Wednesday, April 27, 2016

Saudi Vision 2030

"Saudi Vision 2030": What it Means to Investors
By James Garrett Baldwin
It is perhaps the boldest set of economic reforms since the Saudi Kingdom was founded in 1932. After decades of weak reforms yielded barely recognizable benefits to the nation, the country is trying to do something that few anticipated it could.
Saudi Arabia is diversifying its economy away from oil revenues in order to bolster economic growth and meet its significant social spending obligations outlined in recent years. With oil prices falling significantly over the last year-and-a-half, the nation needs to find ways to increase investment in the nation. Roughly 70% of the country’s revenue in 2015 came from oil production. Profitability fell as oil prices declined, generating a near $100 billion budget deficit (for more, read How Cheap Oil Will Hurt the Saudi Arabian Economy.)
At the center of this economic liberalization is a long-term strategic plan called “Saudi Vision 2030.” Outlined today by Deputy Crown Prince Mohammad bin Salman Al-Saud, the goal is to shift the oil-producing giant into the 21st century and bolster investment in the country in order to spur alternative revenue streams. The Prince argues that the nation does not require oil production to survive, something that will be critical in the future as nations move toward more alternative forms of energy (for more, read Why Saudi Arabia Just Issued $10 Billion in Bonds (JPM)).
The reforms are quite bold. Here’s a list of several key points from the Prince’s announcement.
First, the Saudi Kingdom plans to float roughly 5% of shares in its state-owned oil giant Aramco. The prince says that floating just one percent of the company would create the largest IPO in market history, as the firm is valued between $2 trillion and $3 trillion (for more, read A Saudi Aramco IPO? Why You Should Steer Clear).
The Prince said the country plans to use money raised through the IPO to establish a sovereign wealth fund, which would be used to fund new investments in other industries. The value of the fund? The Prince is aiming for $2 trillion.
The fund would contribute to the larger goal of economic diversification. The nation plans to invest mining and to bolster its military production. The country is one of the world’s three largest arms purchasers, and domestic development could be a boon to its private sector.
Perhaps most intriguing is the liberalization toward women in the economy, a much welcome action from human rights, worker rights, and women’s rights groups. The nation will provide measures to increase Saudi women in the domestic workforce. According to the International Labor Organization, just 18.6% of Saudi women hold jobs in the Saudi economy.
Finally, the nation plans to establish a new visa system that will bolster its long-term workforce.
Saudi Arabia’s bold “Saudi Vision 2030” is a remarkable overhaul of decades of investment and structural policy. By diversifying its economy away from the oil sector, the nation aims to be a hub of innovation and investment for decades to come and to reestablish its strength in the Middle East as an economic powerhouse.
For more, read Saudi Aramco: An IPO for the World's Largest Firm?
Read more: "Saudi Vision 2030": What it Means to Investors | Investopedia
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