by Jaansiva Yuliya Sheejan
The COVID-19 pandemic, one of our era’s defining black swan events, has wreaked havoc throughout the global economy, bringing the world to a grinding halt. The energy industry has been among those sectors bearing the brunt of the pandemic, particularly the global oil industry.
Global demand for oil is expected to fall by a record 9.3 mb/day y-o-y in 2020. As a result of the historic OPEC+ output deal, global oil supply is set to plunge by 12 mb/day in May 2020. With the ongoing pandemic resulting in the literal shutdown of economies, demand for oil is expected to be subdued, meaning low oil prices are here to stay.
Under these circumstances, it is worth taking a closer look at Saudi Arabia, the world’s largest oil exporter and a member of the G20 grouping. Specifically, this piece examines Saudi Arabia’s ‘Vision 2030’.
The nose dive of Brent Crude prices has thrown a spanner in the works of the Saudis’ financial budgeting. While the Kingdom was planning to borrow a record $58 billion, Moody’s has cut its outlook from ‘Stable’ to ‘Negative’, citing fiscal risks due to the crash in oil prices and uncertainty about the government’s ability to offset oil revenue losses and stabilise debts. The country’s fiscal position was already deteriorating with its net financial asset-to-GDP ratio falling to 0.1% in 2019 from 50% in 2014. This has resulted in the Kingdom announcing an $8bn cut in its Vision 2030 modernisation and diversification programme.
Vision 2030: Context
Vision 2030 was announced in 2016 amidst the falling oil prices that began in 2014, envisioning an economy diversified away from dependence on oil revenues.
Two of the major pillars of the Vision, as elucidated by Crown Prince Mohammed bin Salman, are:
- A diversified economy less dependent on oil, and
- Transforming the Kingdom into a ‘global hub’ of transportation between the three continents of Europe, Africa and Asia.
The plan also includes a $500bn ‘futuristic city’ Neom, replete with flying taxis, glow-in-the-dark sand, robotic martial arts and other futuristic elements.
At the outset, the Vision 2030 blueprint appears to have taken inspiration from the neighbouring Emirate of Dubai, often considered a symbol of Middle Eastern prosperity and the opulence of contemporary globalisation. The Emirate’s diversified economy was hit hard following the global financial crisis of 2008, which resulted in the end of the city’s real estate bubble in 2009. As a result, the Emirate further diversified its economy into industries with long-term growth prospects such as media and IT.
Vision 2030 in a Post-Pandemic World
The example of Dubai helps us to understand the impact of the COVID-19 pandemic on a ‘global hub’ – a diversified economy dependent on globalisation, as is envisioned for Saudi Arabia in Vision 2030.
As stated in a Moody’s research report, Dubai’s economy, of which the non-oil sector constitutes a huge share, faces a substantial challenge as a result of the pandemic. The Emirate’s government-related entity (GRE) debt remains the most exposed to macro risks owing to its holdings in ‘diversified’ sectors including real estate, transportation and tourism.
The global air travel industry, which the Saudi’s seek to leverage in order to become a ‘hub’, is expected to again reach 2019 levels only in 2023, with social distancing norms making most airlines financially unviable. Furthermore, the X-factor in this industry is passenger confidence, which has taken a the biggest hit due to the pandemic and the impending global recession, making this a huge gamble. In a bid to increase accessibility and promote tourism, the Kingdom, through its sovereign fund, has set up the country’s first private commercial helicopter operator. Closely tied to this is the major overhaul required in the tourism sector post-pandemic. This would require host countries such as Saudi Arabia to liberalise visa norms and ramp up health infrastructure to guarantee private treatment.
Public Investment Fund
The Public Investment Fund (PIF), the Kingdom’s sovereign wealth fund, is another major instrument to deliver Vision 2030’s diversification objectives. Initially established in 1971 under the Kingdom’s Finance Ministry, the PIF was later assigned to report to the Council of Economic and Development Affairs (CEDA), chaired by Crown Prince Mohammed himself, to ensure greater synergy with Vision 2030.
Sovereign funds have been increasingly playing an important role in supporting economies during the current pandemic. Even prior to the pandemic, sovereign wealth funds have been overseeing assets worth more than $8trn, or around 10% of global GDP. The PIF, among the top 10 largest sovereign wealth funds by assets, has had returns double their target of 4–5% a year, making it a prudent vehicle for diversification.
In addition to investments in the likes of Uber, SoftBank’s Vision Fund and electric carmaker Lucid Motors, the Fund has been on a shopping-spree of sorts during the pandemic. In the US alone, the Fund has recently made investments in corporate houses in diverse sectors ranging from Disney and Bank of America to Berkshire Hathaway and Boeing. It may also be noted that the fund has made international investments of more than $2bn in the very sector it seeks to diversify out of domestically – oil and gas. The fund has picked up stakes in ‘Big Oil’ through investments in BP, Total, Shell, Suncor and Equinor.
The road ahead is fraught with uncertainty and challenges for all economies, and like others Saudi Arabia hopes to convert this crisis into an opportunity, and in doing so realise their vision of becoming a modern, resilient nation. Their recent investment activity indicates that the Saudis are looking to seize the moment.