Wheels of Change Sweep Saudi Arabia

Public Investment Fund invests $3.5 billion in Uber as part of Vision 2030 plan

The Kingdom of Saudi Arabia is on the threshold of a new era after it made several strategic investments in foreign companies as part of its Vision 2030 plan, aimed at reducing dependence on oil production and achieving diversification as part of its long-term growth strategy. The Kingdom is also looking to boost small and medium-sized businesses, drive exports, and improve economic competitiveness to provide jobs to its population of 28 million. At the crux of the Vision 2030 plan, announced by Deputy Crown Prince Mohammed bin Salman, son of King Salman, is Saudi Arabia’s Public Investment Fund (PIF), which is seen to emerge as the world’s largest state investment fund with $2 trillion in assets. Read more about how PIF can transform the Kingdom in the near term.

Source: Wikipedia
Source: Wikipedia

Saudi Arabia’s PIF has invested $3.5 billion in San Francisco-based Uber Technologies Inc. for approximately 5% stake, as reported by Reuters on June 2nd, 2016. Uber, a ride-hailing service that connects passengers and drivers globally, is most-used form of transport for Saudi women, who are not allowed to drive. With this investment, Uber is valued at roughly $62.5 billion. The PIF investment is expected to help Uber, which has been operating in Saudi Arabia since early 2014, to expand its global operations.

PIF Managing Director, Yasir al-Rumayyan, will become a director on Uber’s board, giving the Saudi government a say in Uber’s management decisions. The deal could also help mitigate any legal obstacles for Uber’s operations in Saudi Arabia.

Also operating in Saudi Arabia is Middle East-based ride-hailing firm Careem. Both these ride-hailing services are preferred over the traditional taxis, which are often seen as inconvenient and potentially dangerous for Saudi women. It therefore comes as no surprise that women account for about 80% of the riders for both Uber and Careem. What’s more, the Uber investment achieves significance since Prince Mohammed plans to increase women’s workforce participation to 30% from 22% by 2030 to raise household incomes. In this regard, women feel that the lack of affordable and convenient transport for them can hinder their chances of finding employment.

New economic strategy to wean off oil

Saudi Arabia is reaching out to foreign multinationals to invest in their country more than ever before, signaling a reversal of its earlier trend. In a press release on Monday, May 23rd, 2016, General Electric (NYSE: GE) announced that it has committed to investments worth over $1.4 billion in Saudi Arabia to support the kingdom’s Vision 2030 plan, aimed at reducing dependence on oil production and achieving diversification.

For decades, Saudi Arabia took a conservative approach to its investments in the global markets, using the central bank as its main sovereign fund. It mainly invested its oil wealth in assets such as U.S. Treasury bonds and bank accounts. Saudi Arabia’s heavy dependence on oil, compounded by the sharp drops in oil prices, has caused state revenues to drop substantially. What’s more, in 2015, Saudi Arabia saw a nearly $100-billion deficit following a fall in global oil prices by more than 50% since June 2015. Saudi Arabia’s economy, which is predominantly fueled by oil revenue, is faced with a crisis owing to stunted public sector growth. As part of its new economic reforms, the Kingdom is looking to diversify into those sectors that do not rely on the country’s oil resources.

Deputy Crown Prince, Mohammed bin Salman, has indicated that the PIF kitty would expand from 600 billion riyals ($160 billion) to over 7 trillion riyals over the next few months. Profits from the PIF would help economic diversification and substitute dwindling oil revenues.

The Kingdom takes bold new step

The Kingdom of Saudi Arabia is taking bold measures in following the footsteps of high profile businessman Prince Alwaleed bin Talal, whose Kingdom Holding Co. has investments in the Euro Disney theme park, Four Seasons hotels, News Corporation, and Citigroup. In late 2015, Kingdom Holding became the second-largest shareholder in Twitter Inc. (NYSE: TWTR), and invested more than $100 million in Lyft Inc., also a San Francisco-based ride-hailing app and a rival to Uber. Not far behind, PIF acquired a 38% stake in the engineering unit of South Korea’s Posco for $1.1 billion also in 2015. So far, Prince Mohammed stated that only about 5% of the fund is currently invested abroad, as per a Bloomberg’s interview published on April 1st, 2016.

With these measures in place, it remains to be seen whether Saudi Arabia can achieve sustainable growth from sectors other than oil.

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