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Abu Dhabi, UAEFriday 16 November 2018

Saudi Arabia adapting to new economic realities

Prince Mohammed previously outlined a plan to transfer state assets, including proceeds from the sale of a stake in the oil giant Saudi Aramco, to a new sovereign wealth fund, the Public Investment Fund.
Publicly listing Aramco and transferring its shares to PIF will technically make investments the source of Saudi government revenue, not oil, according to Saudi deputy crown prince Mohammed bin Salman. Fayez Nureldine / AFP
Publicly listing Aramco and transferring its shares to PIF will technically make investments the source of Saudi government revenue, not oil, according to Saudi deputy crown prince Mohammed bin Salman. Fayez Nureldine / AFP

The first details of Saudi Arabia’s long-mooted economic plan to cope with this era of low oil prices have been described by Prince Mohammed bin Salman, the country’s deputy crown prince.

Speaking in an interview with Bloomberg, he said that the kingdom plans to raise US$100 billion per year in new revenues by 2020 through a combination of levies and subsidy reforms.

The economic reform measures include:

• A green card-style immigration system and new fees on Saudi businesses that seek to exceed quotas on foreign workers.

• A further “restructuring” of energy subsidies, aimed at saving an additional $30 billion.

• A house-building programme to help plug the country’s shortage of homes.

• International sovereign dollar bond issuance by September, which will be the first time the country has tapped foreign debt markets for funds.

• VAT of 5 per cent, as part of a previously announced Gulf-wide tax roll-out, expected to raise $10bn each year.

“We have the sin tax, energy drinks and soda drinks tax. We are working on a specific programme similar to the Green Card. Some fees might be on luxury items and as we said earlier, restructuring subsidies. So it is a large package of programmes that aims to restructure some revenue-generating sectors,” said Prince Mohammed.

Prince Mohammed previously outlined a plan to transfer state assets, including proceeds from the sale of a stake in the oil giant Saudi Aramco, to a new sovereign wealth fund, the Public Investment Fund.

“Undoubtedly, it will be larger than the largest fund on Earth,” he said.

“We will surpass $2 trillion.”

Prince Mohammed’s remarks seem to indicate that Saudi Arabia would transfer ownership of Saudi Aramco and Sabic to the new fund, which would be headed by Yasir Alrumayyan, the former chief executive of Saudi Fransi Capital, a brokerage firm.

“Transferring Aramco’s shares to [the] PIF will technically make investments the source of Saudi government revenue, not oil,” he said.

Further specifics of the plan have not yet been outlined, but it is unclear exactly what assets the new fund would manage.

The interview represents the second set of public remarks made by Prince Mohammed as he attempts to describe how Saudi Arabia would cope with an era of prolonged oil price weakness.

Prince Mohammed previously floated the idea of partial privatisation of Saudi Aramco in an interview with The Economist.

Saudi Arabia has started to draw down on its foreign currency reserves and run large budget deficits as it wrestles with the collapse in oil prices – from above $110 per barrel in June 2014 to just under $40 per barrel now.

It announced major spending cuts in this year’s budget in December, intended to shrink the country’s fiscal deficit from 15 per cent of GDP last year to 13 per cent.

The country depleted more than $100bn of its foreign exchange reserves last year. Its assets at the central bank and the sovereign wealth fund Sama Foreign Holdings declined by 15.9 per cent to $608.8bn at the end of last year, down from $724.2bn a year earlier.

abouyamourn@thenational.ae

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