Saudi Arabia has transferred US$40 billion ($64.4b) of its foreign reserves to the Public Investment Fund to finance its overseas spending spree as the kingdom seeks to take advantage of the coronavirus pandemic by hunting for assets at knockdown prices.
Mohammed al-Jadaan, finance minister, said the funds were transferred to the sovereign wealth fund from the central bank "exceptionally" during March and April.
He told the Financial Times that the foreign currency would provide dollar liquidity to the US$325b PIF to allow it to continue investing overseas, both "tactically" and for the "long term".
"They are obviously looking for the right time and the right market," Jadaan said in an interview. "They have finished part of their investment and they may be waiting for opportunities to come in the weeks and months to come."
The PIF, which is chaired by Crown Prince Mohammed bin Salman, has already spent at least US$8b investing in US and European blue-chip companies, including BP, Royal Dutch Shell, Total, Boeing, Citigroup, Disney and Facebook, in the first three months of the year.
It has also led an investor group that has agreed to buy Newcastle United, the English football club, for £300 million ($597.1m).
The flurry of investment activity has taken place as Saudi Arabia faces its worst economic crisis in decades with the kingdom buffeted by the twin shocks of Covid-19 and the plunge in oil prices.
The government has been forced to increase borrowing and introduce tough austerity measures, including tripling VAT to 15 per cent and suspending cost of living allowances for the civil service, which employs most Saudi workers, as well as slashing state spending and delaying projects.
It has also had to tap its foreign reserves, which fell by about US$24b in March to about US$470b — the largest monthly decline on record. The budget deficit is expected to balloon into double digits this year.
Jadaan said in March that Riyadh would increase borrowing rather than use its reserves. But as the scale of the crisis became clear, he said in April that the government would need to further increase its borrowing by US$26b and could draw down up to US$32b of its reserves.
While the kingdom has substantial foreign reserves, economists say that Riyadh has to keep them above US$300b to preserve the riyal's peg to the dollar — which the government insists it will maintain.
Jadaan said Riyadh had conducted a lot of stress testing and that the authorities believe the foreign reserves "level is very high compared to what we think we need to maintain the peg and support the economy".
"The money is available and it's not going away — it is being invested and the returns will be available to us at any time," he said.
"The PIF has significant liquidity . . . and there are significant opportunities in the international markets . . . that call for some tactical investments by the PIF, which will yield, and have yielded, some very good returns."
Prince Mohammed has identified the PIF, which has the goal of becoming the world's largest sovereign wealth fund, as being the main vehicle to drive his bold plans to diversify the kingdom's oil-dependent economy and modernise the conservative nation.
It has huge domestic commitments, including the development of three "giga-projects" and incubating new local industries.
Jadaan said that despite the government's spending cuts, the development of the giga-projects, including Neom, a US$500b futuristic city that is Prince Mohammed's flagship scheme, would continue. "Segments of these, particularly Neom, that have been approved are on track. The only delays were caused by the lockdown," Jadaan said.
But the scale of transfers to the PIF could raise unease among Saudis at a time when they are enduring painful austerity measures.
Jadaan said "people understand you cannot be expected to suspend your assets that are generating revenue".
"We need these assets to finance your operations going forward. The returns from these assets are available to us as needed," he said.
"The rationale [is], instead of keeping reserves in fixed income and liquid assets, you invest in something that's dropping in value and has the potential to give you a very good return while you still have significant more liquidity and reserves available."
The PIF was transformed from a once-sleepy fund after Prince Mohammed took over as chair in 2015. It rose to international prominence after investing US$3.5b in Uber in 2016.
A few months later, it agreed to become the main investor in SoftBank's US$100b Vision Fund, committing US$45b to the biggest private fund of its kind ever created.
Written by: Andrew England and Ahmed Al Omran
© Financial Times