Saudi Arabia: Sovereign Wealth Fund Gets A Boost

Saudi Arabia is in the midst of epochal reform to shift its economic model and diversify its investment base. As part of this process, known as Vision 2030, Riyadh announced Nov. 30 that it will transfer $27 billion (100 billion riyals) to the Public Investment Fund (PIF), a sovereign wealth fund established in 1971 using oil revenue. The transfer will increase the PIF's asset base to $187 billion.

With this infusion, the Saudi government hopes to facilitate some of the groundbreaking investment agreements it has signed over the past few months. Already in 2016, PIF announced a raft of investment deals: $3.5 billion into Uber, up to $45 billion in Softbank's new $100 billion tech fund as well as $500 million into Noon, a regional e-commerce startup founded by Mohamed Alabbar. And on Nov. 13, it announced that it would take a 50 percent stake in Alabbar's Adeptio investment fund valued in the billions of dollars.

The implementation of Vision 2030 has already seen Saudi Arabia enhance the status of the PIF and move assets away from the Saudi Arabian Monetary Agency, the kingdom's central bank. Saudi Arabia hopes to boost the PIF to surpass the Norwegian Government Pension Fund, which is currently the world's largest sovereign wealth fund. Much of the expansion of PIF would be tied to the capitalization provided by the 5 percent Saudi Arabian Oil Co. (Aramco) initial public offering and the eventual transfer of Aramco ownership to the fund. The Nov. 30 transfer, although a small part of the broader process, represents a key step forward.

Historically, Saudi Arabia's strategy has been to pursue low-risk investments and to use its oil revenue to purchase assets such as U.S. Treasury bonds. With Vision 2030, this is set to change. Riyadh now aims to emulate the strategies of other Gulf states and oil-producing nations, which use their sovereign wealth funds to increase exposure to non-oil industries. Saudi Arabia is targeting primarily international investment with the goal of reaching $2 trillion in total value but also hopes to boost domestic investment in non-oil sectors.

But the transition will be difficult and has to be unrolled carefully. Already, it has caused economic ripples. Earlier this month Tadawul, the local Saudi Arabian stock exchange, was spooked by several reports that the PIF was considering divesting stakes in Saudi Arabian companies to finance its push overseas. The fund holds about $100 billion worth of shares in companies listed on Tadawul. The PIF currently has about 95 percent of its assets in domestic investments with 5 percent in foreign ones. Earlier, Deputy Crown Prince Mohammed bin Salman said the fund would increase its foreign holdings to encompass roughly half of its value, although the PIF has denied his assertion in hopes of calming the domestic market. Injections like the one recently announced can serve that expansion without forcing the PIF to pull out of domestic investments.