Saudi Arabia is a country in the middle east, with 18% of the proven petroleum reserves in the world. It also is the biggest exporter of oil, carrying responsibility with 16% of global oil exports. It is no easy job and comes with the trust, but thanks to them owning the biggest company in the world, Saudi Aramco, they can get the job done without trouble. Aramco has been 100% state-owned since its founding in 1933, but that will change on the 5th of December, 2019. Aramco is now preparing for its upcoming IPO, which has been postponed on more than one occasion. They will sell 1.5% of their total stocks. But why would the government and the company change their business plans all of a sudden?
“Vision 2030” was first announced by the Crown Prince Mohammad bin Salman on the 16th of April, 2016. It is an extensive plan about the actions their government will take by certain checkpoints until 2030. It is mostly due to the very oil-dependent economy of Saudis, and the Crown Prince is trying to change that. The plan’s objective is to reach and exceed world standards socially, economically, and culturally.
To achieve this, they will require the funding and investments of other nations as well, although the social changes in Saudi Arabia helped with easing the investors. The murder of Jamal Khashoggi inside the Saudi Arabian Consulate in Istanbul has shifted the lately positive views towards the Crown Prince and Saudi Arabia. Also, following this, the economic growth rate took a hit in 2018, and Saudis still haven’t been able to recover. Saudi official unemployment rate for Saudi citizens is 12.3% as of the Second Quarter of 2019.
There are currently 1.5 million workers in the retail industry, among which only 0.3 million are Saudi nationals. Even though the 2019 budget was the highest ever, Saudi Arabia will grow 1.9% in 2019, close to predictions of IMF. According to Business Insider, foreign investment is now a twelfth of what it was before. Although with a GDP of 640 billion USD, Saudi Arabia is the largest economy in the Middle East, investors don’t seem convinced because of the shaky economy and poor ethical standards.
Vision 2030 has a variety of branches to stabilize their economy without the dependency on the oil. As we know, when Aramco sustained substantial damages after the drone attack in September, their oil production was reduced by 50%, and 9 dollars increased oil prices in a day because of the monopolistic effect of Saudi oil. To prevent that from happening again, Crown Prince’s plan to diversify the economy will help them and the rest of the world. To achieve this, investment gained from the IPO (approx. 25 billion dollars) will be used for various markets countrywide.
Among the proposed programs, ones related to the economy look very promising if it can be met. The Fiscal Balance Program pledges to remain the current tax levels and not to impose any more financial impositions to its citizens or the private sector, not to impose income taxes on its citizens and not to impose corporate income tax on its corporations.
Their Privatization Program hopes to unlock state-owned assets for the private sector and privatizing some of the government services. According to Saudis, this will contribute to the GDP by 3.2 billion USD and create 10.000-12.000 jobs. Their Public Investment Fund aims to be the largest sovereign wealth fund in the world, which will be, of course, funded by the government. As part of their 2020 commitments, the Public Fund will generate 20.000 direct jobs and contribute to the GDP by 49 billion USD.
As part of their Financial Sector Development Program they are hoping to achieve; increasing the share of capital markets assets from 41% in 2016 to 45%, opening the Financial Services sector to emerging players (i.e., FinTechs) to spur innovation and growth, fully comply with international standards related to financial stability, increasing the share of non-cash transactions from 16% in 2016 to 28% by 2020, to raise the share of non-oil exports in non-oil GDP from 16% to 50% and lastly, to increase non-oil government revenue from USD 43 billion to USD 270 billion.
These innovative approaches have immediately eased investors. They have helped with growing their economy in the short run, but with the constant political tensions in the Middle East and diplomatic crisis,’ it’s hard to maintain the trust in the long term. That is why the Aramco IPO will be speeding up the funding of Vision 2030. Instead of expecting foreign investors to fund their efforts, they will be using the biggest company in the world. Al-Falih, Minister of Energy, Industry and Mineral Resources, and Chairman of Saudi Aramco’s Board of Directors noted that Saudi Aramco would take center stage in helping to implement Vision 2030. Al-Falih described the transformation taking place in Saudi Arabia as being both bold and visionary, and in step with a changing world, an evolving global economy and said as Saudi Arabia diversifies, so will Aramco.
This is a win-win situation for both the investors and Saudi Arabia because investors are rewarded with an annual 75 billion USD in dividends which is subject to increase after the IPO, and Saudi Arabia is given a chance to diversify their economy for the long run after the precious natural resources run out, better be safe than sorry.