Saudi Arabia, having forced down oil prices to try to push US shale oil producers out of business, is now having to address the problems of much less money flowing into its state coffers.
Its answer is an economic reform plan including selling off as much as five percent of its state energy giant Saudi Aramco and using the cash raised for a massive global investment fund.
After approval by the country’s rulers, Deputy Crown Prince Mohammed bin Salman, who oversees Saudi Arabia’s economy explained Saudi Aramco will be transferred to the existing Public Investment Fund.
Key to the success of the plan is the valuation of Aramco, which the prince said will be more than $2 trillion. He believes other assets – such as government land and monetary reserves – worth around $300 billion will be added to the fund, which is currently valued at close to $200 billion, and that will create a public investment fund of up to $3 trillion.
Low oil prices mean that Saudi Arabia is not bringing in enough money to cover its spending.
The Saudi government’s budget deficit widened to 14.8 percent of GDP last year, up from 2.3 percent in 2014.
The prince’s plan calls for a major shift away from oil earnings to other investments.
He says non-oil revenue should reach the equivalent of up to 140 billion euros by 2020 and 235 billion by 2030 – part of it from the diversification of investment, engaging in new opportunities and part of it from exploiting untapped assets that are not used now.
Saudi Arabia’s real GDP grew 3.4 percent last year, but the IMF anticipates this growth will slow to 1.2 percent this year and will be just 1.9 percent next year.
That reflects the fact that oil still accounts for somewhere around three quarters of Saudi exports.
The plan to accelerate away from petrodollars but keep the country’s economic engine running smoothly includes cutting unemployment to 7.0 percent from the current 11.6 percent and increasing women’s participation in the workforce to 30 percent from 22 percent.
It is also likely to push for improved governance, transparency and structural reform in many industries.
However sceptics point out the plan was short on details.