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Saudi Arabia's Davos in the Sandstorm

Professor of Financial Economics and Part-time Value Investor, Transfin.
Oct 23, 2018 6:41 AM 3 min read
Editorial

This year’s Future Investment Initiative kicked-off today in Riyadh, Saudi Arabia.

 

The two-year old annual investment forum, very promptly adopting the moniker “Davos in the Desert” (after its much more illustrious and (now much more) respectable counterpart organized by the World Economic Forum) has been, metaphorically, caught up in a geopolitical sand storm.

 

Considering FII’s commencement, we thought a summary of key events to-date and their implications would be worthwhile:

 

The Future Investment Initiative (FII) is organized by Saudi Arabia’s Public Investment Fund (PIF).

PIF, within three years, is on track to become one of the world’s largest sovereign wealth funds (with AuM targeted to double to $600bn by 2020!).

 

[Listen in from 8:05 onwards to learn more on the lost aura of MbS in light of the Khashoggi incident] 

 

PIF’s inception is part of Crown Prince Mohammed bin Salman (MbS)’s Vision 2030.

Oil and related industries accounted for around 90% of the Saudi Arabia’s export earnings, 87% of budget revenues, and 42% of Gross Domestic Product (GDP) in 2017.

 

Post a plunge in oil prices in 2014, Saudi Arabia is realizing the importance for economic liberalization and diversification.

 

As part of MbS’s ongoing attempts to modernize and possibly wean off reliance on oil, the Prince in 2015 launched a campaign called ‘Vision 2030’, aiming to promote financial diversification, support private sector growth, develop an advanced capital market etc.

 

A privatization drive was commenced, kickstarted by the proposed but now in limbo IPO of Saudi Aramco, the state-owned company owning all the Kingdom’s oil assets.

 

PIF acts as a funding vehicle for Vision 2030. And PIF’s outreach is supposed to be channelized through the FII, launched in 2017

The main objective of FII is to demonstrate and showcase the Kingdom’s pull amidst western financiers and executives, enhancing its global outreach amongst the investor community.

 

And in 2017 it did. Top representatives from global western names, ranging form Boeing, MasterCard to BlackRock flocked along. Bold targets were announced by the Saudi government, including an investment of $500bn into Neom, a 26,500 sqkm proposed futuristic investment zone adjoining the Red Sea.

 

This year however would be much different due to the Khashoggi scandal.

The scandal around the mysterious death of Jamal Khashoggi, a Saudi journalist and US resident in the Saudi Consulate in Istanbul - allegedly by state agents under orders of Crown Prince Mohammed bin Salman (MbS) who Khashoggi regularly criticized, has spurred a diplomatic crisis.

 

Underpinning this crisis would be the impact of the Kingdom’s perception and viability as a suitable economic and investment partner.

 

Many Western Delegates as a result have withdrawn from FII, but to what extent will economic partnerships really suffer?

Yes, symbolic withdrawals from the forum have transpired, be it the head of JP Morgan, BlackRock, or Chief of Uber. But corporate memories are notoriously short-term. One would be too naïve to think that any substantial retrenchment would happen in real terms, due to a mere “diplomatic incident”. Multinational groups such as HSBC, Deloitte, BCG, McKinsey etc. are still listed as conference partners.

 

There is little doubt that outbound flows would not be shunned away. Inbound investment to the Kingdom however, may suffer, as argued by a recent Financial Times story.

 

But, one thing is for sure certain. The lustre and aura surrounding MbS as the youthful Saudi social reformer, and the annoyingly self-righteous Silicon Valley eco-system gleefully taking his money, is gone.

 

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