Saudi Arabia is 'gradually running out of money' and needs IPO to fund reforms, ex-CIA chief says

Key Points
  • Saudi Arabia is going to float a small portion of its state oil giant Saudi Aramco, the most profitable company in the world, in December.
  • The IPO was first flagged in 2016 by the now-Crown Prince Mohammed bin Salman.
  • The listing is seen as part of the crown prince's "Vision 2030" program of economic and social reforms designed to diversify the kingdom's economy and reduce its dependence on oil.
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Saudi Arabia is 'gradually running out of money,' former CIA director says

Saudi Arabia needs the initial public offering (IPO) of its state oil company to be successful as it needs to attract outside investment and, frankly, it needs the money, the former chief of the CIA David Petraeus told CNBC Thursday.

"It's a fact that Saudi Arabia is gradually running out of money, they'd be the first to acknowledge that the sovereign wealth fund has been reduced, it's somewhere below $500 billion now," Gen. David Petraeus, who is currently chair of the KKR Global Institute, told CNBC's Hadley Gamble in Abu Dhabi.

"The (budget) deficits each year, depending on the price of Brent crude, can be anywhere from $40 to $60 billion depending on some of their activities in countries in the region."

"The bottom line is that they need the money, they need that outside investment that is crucial to delivering 'Vision 2030' which cannot be realized without outside investment, this is just one component of a number of different initiatives that they're pursuing to try to attract that outside investment," he added.

Saudi Arabia is going to float a small portion of its state oil giant Saudi Aramco, the most profitable company in the world, in December. The IPO was first flagged in 2016 by the now-Crown Prince Mohammed bin Salman. He said then that he believed the company was worth around $2 trillion. The listing is seen as part of the crown prince's "Vision 2030" program of economic and social reforms designed to diversify the kingdom's economy and reduce its dependence on oil.

Saudi Arabia does not openly publish the amount of assets it holds within its sovereign wealth fund, known as the Public Investment Fund (PIF). The Institute of International Finance estimated in a report in June that the kingdom has assets worth around $300 billion with roughly a quarter of its holdings overseas. The Sovereign Wealth Fund Institute puts the figure closer to $320 billion. On its website, PIF says it "seeks to become one of the largest sovereign wealth funds in the world."

Saudi Arabia's economy is still largely reliant on oil exports, and lackluster oil prices (a barrel of Brent crude is currently priced at $63) have prompted the country's budget deficit (the amount by which its spending exceeds its revenues) to widen. In 2018, the budget deficit was forecast at around 136 billion riyals (or around $36 billion), according to the kingdom's Ministry of Finance. It's expected to be a similar amount in 2019. And in 2020, the kingdom expects the deficit to widen to $50 billion, the kingdom's finance minister said in October, according to Reuters.

Gen. David Petraeus, Former CIA Director, Fmr. Central Commander and American commander in Iraq.
Adam Jeffery | CNBC

Aramco has not yet revealed all the details of the size and scale of its share offering but said last weekend that it will sell up to 0.5% of its shares to individual investors. The listing on Saudi's Tadawul exchange next month could form part of the largest IPO in history. A final offer price, as well as the number and percentage of company shares that will be sold, will be determined in early December. Analysts' valuations of the company have varied from $1.2 trillion to $2.3 trillion.

Petraeus said there were "a number of different elements that will determine the success of Vision 2030" and that it was in "everyone's interests" to see the kingdom succeed and to see it carry out reforms.

He said there had been some "missteps — some of them truly grievous, the horrific murder of (Saudi journalist Jamal) Khashoggi being foremost among those" but added that "at the end of the day, we all want Saudi Arabia to succeed, and for that to happen Vision 2030 is some element of that."

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Investor confidence

The murder of Khashoggi, a journalist and vocal critic of the Saudi regime, in a Saudi consulate in Istanbul in October 2018 at the hands of a Saudi hit squad caused an international uproar. Saudi Arabia denied any involvement in the murder but a United Nations special rapporteur on extrajudicial executions said in the summer that the evidence suggested that Khashoggi was "the victim of a deliberate, premeditated execution, an extrajudicial killing for which the state of Saudi Arabia is responsible under international human rights law."

The murder shook investor confidence with many big name investors and companies pulling out of the much vaunted Future Investment Initiative investment conference in Saudi Arabia last year. Petraeus said he was also among those who canceled his attendance.

Asked if global investment firm KKR (whose Global Institute he chairs) would put money into Saudi Arabia, Petraeus said it needed to regain investor confidence.

He said KKR had put money in the region, having put $2 billion into the UAE's Abu Dhabi National Oil Company (ADNOC) (together with BlackRock which also put in $2 billion), but said that was the first direct investment by KKR in the region.

"We are looking elsewhere in the region. But as we do that we evaluate not just the financial aspects of the deal but also the geopolitical and security risks, the macroeconomic situation and the environmental, social and governance issues."

"You have to have confidence in the rule of law. And what Saudi Arabia has to do is regain confidence of all the investors of the world so that it can attract the kind of outside investment that is necessary for Vision 2030's success."