Saudi Arabia Expands Fundraising and Diversification Efforts as Non-Oil Economy Now Represents Half of GDPMar22

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Saudi Arabia Expands Fundraising and Diversification Efforts as Non-Oil Economy Now Represents Half of GDP

Summary: Half of Saudi Arabia’s economy is now composed of revenue from non-oil assets and enterprises. That is a testament to the government’s diversification drive; an effort that it is expected to pour $3.2 trillion into by 2030. Oil income is likely to bolster Saudi coffers for many years to come, but the crown is now looking far beyond the money it makes in the energy sector. This will require a ramping up of fundraising at the state level, as well as in the private sector, which are both expected to materially increase debt levels throughout the rest of the year. Hundreds of billions of Dollars will be needed to finance construction spending over the next half decade.

A jump in sovereign bond issuance would not be a major concern for the Kingdom, as it maintains a debt to GDP ratio well below its most of its emerging market peers and the OECD average. A near doubling in the value of Saudi Arabia’s mineral resources makes its debt look even more manageable, as a burgeoning mining boom is on the horizon. Bond offerings by the Saudi Public Investment Fund (PIF) will likely be supplemented by IPOs of its privately-held enterprises, as well as dividends earned from its 16% stake in Saudi Aramco and a $35 billion US equity portfolio.

Related ETF: iShares MSCI Saudi Arabia ETF (KSA)

For the first time on record, non-oil revenues represented half of Saudi Arabia’s GDP in 2023. Per the Kingdom’s Ministry of Economy and Planning, the country’s non-oil economy was valued at 1.7 trillion SAR (approximately $453 billion) at constant prices. The Kingdom’s private-sector investments expanded by a brisk 57% last year, reaching a record high of 959 billion SAR ($254 billion). The categories for arts & entertainment and real service exports grew by 106% and 319%, respectively.

MRP has recently highlighted a boom in the Saudi tourism and travel industries, as well as the booming value of its mineral resources, which are lighting the path forward for an oil economy that must begin diversifying to prepare for a future beyond peak oil. Though CEO of the state-run Saudi Aramco petroleum and natural gas company, Amin Hassan Nasser, asserted this week that the current phaseout of fossil fuels is “visibly failing on most fronts” and does not envision oil demand peaking by 2030, Saudi Arabia itself has committed to transitioning away from the polluting fuels and reaching net-zero carbon emissions by 2060.

Still, income from the oil trade is sure to bolster the Kingdom’s coffers for some time – particularly this year, as benchmark Brent crude oil futures have risen by 10.6% in the year-to-date period to more than $85.00 per barrel. That is well-above the $79.69 average price point that Saudi Arabia needs to maintain to balance its budget, per IMF figures. The Saudi finance ministry has forecast a budget deficit for 2024, but a continued rise in oil prices could potentially flip that balance into surplus.

Saudi Arabia may begin relying more heavily on sovereign debt markets to fuel their large ambitions this year, selling $12 billion in US Dollar bonds in January. That is the kingdom’s largest single issuance since 2017. Thus far, the Saudi government has relied very little on debt financing, carrying a debt to GDP ratio of just 24.8% last year. Per The Wall Street Journal, this figure is expected to rise to 26.9% by 2026, but that is still well below the average of emerging markets, as well as all countries tracked by the OECD, at 64% and 89%, respectively. The US, by comparison, carries federal debt that is equivalent to 144% of its GDP.

The relatively low debt load, combined with a massive boost to the value of Saudi Arabia’s mineral resources, which were recently increased to a valuation of $2.5 trillion (up from a 2016 forecast of $1.3 trillion), suggests the country has significant leeway to further tap debt markets while keeping the load borne by the government well within a manageable range. The mineral resources in question are largely composed of phosphate and valuable rare earths. Khalid al-Mudaifer, the Saudi vice minister for mining, told Semafor that a regional geoscience survey of the Saudi territory is currently only about 40% complete, which means there may be trillions of Dollars of further mineral reserves waiting to be discovered in the Kingdom. MRP noted in January that new mining projects would be backed by a $182 million mineral exploration incentive program. At the time, Saudi Arabia had already signed several memorandums of understanding (MOU), securing mining collaborations with Egypt, Russia, Morocco and the Democratic Republic of Congo. 

The private sector of Saudi Arabia is expected to bear more debt in upcoming years. Bloomberg notes that Saudi banks may need to raise at least $11.5 billion via bonds in local and foreign currencies this year to keep liquidity flowing toward the construction of so-called giga projects such as the urban development of Neom. Cumulative debt offering of that size would surpass the previous annual record of $10 billion. The Kingdom will require $640 billion in construction spending over the next five years based on the current pipeline of projects, according to data compiled by Dubai’s MEED Projects. 

Saudi Arabia’s Public Investment Fund (PIF) just expanded its AUM to $925.2 billion after receiving an additional 8% stake in Aramco (taking its total stake in the company to 16%) from the Saudi crown earlier this month. That could entitle the sovereign wealth fund to about $5 billion in dividend payments from Aramco every quarter, or about $20 billion per year, in addition to payouts from its vast $35.2 billion portfolio of publicly traded US equities tracked by fintel.io. Income from the PIF can make up for potential shortfalls related to the budget and, therefore, ease pressure on the Kingdom’s energy industry to fund the government’s aggressive fiscal expansion.

Though it just became the world’s fifth-largest state-owned investment organization, Reuters reports that PIF spent $31.5 billion deploying capital last year, equivalent to about a quarter of the $124 billion spent by all sovereign wealth funds worldwide in 2023. The PIF has been dabbling in debt markets frequently throughout the past two quarters, tapping $5 billion through the sale of a triple-tranche conventional bond in January and $3.5 billion in a sukuk deal in October. It reportedly began organizing investor meetings for another upcoming Islamic Dollar bond offering in late February. These raises may be in preparation for a planned escalation of annual capital deployment to $70 billion after 2025. IPOs of privately-held enterprises owned by PIF may also help with fundraising efforts going forward. The fund’s cash reserves have recently declined to a four-year low of $15 billion, but it appears it is gearing up to continue its investing spree.

THEME ALERT – LONG Saudi Arabia

MRP added LONG Saudi Arabia to our list of themes on October 26, 2022, due to our expectation that the Kingdom’s economy was finally set to undergo a major transformation. Though the pace of overall GDP growth had been slammed by softer oil prices in 2023, the non-oil economy of Saudi Arabia is still expected to expand between 3% to 4% each year until 2030, according to Moody’s Analytics.

Non-oil growth in the Kingdom exceeded that range last year, expanding by 4.6% and defying a -0.9% contraction in the broader economy. Economists polled by Reuters expect Gulf Cooperation Council (GCC) will see this year’s economic growth re-accelerate from a subpar 2023. The 20 economists project Saudi Arabia, the region’s largest economy and the world’s leading crude exporter, will experience growth of 3.0% in 2024.

The primary pillar of Saudi Arabia’s transformation is the Vision 2030 project – a major investment initiative meant to attract new business to the country, diversify away from oil, ease social restrictions, and establish a legacy for the Crown Prince and Prime Minister of Saudi Arabia, Mohammed bin Salman. Saudi Arabia is expected to spend more than $3.2 trillion to revitalize its economy by 2030.

Many of Saudi Arabia’s long-term plans – particularly those apart of the Vision 2030 plan – have long been met with skepticism, but the country has come out on the other side of a global pandemic largely stronger than it went in; a testament to the staying power of the Kingdom’s industry and political order. Since we added LONG Saudi Arabia to our list of Active Themes, the iShares MSCI Saudi Arabia ETF (KSA) has thus far returned 2%, underperforming an S&P 500 gain of 36% over the same period. Emerging markets have lagged US shares for more than decade, but could soon experience a long-awaited breakout on the back of a softening US Dollar.

Saudi Arabian equities have been one of the top emerging market plays since joining MSCI’s Emerging Markets Index in 2019. The Kingdom’s stocks now make up 4.3% of the index, up from about 1.5% when it was first included in the benchmark, reflecting long-term outperformance. Over the past year, KSA has risen by 20%, more than doubling an increase of just 9% in the iShares MSCI Emerging Markets ETF (EEM).

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