Crown Prince Mohammed bin Salman announced March 7 that a further 8% of Saudi Aramco’s equity has been transferred to the Public Investment Fund. The PIF now holds 16% of Aramco’s equity and the government 82.2%, with the remainder held publicly following the company’s 2019 initial public offering.

This latest equity transfer is no surprise given the ambitious target that has been set for growing the PIF’s assets under management. With the equity transfer valued at around 615 billion riyals ($164 billion), the PIF’s assets under management are now likely in excess of 3.3 trillion riyals ($890 billion) and rapidly closing in on the 2025 target of 4 trillion riyals ($1.1 trillion).

Beyond boosting its assets under management, the equity transfer has important implications for the financing of PIF investments and the central government budget.

Support for PIF Financing

The dividends the PIF will receive from Aramco will go a long way to meeting its financing needs in 2024. While the exact size of this need is unknown, the PIF’s governor, Yasir al-Rumayyan, recently said the fund is investing $40 billion to $50 billion (150 billion riyals to 190 billion riyals) annually and intends to raise this investment to $70 billion annually between 2025 and 2030.

Following the equity transfer, the PIF should receive around 70 billion riyals ($19 billion) of dividends from Aramco in 2024 (assuming the company maintains its dividends at the level of the third and fourth quarters of 2023). In addition, the PIF will continue to receive dividends from its other equity holdings. These could total around 19 billion riyals ($5 billion) in 2024. The PIF has also issued 26 billion riyals ($7 billion) of international bonds and sukuk (Islamic bonds) so far this year.

This suggests that additional financing of some 35 billion riyals to 75 billion riyals ($9 billion to $20 billion) will be needed by the PIF this year. This could come from five sources: further asset transfers from the government; additional debt issuance; a continued rundown of assets in the PIF’s Treasury pool, which stood at 82 billion riyals ($22 billion) at the end of September 2023; a further public sale of Aramco equity; and the sale of other PIF investments to free up capital for investing in new projects.

Government Budget Strain

The transfer of Aramco equity from the government to the PIF is a zero-sum game – what the PIF gains, the central government budget loses. Consequently, there will be a 35 billion riyal hole (the additional dividends on the 8% transfer) in the 2024 central government budget unless this transaction was factored into the originally published budget numbers, which appears unlikely.

The budget statement published in December 2023 projected a fiscal deficit of 79 billion riyals in 2024, or 1.9% of projected gross domestic product. If nothing else changes, the loss of dividends from the transfer will increase the size of the government’s fiscal deficit. There are also other pressures on Saudi oil revenue this year. With the OPEC+ alliance having recently announced the extension of its production cuts until the end of the second quarter, taxes received by the budget from Aramco may also be lower than budgeted, although this cannot be said with certainty given the oil revenue forecasts that underlie the budget are not published by the Ministry of Finance.

With the lower revenue from Aramco’s dividends, the government will need to either finance a higher deficit or reduce the size of the deficit by taking measures to boost other revenue or cut spending. Running a larger fiscal deficit in the short term should not be an issue given the low debt level of the Saudi government, even more so if the U.S. Federal Reserve starts to ease its monetary policy later this year and borrowing costs fall.

If the government decides to stick with the deficit target it set in the 2024 budget, it will likely have to cut spending, particularly capital spending. Measures to increase non-oil revenue seem unlikely at this stage, although a further increase in Aramco’s dividend payout is a possibility given its still high net income and considerable cash and liquid asset holdings. Higher dividends would help the PIF and the government and increase the attractiveness of the equity to investors ahead of a potential public sale.

Financing Challenges Ahead?

The transfer of Aramco equity and the additional dividends it brings means there will be more than enough financing for the PIF’s planned activities this year. And while the equity transfer may result in a higher-than-budgeted government fiscal deficit, this is very unlikely to cause any problems in the short term given the low level of government debt.

However, a growing volume of financing will be needed to meet the PIF’s goal of increasing its annual investment over the medium term. Balancing the financing needs of the PIF, the central government, and other parts of the public sector may become a growing challenge unless there is an increase in oil revenue and may require accepting a higher degree of economic and financial risk than has been the case in the past.