Four Things We Learned From Saudi Arabia's Deputy Crown Prince

Saudi Deputy Crown Prince Mohammed bin Salman gave a five-hour interview to Bloomberg News last week at the royal compound in Riyadh. Here's a breakdown of what he said.

1. The kingdom is thinking beyond oil.

The center piece of the 30-year-old prince's vision for a revamped Saudi Arabia is a plan is to turn the kingdom's Public Investment Fund into a sovereign wealth fund billed as the largest on the planet, a fund so large that the country will eventually rely more on investment income than oil income.

For decades, the world's largest oil exporter has kept most of its wealth at the Saudi Arabian Monetary Agency, ignoring calls from economists at home and abroad to create a separate sovereign fund. But with the slump in crude prices, the status quo can remain no more.

While an eye-grabbing figure, the fund's $2 trillion of assets would mainly be due to Aramco. The plan is to transfer most of the oil giant to the fund to sit alongside holdings in commercial and financial companies.

"Undoubtedly, it will be the largest fund on Earth," the prince said.

The fund will be so big that it could buy the world's four largest companies by market value.

2. The hole in the budget must be fixed.

Regardless of its size, one megafund won't solve all Saudi Arabia's problems. The kingdom's budget deficit reached almost 15 percent of the economy last year and unemployment among Saudis ages 30 or under was 29 percent last year.

So Prince Mohammed also proposes finding other ways to raise money, with plans to generate $100 billion per year in additional non-oil revenue by 2020. Measures range from cutting the cost of subsidies for household bills, taxes on consumers and a Green Card-style program for expatriates.

3. Even a partial Aramco IPO would dwarf all others.

The initial public offering of shares in Aramco could come as soon as next year and would be one of the biggest in corporate history. Bin Salman said that less than 5 percent of the mother company will be offered to the public as well as "a number of its subsidiaries." The rest would go to the megafund.

A back-of-the-envelope calculation puts the value of Aramco at about $2.5 trillion, using a conservative $10 per barrel for its reserves. But what foreign investors are willing to pay is unclear, given the fact the company has never published financial details. Based on the estimate, the IPO could raise as much as $125 billion.

4. There will be losers.

Changes to subsidies and new taxes and fees may be good for government coffers, but they also mean that Saudis, foreign residents and companies will need to cough up more money in a country where the population has grown accustomed to government largesse.

In the first reduction of energy subsidies announced in late December, the price of 91 octane gasoline rose 67 percent, though it is still among the cheapest in the world. Saudis rushed to the pumps to fill their tanks before the midnight price rise. The increase in water tariffs led to a flurry of complaintsthis month when Saudis received their new bills. Inflation accelerated to 4.3 percent in January.

© 2016 Bloomberg L.P. 

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