The Strategist

Saudi Arabia to create a hi-tech zone

10/26/2017 - 14:25

Yesterday, the authorities of Saudi Arabia announced how they intend to implement their previously announced plan to reduce the dependence of the country's economy on oil exports. This is planned to be done by building a new mega city, precisely, a large industrial zone for high-tech projects near the Suez Canal. The volume of investments is estimated at $ 500 billion. Funds will be raised, in part, through the sale of a portion of the shares of the oil company Saudi Aramco.

Jim Mattis
Jim Mattis
Crown Prince of Saudi Arabia, Mohammed bin Salman, speaking at a conference for investors in Riyadh, announced plans to create the largest special industrial zone on the border with Egypt and Jordan - NEOM. Its creation will help attract foreign investment in high-tech industries and reduce the outflow of capital from the country by expanding "a limited set of projects for domestic investment", Reuters quotes a message of the country’s sovereign investment fund PIF.

The zone will operate under a special regime of taxation and regulation of the labor market; it will also have an autonomous judicial system. All the necessary energy will have to be generated exclusively by solar and wind energy. The authorities hope that NEOM will become a testing ground for the use of drones, unmanned technologies and robots. It is assumed that investment in the zone’s creation will amount to $ 500 billion. This makes it the largest measure of the previously announced plan Vision 2030, which provides for the reduction of Saudi Arabia's dependence on oil exports.

The initiative to create a diversification program is attributed to Prince Mohammed bin Salman, who received the status of heir in June this year (he heads the Council for Economic and Development, CEDA, responsible for the program’s implementation). The goal stated in the document is making the country an "investment superpower and an intermediary country linking the three continents with each other". It says there was a reduction in the budget deficit, which sharply increased against the backdrop of declining oil revenues (the share of mineral products in exports is about 80%, while the Saudi real rate is pegged to the dollar and has not actually changed since the beginning of the decline in oil prices). According to the IMF forecast, the country's budget deficit could fall from 17.6% to 9.3% this year. However, the fund noted that further introduction of VAT and fiscal consolidation are necessary for further reduction.

The sovereign fund PIF is expected to become the main source of the zone’s financing. Yet now the volume of assets under his management, according to the Sovereign Wealth Fund Institute, is only $ 183 billion. Public placement about 5% of the shares of the oil giant Saudi Aramco Sharply, scheduled for the next year, may increase the fund’s capital. It is expected that this event will attract about $ 300 billion and will make PIF the largest sovereign fund in the world (the estimated cost of Saudi Aramco, whose assets will be transferred to fund management, exceeds $ 2 trillion). Sale of a larger share of the company is not excluded as well.

However, Riyadh does not expect any rapid effect of implementing such radical plans as the first stage of the project should be completed by 2025. Meanwhile, the country's leadership is still counting on growing demand for oil. Yesterday, Mohammed bin Salman said: "Between 2030 and 2040, energy consumption will grow, as it will be supported not only by energy production, but also by petrochemicals and other industries."


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