In this usually quiet holiday period, the Financial Times broke a remarkable story (based on an unnamed source) that the Kingdom of Saudi Arabia (KSA) is contemplating a sovereign investment fund that would “dwarf Abu Dhabi’s $900bn” ADIA. The implications of such a fund, if and when created, would be far-reaching and profound.
For seasoned observers of the Gulf, the story raises more questions than answers.
One such question is which components of the Saudi investment apparatus might be re-organized to form the body. It is most prudent, at this point, to refrain from commenting on such a fund until more information is available.
By way of context, however, three important attributes of the Saudi economy (and its public sector in particular) are useful to remember when reflecting on the scope for KSA public sector overseas investment:
1. Saudi Arabia is the Gulf’s “core market”, far larger than any other GCC economy
The Saudi GDP – $400bn in 2006 and now significantly higher – is about half the total GCC economy. The KSA’s dominance in population is even greater – it has 25 million inhabitants, about two-thirds of the Gulf total. No global company, especially a consumer-facing one, can ignore Saudi Arabia if it wishes to build a large-scale Gulf presence.
In the critically important oil sector, Saudi Arabia far outweighs its neighbors: the Kingdom has 22% of the world’s known oil reserves, more than Kuwait and the UAE combined. Despite its (sometimes) lower commercial profile, Saudi Arabia is clearly the “core market” of the GCC, a point discussed in length in Dubai & Co.
(For more on Saudi Arabia as the Gulf’s “core market”, see Chapter 4 – “Silicon from Sand: Essential Background on the GCC” – of Dubai & Co.
2. Demands on the Saudi budget are, however, significant and growing
The KSA’s population of 25 million is spread over a vast territory and is growing quickly. The need for government spending on social services programs (e.g. schools and hospitals) is tremendous. At the same time, the Saudi infrastructure requires a great deal of capital investment – much of the infrastructure was developed in the 1970s and early 1980s and is showing wear and tear.
Huge projects such as a series of “Economic Cities” are underway, tapping deeply into the government’s income. Besides these capital projects, the operating budgets of government departments have grown as the KSA population and social needs have expanded greatly.
3. Generating a steady, long-term budget surplus is therefore a challenge
While high energy prices do create windfalls for the Saudi public sector, the KSA’s “break even” oil price is significantly higher than its neighbors. While analysts report that the UAE could balance its budget with an oil price below $20 per barrel, the KSA needs a much higher price to meet its spending needs.
In today’s environment, a budget surplus seems inevitable. As recently as 2003, however, the Kingdom reported a budget deficit. Should oil prices drop to the $50 level, the situation for the Saudi budget will tighten. If the dollar falls further and the prices of imported inputs continue rise, the KSA is less assured of a budget surplus than are its GCC neighbors Qatar, Kuwait, and the UAE.
Saudi Arabia is a massive economy and its public sector holds a great deal of wealth. A Saudi sovereign wealth fund like the one described by the FT would no doubt be a global powerhouse. Compared to other Gulf states, however, Saudi Arabia depends far more on high energy prices to enable and sustain the kind of healthy surpluses fueling the region’s celebrated sovereign wealth funds.