Khashoggi to Aramco attacks: Saudi ‘Vision 2030’ clouded by risks

Investors can tolerate a lot when there are deals to be done and money to be made. In the case of Saudi Arabia, the government’s human rights violations at home and abroad failed to deter the titans of global capitalism from feting Crown Prince Mohammed bin Salman (MBS) as he peddled his grandiose Vision 2030 blueprint for diversifying the kingdom’s economy away from oil. 

Until Saudi journalist Jamal Khashoggi was murdered.

Khashoggi’s killing in the Saudi consulate in Istanbul a year ago this week proved just how powerful a deterrent reputational risk has become in the age of “woke”. As details of Khashoggi’s murder were drip-fed via the Turkish media to a shocked global audience, business A-listers bailed in droves from the Saudi Public Investment Fund’s (PIF) annual “Davos in the Desert” summit. Top executives who boycotted sent lower-ranking ones in their stead. 

If the absence of marquee speakers on the website for this year’s investment summit later in October is anything to go by, the brightest stars of business may have concluded that a photo op with MBS is something they could still do without for now.

As happens with most scandalous episodes, though, the more time passes, the more investors seem willing to look past the Khashoggi affair, even if United States intelligence concluded that MBS had ordered Khashoggi’s murder. That finding didn’t stop US President Donald Trump from lavishing praise on MBS during the G20 summit in July.

But as reputational risk recedes, a new set of threats is emerging, casting doubt over the kingdom’s ability to get investors to buy into MBS’s Vision 2030 on the scale needed to decisively launch Saudi Arabia in a new, more sustainable economic direction. 

Vision in meltdown

Successfully diversifying away from oil hinges on Riyadh reinvesting fossil fuel wealth into growth industries of the future and convincing the private sector, both foreign and domestic, to invest in the kingdom. 

Investor appetite in April for the $12bn debut bond offering by state oil giant Saudi Aramco was ravenous. The kingdom’s rehabilitation got another shot in the arm in September when the world’s biggest fund manager, BlackRock, announced it had opened an office in Riyadh.

More good news dropped on Monday when government figures showed that non-oil economic growth in the second quarter of this year accelerated at its fastest pace since 2015. And an executive from Aramco announced on Monday that full oil production and capacity had returned to the levels they were at before the September 14 attack on the company’s facilities. 

“By September 25 we were able to restore all capacity that we had before the attacks,” Aramco’s trading arm chief, Ibrahim Al-Buainain, told a conference in the United Arab Emirates.

But not all of Monday’s news was positive for the kingdom. Overall, Saudi Arabia’s economic growth decelerated to a mere 0.5 percent in the second quarter, largely due to declining oil output. The anaemic growth rate sparked talk of recession risk.

There was also more disappointing news on Monday for Softbank Group’s Vision Fund, in which the kingdom’s PIF has a $45bn stake. Vision Fund invests in tech-oriented startups, the kind of industries that are critical to the kingdom’s diversification efforts, but that mark a radical departure from the government’s previous conservative approach to investing.

On Monday, one of Vision Fund’s flagship investments, We Company, parent of co-working startup WeWork, abandoned its plans for an initial public offering (IPO). The move was no surprise after a punishing few weeks that saw We Company’s founder removed from his role as the chief executive. Analysts question the firm’s business model and reports that the startup had considered a valuation as low as $10bn to $12bn before ditching its flotation plans. In January, Softbank had invested in We Company at a $47bn valuation.

The We Company meltdown was not the only Vision Fund investment to disappoint this year. Two other high-profile names in the portfolio of startups including ride-sharing giant Uber Technologies Inc and messaging platform Slack Technologies Inc have both underwhelmed since making their stock market debuts.

“The crown prince is looking to take more risks to increase returns,” said F Gregory Gause, professor of international affairs at the Bush School of Government, Texas A&M University.

“While the jury is still out on the long-term results, the problem with risky investment strategies is that they sometimes lose money,” he told Al Jazeera.

Vision in flames

Monday’s most painful gut punch to Vision 2030 was arguably delivered by New York-based ratings agency Fitch, which downgraded Saudi Arabia’s credit rating to A from A+. Fitch cited rising geopolitical and military tensions in the Gulf and “the vulnerability” of the kingdom’s economic infrastructure for the slight downgrade.

“Although oil production was restored fully by end-September, we believe that there is a risk of further attacks on Saudi Arabia, which could result in economic damage,” said Fitch.

The attacks on Aramco’s oil facilities at Abqaiq and Khurais were not the first on Saudi’s oil sector, but they were the most brazen. And investors were primed for maximum scrutiny, given that the attacks happened less than a week after the kingdom’s newly installed Energy Minister Prince Abdulaziz bin Salman had fuelled expectations that Aramco’s long-awaited IPO would happen before the year was out.

The Aramco IPO, with which the Saudis are pressing ahead, is a linchpin of Vision 2030’s plan to plough vast sums of oil wealth into new industries.

Before this latest attack, analysts and energy experts had already baulked at the $2 trillion valuation MBS was hoping to achieve for the company. Many reckoned $1.5 trillion was a more realistic figure, given the outlook for oil prices and the mounting pressure climate activists are placing on governments to aggressively tackle greenhouse gas emissions.

There was also the question of just how much Saudi officials were willing to reveal about its biggest money-spinner.

“It is unlikely that private investors will be given the kind of information on Aramco that they would expect on a private sector IPO,” said Gause. “That might reduce investor appetite for the shares.”

To whet that appetite, Aramco announced on Monday that it would boost dividend payouts in 2020. If that fails, the kingdom is also reportedly pressuring wealthy Saudis to step up and take a stake to bolster the valuation.

Such strong-arm tactics could work. But forcing investors to buy into a vision is not the same as convincing them.