Petraeus: Saudi Arabia Is Running Out of Money

Saudi Arabia is in the throes of a fiscal crisis that is leading the country on a search for new revenue, including an upcoming initial public offering for Aramco, its sovereign oil company, former CIA chief David Petraeus told CNBC.

The kingdom, said Petraeus, who commanded troops in the Middle East as a US Army general, is going broke due to weak oil prices, so an IPO of Aramco stock is a lifeline. “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,” he said. “The deficits each year, depending on the price of Brent crude, can be anywhere from $40 [billion] to $60 billion depending on some of their activities in countries in the region.”

Another fiscal drain, he noted, is the Saudis’ ambitious development plan, which the Aramco IPO proceeds would help fund. “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.”

The Vision 2030 program, launched in 2017, seeks to boost Saudi Arabia’s economy with non-oil revenue. The decline in oil prices has led to a financial crunch for the country. With Brent crude oil at $62 a barrel, the kingdom needs to fill the revenue gap that opened since the heyday of $100 a barrel petroleum and the emergence of other oil markets. In 2018, the budget deficit was about 136 riyals (around $36 billion) or 4.6% of GDP. In 2019, the estimated deficit is 131 riyals (around $35 billion) or 4.7% of GDP. Next year, it is projected to widen to 187 riyals (around $49 billion) or 6.5% of GDP.

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Investors are lining up for the IPO of Aramco in December. The IPO is expected to generate anywhere from $40 billion to $100 billion. Nine US banks are underwriting it. Countries from Brazil to China have expressed interest. RDIF, Russia’s sovereign wealth fund, is reportedly enlisting pension funds to get in on the action. Cash generated from the IPO will go to Saudi Arabia’s sovereign wealth fund, which owns the majority stake of Aramco. Valuations of Aramco range from $1.2 trillion to $2.3 trillion.

The Sovereign Wealth Fund Institute estimates that the current assets of Saudi Arabia’s Public Investment Fund are valued at $320 billion. The fund is invested in US firms through its $100 billion SoftBank Vision Fund. One of the mandates of the 47-year-old fund is to help the Saudi economy transition to less oil dependency.

Some of the funds’ investments center on autos, whether gasoline-powered or not. In 2016, the fund poured $3.5 billion into Uber, and took a 5% stake and a seat on its board of directors, which was filled by Yasir al-Rumayyan, managing director of the fund. This week, it invested $400 million into former Uber CEO Travis Kalanick’s new company, CloudKitchens. In August, the fund invested $1 billion in Lucid Motors, an electric auto startup. Earlier this year, the fund purchased a $2 billion stake in Tesla and a $461 million stake in Magic Leap, an augmented reality startup.

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Tags: Aramco, IPO, Public Investment Fund, Saudi Arabia

The number of state and local pension funds receiving Texas Pension Review Board recommendations for overall financial health reached a record high in 2019, according to the Texas Association of Public Employee Retirement Systems (TEXPERS).

“This is indisputably the best overall set of data we’ve seen regarding the aggregate health of Texas’ state and local pension funds,” Art Alfaro, executive director of TEXPERS, said in a release. “Clearly, the public policies established by the Texas Legislature are achieving intended results.”

A special report issued by TEXPERS said the 99 state and local pension funds that report financial statistics to the review board significantly improved their aggregate amortization periods. The report said that 45 of them achieved PRB-recommended amortization period of 0-25 years, which is the most that reached this level in eight years. The PRB has said that amortization periods are the single “most appropriate” measure of public retirement systems’ health.

“The most compelling finding is that amortization periods continued to improve despite a very bad year-end in the markets in 2018, and despite systems’ continuing efforts to lower target rates for investment returns,” Alfaro said. “If target rates had remained the same, we might have seen even greater numbers of funds improving their amortization periods.”

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The report emphasized, however, that amortization periods are not the only measure of pension fund health and said the PRB has developed other tests in recent years to trigger “intensive reviews.” The evaluations are intended to help detect whether certain measures might be giving warning signs before “worrisome amortization period changes” occur.

“Our member pension systems can always strive to do better and the Pension Review Board’s expansion of issues of concern beyond amortization periods is warranted,” said Alfaro. “The intensive reviews it established a few years ago to explore other measures of pension fund health may already be having effect in the data here.”

The analysis also found that the trend of pension funds lowering their target investment return rate continues to rise. For the first time in decades, no Texas pension fund has a target investment return rate greater than 8%. Only five have a target of 8%, which is down from 11 last year, and 21 in 2017. Meanwhile, the number of pension funds with investment return target of 7% has more than doubled in the past two years to 16 in 2019 from 12 in 2018 and 7 in 2017.

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Tags: Texas Association of Public Employee Retirement Systems (TEXPERS), Texas Pension Review Board