Saudi Arabia steps up domestic investment as low oil prices and coronavirus bite

Saudi Arabia’s sovereign wealth fund has pledged to spend at least $ 40 billion annually on the national economy over the next five years, as it prepares to launch its latest mega-project.

Yasir al-Rumayyan, governor of the Public Investment Fund, told the Financial Times that after 2025 “these amounts may increase” as he described the investment vehicle becoming the “engine of economic growth” in the kingdom. The PIF invested around $ 15.5 billion in the kingdom in 2019.

Mr Rumayyan was speaking days after the PIF unveiled its most ambitious project to date – the creation of a futuristic, carbon-free city that will stretch along a narrow 170 km strip of Neom, the flagship development of Crown Prince Mohammed ben Salman. The cost of infrastructure for the city, known as “The Line”, is expected to be between $ 100 billion and $ 200 billion, with PIF being its main investor.

Rumayyan said funding for the project will come from a combination of bonds, loans and equity from the $ 400 billion PIF, as well as outside investments.

“We have 150 billion riyals [$40bn] be deployed [this year] and that comes from us as equity. Of course, not everything will go to Neom, ”he said. But “we have an action and a roadmap that will take us until 2025”.

He said the PIF “had a lot of liquidity” on its balance sheet, citing $ 40 billion the fund received from the central bank last year and the proceeds from Saudi Aramco’s initial public offering, which raised $ 29 billion after listing 1.7% in 2019. The fund also receives $ 69 billion from the sale of PIF’s stake in the petrochemical company Sabic to Saudi Aramco, though that amount is being paid in installments over many years.

Besides the development of Neom, the PIF is the benchmark investor in two other “giga-projects”: Qiddiya, a sports and entertainment complex of more than 15 billion dollars, and a tourist development of the Red Sea which is expected to cost about $ 10 billion. .

The fund, which has a dual mandate to develop the economy and invest abroad, has also created more than 30 companies in the kingdom.

The PIF insists that megaprojects continue, although Riyadh has been forced to cut spending and impose austerity measures as the world’s largest oil exporter has been hit by the double shock of weak prices. price of crude oil and coronavirus.

There has been skepticism about Prince Mohammed’s very ambitious plans for Neom, which the Crown Prince announced in 2017 as a $ 500 billion project that would span 26,000 km2 on the Red Sea coast of Saudi Arabia. and which would be linked to Jordan and Egypt.

Analysts have also wondered how the kingdom will fund all of Prince Mohammed’s grandiose projects, which are part of his Vision 2030 plan to modernize the conservative kingdom.

“It’s very hard to see how the money is going, not just to go to Neom, but to all the other megaprojects and ambitions that they have,” said one Gulf-based executive. “If they hit half of what they expect, great. But at the moment, there is a credibility gap between what is said and what is done.

Mr Rumayyan said domestic investment would not prevent the PIF from seeking opportunities abroad.

In the first months of last year, the fund used market turmoil triggered by the coronavirus pandemic to invest at least $ 7.7 billion in stakes in a host of blue chip stocks in the United States. United and Europe. But he subsequently sold about $ 3 billion of his US holdings.

Mr Rumayyan said foreign investments made up more than 20% of the fund’s assets under management, compared to less than 5% four years ago.

“The percentage will remain at the level of 20 to 30% at the international level. But remember that our aspiration is to increase our [assets under management] from $ 400 billion to $ 2 billion in 2030, ”he said. “We are therefore not going to back down on our international [strategy]. ”

He dismissed skepticism of “The Line,” which is supposed to create 380,000 jobs, add $ 48 billion to GDP by 2030 and have a self-sustaining underground rail system powered by hydrogen.

“You have PIF behind [and] you have the political will behind it, ”said Rumayyan.

He cited a $ 7 billion venture between Air Products, an American company, and Acwa Power, a Saudi company 40% owned by PIF, to develop a power plant for buses and trucks.

But others are still not convinced.

“With all of these projects, until there is little more than a video ad, there won’t be a lot of people taking them seriously,” said the Gulf-based executive.

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