(Bloomberg) —
Saudi Arabia’s biggest listed companies, including energy giant Aramco, will reduce their dividends and redirect the money to the local economy as the crown prince tries to get his economic overhaul plan back on track.
Twenty-four firms such as Saudi Basic Industries Corp., Almarai Co., Saudi Telecom Co. and National Shipping Co. have agreed to join the plan, contributing 5 trillion riyals ($1.33 trillion) of domestic capital spending over the next 10 years, said Crown Prince Mohammed bin Salman.
The new plan comes after last year’s coronavirus pandemic and oil market turmoil created a double crisis for Saudi Arabia, setting back the 35-year-old’s goals to boost the non-oil economy and slash unemployment.
Minority shareholders of Aramco — the world’s biggest oil company and 98% owned by the kingdom — will still get dividends, the kingdom’s de facto leader said. Investors in other firms will profit because stock prices will rise as the extra investment boosts the economy, he said.
The companies will benefit from extra subsidies and the ability to lobby for law changes, he said. The Saudi stock market was up 1.5% at 10.43 a.m. in Riyadh, while Aramco shares gained 1.4%.
“What we’re trying to create is growth in Saudi Arabia: growth in GDP, more jobs in Saudi Arabia, more income to the Saudi government and a better life for Saudis,” the prince said Tuesday during a night-time briefing with journalists in Riyadh. “That will not harm the shareholders of those companies because instead of getting dividends in cash, you’re going to get growth in the stock market.”
Radical Transformation
Cutting dividends for reinvestment purposes is not necessarily negative news for investors in Saudi markets, according to Hedi Ben Mlouka, chief executive officer at FIM Partners in Dubai.
“You’ll lose on the dividend yield but you’ll gain on growth momentum,” he said to Bloomberg Television on Wednesday. “That’s the way any long-term investor should look at it. This is a country going through transformation. You need to accept change like this that is radical.”
The 5 trillion riyals from private firms is part of a 27 trillion-riyal investment strategy Prince Mohammed outlined for the next 10 years. Central government spending will account for around 10 trillion riyals, while the sovereign wealth fund previously announced that it plans to invest 3 trillion riyals on top of that.
Read more: Saudi Jobs for Saudis Is Crown Prince’s Generational Challenge
Another 4 trillion riyals will come from private investments, while the final 5 trillion riyals will come from ordinary consumer spending.
Diversify the Economy
The announcement underlined the extent to which the prince’s focus is turning domestic as he tries to diversify the economy of the world’s largest oil exporter and create enough jobs for the kingdom’s youthful population. It also showed that the government is counting on the struggling private sector to boost growth — which has long depended primarily on state spending.
“It’s definitely a squeeze on businesses, to mandate domestic investment,” said Karen Young, resident scholar at the American Enterprise Institute in Washington. “He’s seeing multiple generations of shared savings as his and his generation’s to spend, and so the gamble is that he’s going to be able to deploy this and jump-start a post-oil era.”
The government is still negotiating with other companies to join the program, but around 60% of the 5 trillion riyals will come from Aramco and Sabic alone.
“The dividend of the stakeholder for Aramco is going to be stable,” the crown prince said. “We promised them that, and we are going to keep our promise.”
The Saudi government promised before Aramco’s initial public offering in late 2019 that minority investors would get their share of a $75 billion annual dividend regardless of the oil price. That payout would last for at least five years, the government said.
Aramco increased borrowing last year, even as crude prices fell, to keep up payouts to both the state and stock-market investors.
The company already has a huge capital expenditure plan, saying it would spend $35 billion this year.
‘Going to Sell’
In return for the firms’ participation, “we’re going to give them subsidies, we’re going to change the laws as they wish and we’re going to do their wish list to make that happen,” Prince Mohammed said.
He also said that the kingdom’s wealth fund, the Public Investment Fund, would look to sell off some of its local holdings in order to support new investments.
Read more – What Now for Saudi Arabia’s Planned $2 Trillion Fund?
“We shouldn’t keep our share forever, whatever mature investment we have, we’re going to sell,” the prince said. “So if you own 70% of a company then that’s wrong — PIF would own 30% of that company and they will sell that 40%.”
Last year the PIF completed the sale of its 70% stake in Sabic to Aramco, in a deal that raised about $70 billion. The PIF holds large stakes in many Saudi companies, most notable Saudi Telecom Co and National Commercial Bank. The prince didn’t comment on any specific asset sales the PIF was planning.
Overall, 90% of the 27 trillion-riyal plan will come from within Saudi Arabia, he said. Around 2 trillion riyals is expected to come from foreign investment, including from the Middle East and Western and Asian investors. That would translate to more than $50 billion of foreign investment per year, compared to $4.6 billion in 2019.
“Yes, it’s ambitious. Yes we’ve said a lot of ambitious things in the past four years,” said the crown prince. “I believe we can deliver that in the next 10 years.”
(Adds stock-market reaction.)
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