Saudi Arabia, a country implementing austerity measures in a depressed oil market, has been dipping deep into its national reserves to fund a stock buying spree.
In the span of two months, US$40 billion in reserves have been transferred to the kingdom’s Public Investment Fund (PIF), according to the government.
Finance Minister Mohammed al-Jadaan assured the public in a televised interview with Al-Arabiya in early May that, “this procedure was taken after comprehensive study and taking into consideration the sufficient level for foreign-currency reserves.”
Gross official reserves now stand at just over $450 billion, a comfortable cushion, but also a level not seen in Saudi Arabia since the 2008 financial crisis. At their highest point in 2017, the kingdom’s reserves reached $744 billion.
The PIF has used the injection to take significant stakes in a host of big-name, mostly US companies in industries suffering amid the Covid-19 financial recession.
In April, those purchases included an 8.2% stock in struggling cruise line operator Carnival, and a 5.7% share in events promoter Live Nation.
PIF executives see the move as a smart way to capitalize on the downturn.
A spokesman for the fund told the Riyadh-based Arab News the massive transfer will “allow us to tap into a number of local and global investment opportunities at attractive prices.”
He added,”This includes investments in sectors that are well positioned to drive economic growth and value creation and derive benefits for the citizens of our country well beyond the current crisis.”
The PIF falls under the umbrella of Crown Prince Mohammad bin Salman’s economic overhaul, whose overriding goal is to diversify the Saudi economy for the post-oil era.
But the fund has also embraced the oil-based present, buying up significant shares in energy giants Shell, BP and Total, as well as the carbon-guzzling cruise line and hotel business via Carnival and Mariott.
The massive transfer of foreign reserves may raise eyebrows, but Saudi Arabia maintains a comfortable cushion, analysts say.
“Reserves are important because the Saudi riyal is pegged to the dollar and imports most of what it consumes. Therefore reserves are needed to maintain the exchange rate [and] a shortfall of reserves could result in a break of the peg and a devaluation of the Saudi Riyal,” said Ali al-Salim, a Gulf-based investor and adviser.
He notes there are no unanimously held views on adequate reserve levels, but a country should be able to cover several months-worth of imports.
Saudi Arabia has far more than that.
“At the end of April, the latest data, they had $437 billion of reserves, excluding SDRs, gold, and position with the IMF – pure foreign currency,” said Alexander Perjessy, vice president and senior analyst at Moody’s Investor Service in Dubai.
“That’s a very strong reserve position,” Perjessy told Asia Times.
One metric to determine reserve adequacy is how long a country can continue to import goods and services absent any exports. By this measure, Saudi Arabia has two years of reserves to fall back on, according to the analyst.
In comparison, he says, Oman has about five months.
Perjessy notes the Saudi monarchy did not simply raid its central bank reserves to inject cash into the sovereign wealth fund.
“The government has deposits with the [Saudi Arabian Monetary Authority], its fiscal reserves, sitting in a reserve account as well as a revolving current account. There has been relatively little movement on those two accounts in March and April, according to the data. That would not indicate government took money and moved it to the PIF,” he said.
Rather, it appears the PIF saw an opportune moment to deploy its riyals – including the windfall from the Aramco IPO – on the global markets. To do that, it went to the central bank to exchange local currency holdings for dollars at the pegged rate.
“Given the exchange rate peg, a large overseas investment by a Saudi entity would likely be reflected in a decline in central bank foreign currency reserves, especially now when the country is no longer running a current account surplus,” said Perjessy.
Salim points out that “since Aramco’s international IPO never happened, the kingdom had to resort to other sources of capital, such as foreign exchange reserves held at SAMA, the central bank.”
“They’re betting they can make a higher return than the one on their US treasuries, whose sale was the major source of proceeds,” he told Asia Times.
Taking a gamble
The PIF gamble on the New York Stock Exchange comes at a time when the Saudi government is implementing extensive austerity measures at home, including a tripling of the value-added tax to 15%.
While the timing may appear awkward, experts say the PIF is fulfilling its role.
“You can debate whether this is the right thing for them to do, given the economy potentially needs public sector investment given the negative impact of the Covid crisis on non-oil growth, but the PIF is looking at where the projects are,” said Perjessy.
“It’s not a grant-making institution or a fiscal institution. It’s an investment fund.”
The Moody’s analyst notes that local projects are not currently at a scale that can take advantage of such large injections of money.
“The PIF is looking at where the projects are,” Perjessy said.
The alternative to investing abroad would be to invest in domestic sectors at home, “but that would require they have those projects at a stage where that amount of cash can be deployed.”
With short- and medium-term US interest rates close to zero, the PIF is betting they can generate a significant return investing in equities, says Salim.
“Higher returns will help improve the kingdom’s public finances, marginally diversifying revenue streams away from oil,” he said.
Marginally, because many of the companies whose shares the PIF has scooped up, are in or closely linked to the energy sector.
“Petroleum companies don’t diversify the Saudi economy, but cruise liners could be argued as being counter-cyclical to oil prices,” said Salim.
Oil companies and cruise lines also aligns with the PIF’s strategic goals of owning substantive stakes in the oil and gas business across the entirety of the supply chain, said a Gulf-based economist, who is not authorized to speak to the media.
Investing in oil companies and cruise and hotel chains do not necessarily contradict the crown prince’s agenda.
“You can see how it fits into the bigger picture,” said Perjessy.
“You’re trying to develop tourism on the Red Sea. If you take a stake in the world’s biggest cruise company, it makes perfect sense strategically,” he said, citing the planned megacity of NEOM as an example of the kingdom’s ambitions.
As for buying stocks in oil companies, he points out that “BP has been pushing the sustainability agenda … and the crown prince has been talking about renewables in Saudi Arabia.”
The alternative, he says, is to invest in domestic economic sectors, something the Saudi finance minister has pledged to do, namely in regards to defense production.
“But that would require they have those projects at a stage where that amount of cash can be deployed,” said Perjessy.