To the outside world, Saudi Arabia has long been seen as a country of largesse, a kingdom gifted with vast oil wealth, where thousands of princes live in opulence, a place that the world’s biggest banks and struggling nations turn to in their hours of financial need.
But beneath that veneer lies another reality: one of a country getting deeper and deeper into debt. Since 2015, when a collapse in oil prices forced it to borrow money to balance the books, Saudi has borrowed more than US$200bn – either directly from banks or on the global bond markets.
Simply put, the kingdom is living beyond its means. Despite big cuts to government handouts, oil sales are no longer enough to balance the budget. It’s a problem that’s set to worsen in coming years as Saudi embarks on a massive – and hugely expensive – overhaul of its oil-dependent economy.
In recent days, the country has taken out yet another bank loan – a US$15bn facility for the Public Investment Fund, the body charged with overseeing the Vision 2030 overhaul, a series of grand plans that McKinsey has estimated could cost as much as US$4trn over a decade. The money came from a 17-strong syndicate of banks (see Loans section for more).
It’s highly unusual for a sovereign wealth fund – especially one that says it has US$400bn of assets – to borrow money. But the PIF is facing up to a simple fact: at present, it simply does not have sufficient cash or income from its investments to do what it has been tasked with.
“The investment plans don't seem to be fully financed at this stage,” said Jean-Michel Saliba, an economist at Bank of America. “So either they will need to be delayed, gradually phased in, or there needs to be more capital allocated.”
Foreign reserves
The government transferred US$40bn of foreign reserves to the PIF a year ago. But that was to fund a one-off chance to opportunistically buy shares in the secondary market after the coronavirus-inspired sell-off in equities last March. The fund made good profits buying stakes in Disney, Boeing, Shell and others that it later sold.
PIF governor Yasir Al-Rumayyan has said such injections won’t happen again until government reserves have been replenished – a prospect far off given the government is spending all of its oil revenues on day-to-day expenses. Instead, debt like the latest bank loan is likely to become the PIF's biggest source of cash.
With two big loans now outstanding – the PIF took out its first, an US$11bn five-year facility, in 2018 – expectations are growing that the PIF could now turn to the bond market, a move that would force it to lift the veil of secrecy around its finances.
“When it comes to loans, it's more about relationships with banks and giving them assurances – so disclosures don't need to go out in the open,” said Saliba. “But if they're looking to tap the bond market – and they could – they will have to open up their books for sure.”
A recent hire by the PIF certainly points in that direction. Fahad Al-Saif joined the fund in January as head of corporate finance. He was the man who set up Saudi's sovereign debt management office, paving the way for the country's successful bond programme.
The PIF was meant to get a US$100bn windfall from the IPO of Saudi oil giant Aramco. When that got delayed, it took out the US$11bn five-year bank loan to tide it over. The listing eventually raised just US$29bn.
To fill the shortfall, in 2018 the PIF decided to sell a stake it owned in chemicals giant Sabic to Aramco for US$69bn. It is still waiting to be paid. With Aramco having to maintain its dividends to help balance the government’s books, it won't fully pay for Sabic until 2028.
Big shift
A bond deal would require a big shift. Until now, the PIF has never given a breakdown of the US$400bn of assets it has under management. Just under US$96bn of shareholdings have been declared under compulsory reporting requirements – in Saudi Telecom, National Commercial Bank, Uber and Carnival.
It has also invested US$45bn in SoftBank’s Vision Fund, which lost US$18bn last year, and has announced joint ventures with Blackstone, Russia and France – but details are thin. The rest of the US$400bn is believed to be invested in privately held Saudi companies.
“There is not a lot of info given to banks,” said one banker involved in the latest loan. “PIF is like a sovereign and like any sovereign it can be difficult. They have to be very careful what they disclose to banks – especially in Saudi where a lot is very confidential.”
But while banks are willing to turn a blind eye in the hope that cosying up to the PIF will lead to other work in Saudi, bond investors may be more demanding. Apart from the lack of disclosure, there are also concerns about due diligence at the fund and how the PIF spends its money.
The PIF’s equity bets last March are a case in point. While the trades ended up generating a profit, such short-term punts are usually associated more with hedge funds than sovereign wealth funds. The PIF has also been linked to other surprising transactions, including a failed attempt to buy English football club Newcastle United.
“The idea is that these funds are meant to be used for long-term investments to promote the government's diversification agenda,” said Alexander Perjessy, a senior analyst covering the region for Moody’s. He expects the PIF to target private money to coinvest in projects.
“Many of these projects are at various different stages of implementation, with different timelines to develop and to finance them,” he said. “There will be some seed money at the beginning, but the rest will be either financed at the project level or will be financed by private investors.”
The ambition of the Vision 2030 plans is also raising eyebrows. The PIF has been tasked with creating 1.8m jobs over the next four years and setting up dozens of new companies – including weapons manufacturers, a heli-taxi firm and a rival to Amazon – as well as “giga projects” like Neom, a futuristic city on the Red Sea coast.
Potential for failure
The potential for failures is, of course, huge. While bondholders may take comfort from the assumption of an implicit guarantee from the Saudi government, what would happen if there was a sudden change of leadership in the kingdom?
It is no coincidence that the Vision 2030 plans were announced in the aftermath of the Arab Spring. But analysts believe that at its heart is a more fundamental pragmatism from the Saudi leadership: a realisation that oil will not always provide for a rapidly growing population that want good jobs.
“It’s less of a concern that an Arab Spring might take place,” said Perjessy. “It's more a realisation that oil prices are unlikely to go back to US$110 or US$120, and that the government and the economy have to find other ways … to support the living standards of the population.”
After racking up US$200bn of debts in just a few years – and with more to come to fund Vision 2030 – the government needs its plan to work. Failure could leave it with a huge bill to pay, and create a dangerous feedback loop.
“At some point, the pressure will mount for the government to create those jobs in the public sector,” Perjessy said. “They will be jobs that will ultimately end up on the government's balance sheet in the form of higher debt. Such a costly job creation will not be fiscally sustainable.”
The PIF did not respond to requests for comment.