Some two weeks ago Western newspapers reported that Saudi Crown Prince Mohammed Bin Salman (MBS) had ordered the arrest of 11 Saudi princes and some 200 wealthy individuals.
On Nov. 4, guests at Riyadh’s Ritz-Carlton were told to make different arrangements and evacuate their rooms. The detainees moved in. So the hotel became a temporary prison.
The message from the Prince (MBS) was:
The party is over. No one is above the law. You can’t embezzle or receive bribes. A new era has begun…
The crackdown against corruption is expected to generate $76 billion. Some estimates say $100 billion and the most extreme estimate mentions $800 billion. It is safer to go with the middle estimate. Yet much of the assets belonging to the 200 plus wealthy Saudis arrested are invested abroad or deposited in foreign banks which will make retrieving such assets extremely difficult without protracted and expensive legal battles. However arms twisting and deals between the Government and the targeted Saudis may yield some billions of dollars that Prince Mohamed bin Salman (MBS) badly needs to implement his Vision 2030 plan. The aim of this plan is to diversify the economy and reduce the country’s reliance on oil as the main source of revenue.
The most famous of the detainees is Prince Al-Waleed bin Talal, who is known in the West as the flamboyant investor. He is a grandson of Saudi’s first ruler and son of a Saudi finance minister, has an estimated net worth of $17bn (£13bn), according to Forbes magazine.
According to the Wall Street Journal, Alwaleed is a major investor in Apple Inc. Twitter and Citigroup.
Middle East observers question the wisdom of MBS for not making use of Alwaleed’s extensive experience in investment and high level contacts. By enticing him to invest in Saudi Arabia would be beneficial to the country. Instead MBS chose to humiliate him. Ironically Al-Waleed expressed his support for MBS’ Vision 2030 and Diversification Plans.
However to understand what’s going on in Saudi Arabia, we must look at some facts and figures.
The oil prices fell sharply in the summer of 2014 from above US$100 per barrel to below $30 in early 2016. The steep drop in oil revenues resulted in a record budget deficit of $98 billion in 2015, the equivalent of 15 percent of its GDP. The government also brought in austerity measures and curbed public spending.
Prices have been recovering slowly and gradually ever since. Now they are in the range of $60 to $63.00 per barrel which is good news for Saudi Arabia but not good enough. Recently the IMF estimated that Saudi Arabia needs a price of $84 to balance its fiscal budget.
The falling oil prices have played havoc with the Saudi economy.
The Foreign Currency Reserves fell from $730 billion in 2014 to $487 in August 2017.
The Budget deficit soared in 2015 to $98 billion dollars and in 2016 it reached $85 billion dollars and despite various austerity measures it will still be above $53 billion dollars in 2017. Employment is around 25%.
Vision 2030, Aramco IPO and NEOM
Central to the Vision 2030 strategy is the Aramco IPO of 5% of its value at New York Wall Street exchange or the London Stock exchange.
Crown Prince Mohammad bin Salman has stated last month that the Aramco’s initial public offering is a part of his plan to diversify the Saudi economy beyond just oil and that it was on track to take place in 2018.
The sale of just 5 percent of Saudi Aramco is anticipated to be the largest in the world. It is supposed to generate $100 billion dollars which put its value at $2 trillion.
London and New York are competing for the IPO due to its colossal size. The Saudis hope to gain $100 billion from the IPO which effectively puts its value at $2 trillion. This huge valuation is also disputed by some London analysts who think the real value is less than that.
Despite the lobbying by Theresa May the UK Prime Minister, the London Stock Exchange rules stipulate that a premium listing must be for a t least 25% of the value of the company and 5% is not acceptable. However the Financial Conduct Authority (FCA) is trying to create a special category for Aramco’s IPO listing. UK opponents of the IPO in London argue that the FCA is bending the rules to accommodate Aramco.
But placing the IPO in Wall Street might trigger legal action against Saudi Arabia by the families of the 9/11 victims. The Financial Times reported on November 10th that President Trump tweeted that choosing the New York Stock Exchange would be “important to the United States.”
The third option is private placements with Chinese buyers and listing on local stock exchanges. Final decision has not been taken yet.
Apart from Aramco IPO, the Crown Prince (MBS) has other grand plans such as “NEOM” which was discussed the last week of October in an investment conference labelled “Davos in the desert” which attracted high profile participants like Richard Branson and IMF chief Christine Laggard.
Over three days, MBS unveiled plans for a vast $500bn investment zone in the north-western coastal region. The NEOM an ambitious project for a futuristic city on the shores of the Red Sea is very impressive on paper, but raising the funds and implementing the project will prove a major challenge. Such projects often suffer from inefficiencies, delays and government interference.
What is of concern to foreign investors and businesses are the lack of transparency, the opaque nature of the system and the bureaucracy. To attract investors, the Saudis need to modernise their methods of operation. Reforming their legal system and introducing contemporary laws to protect investors, more transparency and a positive environment. Above all investors would like to operate in a geo-politically stable environment.
Critics described MBS as a reckless young man in a hurry. Is he really? He was also accused of hypocrisy because a few months ago he bought himself a yacht from a Russian tycoon for $500 million and his father King Salman spent $100 million on a month holiday in Morocco last summer.