving up to 70% of their wealth, to gain their freedom. This may raise $100 billion.

Worried investors

But playing this corruption card has also rattled the nerves of investors. Can they still be confident that the Crown Prince can run a stable ship? And, if they choose to invest, can they be sure to maintain control of their investment?

Or will they possibly find themselves exposed one day to politically motivated charges by Saudi authorities?

International investors have been shaken. After all, many of those tycoons who were arrested were not just prominent in the rolodexes of the world’s biggest investment banks and fund managers. They are also major investors in topflight Western corporations.

The damage to confidence may make it all the harder for the Saudi government to achieve its stated goal of raising cash by selling shares in the state-owned giant oil company, Aramco. Saudi officials have valued it at around $2 trillion in total.

Norwegian doubts

However, this valuation may now be in doubt, thanks to market worries about the Crown Prince’s grip on power – and thanks to the Norwegians.

Norges Bank, managing Norway’s sovereign wealth fund – the world’s largest with assets of around $1 trillion – looks at world oil prices. Its analysts see the prospect of lower oil price levels for some years to come (due in part to increasing U.S. oil and gas production, plus the rise of solar, wind and other energy alternatives).

As a result, Norway’s fund has announced that it will be selling all its shares in giant oil companies, such as Exxon-Mobil, Shell and BP, currently valued at around $35 billion.

The sell-off damages the valuations of all oil companies, including ARAMCO. To initially raise $100 billion, as they have planned, the Saudis will probably have to sell significantly more than 5% of the company and they have to offer handsome commissions to those who can broker the sale.

Only the London and New York stock exchanges are big enough for a public offering of this scale. Both are competing for the deal, but their basic transparency and governance standards may be just too demanding for the secretive Saudis.

Singapore’s sovereign wealth fund might be interested, but it is a shrewd investor and may share the same views on the oil outlook as the Norwegians.

The Saudis could seek to gather all their private equity and investment banking friends from London, Zurich and New York, to make a huge private placement of stock, but this will require a new effort to restore confidence.

Enter China?

There is speculation that the Chinese will buy the Aramco shares in a private placement. Such a transaction would not just be a political signal by China’s president Xi Jinping to support the Crown Prince and a further indication of China’s vitality on the global investment front.

It could also signal a pivotal Saudi realignment vis-à-vis the United States. What may stop the transaction from happening is that it might produce tensions between Iran and China that Xi may not want to unleash.

Xi also has to consider whether a huge foreign investment of this kind is a priority for his government. He has already committed to making vast investments in infrastructure across Asia in the coming decade.

Moreover, China’s all-powerful leader also needs to tackle an increasingly dangerous domestic debt issue. The national debt-to-GDP ratio stands at over 280%, vast credit extension by the country’s commercial banks and firms persists in the shadow banking system, and the mountains of debt by state-owned enterprises, construction companies and municipal governments are still rising further.

From seeking to consolidate political and military power at home, to hitting fellow princes up for cash, the Crown Prince is thus engaged in a high-wire act.

His endeavors are all the more risky given his simultaneous moves against Iranian-backed forces in Yemen and Lebanon, while confronting Qatar.

Investors are watching, and they are wary.

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About Frank Vogl

Frank Vogl is co-founder of Transparency International and author of Waging War on Corruption: Inside the Movement Fighting the Abuse of Power. [Washington D.C., United States]

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