The Saudi Public Investment Fund has become synonymous with big and bold investments at home and abroad. The PIF’s spending has upended major segments of the global sports market through its purchase of the English Premier League team Newcastle United, its takeover of four domestic football clubs and the large salaries being paid to attract global stars to the Saudi Pro League, the creation of LIV Golf, and investments in mixed martial arts. Sports, however, are a small part of the PIF’s portfolio amid heavy spending to develop the futuristic city of Neom, establish companies in new and emerging sectors of the domestic economy, such as tourism, defense, and alternative energy, and invest in the global technology sector through the SoftBank Vision Fund and companies such as Lucid Motors and Magic Leap.

As its global and domestic footprint has grown, the PIF’s assets under management have risen rapidly. It is currently the world’s seventh-largest sovereign wealth fund. Looking ahead, the PIF aims to reach 4 trillion riyals ($1.1 trillion) of assets under management by 2025 and 7.5 trillion riyals ($2 trillion) by 2030.

Given the wealth available to the Saudi government, it is likely the PIF will reach these asset targets and become the world’s largest sovereign wealth fund by the end of the decade. However, while achieving these asset targets may be important for political reasons, they are largely irrelevant from an economic standpoint. The targets could be achieved simply by moving assets to the PIF from other public entities – an accounting transaction with little economic value.

What matters for growth and diversification is whether the PIF can make large and efficient investments that help diversify the Saudi economy. Therefore, the PIF’s target of investing at least 150 billion riyals ($40 billion) a year in the domestic economy by 2025 is of greater importance. The PIF has stepped up its domestic investments in recent years, and more broadly there has been some progress toward economic diversification. But can the PIF’s multiyear domestic investment program be financed without increasing the economic and financial risks facing the kingdom?

Rapid Growth, Underpinned by Government Asset Transfers

The PIF’s assets under management increased from 835 billion riyals ($223 billion) at the end of 2017 to 2.7 trillion riyals ($720 billion) at the end of June 2023. At the end of June, international assets accounted for 22% of the PIF’s assets under management (9% in 2017) and domestic assets 78%. International investments include holdings in about 50 U.S.-listed companies with a market value of $36 billion at the end of September, $23 billion in the SoftBank Vision Fund, and $10 billion in the Blackstone U.S. Infrastructure Fund (both at the end of December 2022). Holdings of Saudi equities account for one-third of assets under management, while a growing share of domestic investments are in companies in new and emerging sectors of the economy, the PIF’s five “giga-projects,” and real estate and infrastructure.

Unlike sovereign wealth funds in some other oil exporting countries, the PIF does not directly receive a share of the country’s oil export revenue through well-established transfer mechanisms. Almost all oil revenue in Saudi Arabia accrues to the central government budget, and the PIF only receives dividends from its equity stake in Aramco, the national oil company. The PIF’s expansion has therefore been financed from other sources as intended in the PIF’s 2021-25 strategy.

A significant part of the PIF’s growth has come from asset transfers and capital injections from the government and central bank. The government’s transfer to the PIF of 8% of Aramco’s equity accounted for about 32% of the growth in assets under management between the end of December 2017 and the end of June 2023. A further 17% came from capital injections sourced mainly from the proceeds of the 2019 Aramco initial public offering and the central bank’s foreign exchange reserves. Returns on the PIF’s investment portfolio accounted for 31% of the increase and borrowing 5%, with the remaining 15% unexplained.

About one-half of the PIF’s growth has therefore come at the cost of a reduction in assets held elsewhere in the public sector. The public sector’s net asset position and the broader economy will only be better off if the PIF manages the transferred assets more efficiently on a risk/return basis. Further, while the capital injections provided assets that the PIF could reinvest in potentially higher return assets, Aramco equity is very difficult to liquidate. From the Aramco equity stake, the PIF receives dividends, potential capital gains, and perhaps an increased ability to borrow, all of which are important, but little investment flexibility.

A Growing Impact on the Domestic Economy

The PIF plans to invest a minimum of 150 billion riyals ($40 billion) in the domestic economy annually by 2025 and is on course to achieve this. It reportedly deployed around 120 billion riyals ($32 billion) in 2022, compared to an estimated 32 billion riyals ($8.5 billion) from 2018 to the first quarter of 2019. The PIF’s domestic spending in 2022 was equivalent to 10% of central government spending, 11% of total investment, and over 80% of central government capital spending.

The sale of existing assets – so-called capital recycling – has been a key source of financing for new investments. Capital recycling does not affect the asset size of the PIF (as long as there is no difference between the sale price and the value of the asset in the PIF’s accounts), but it frees up resources for new investments.

The PIF has sold its stakes in the Saudi Basic Industries Corporation and the National Gas and Industrialization Company, sold part of its stake in the Saudi Telecom Company, and raised funds through the IPOs of Tadawul and ACWA Power. The SABIC sale raised 259 billion riyals ($69 billion), with the other transactions adding smaller amounts. The use of these proceeds to finance new investments can be seen in the drawdown of assets in the PIF’s “Treasury” pool, which holds more liquid investments. These declined from a peak of around 480 billion riyals ($128 billion) in 2020 (after the SABIC sale) to 130 billion riyals ($35 billion) at the end of June.

The quality of the PIF’s domestic investment is critical for spurring growth and diversification. International Monetary Fund analysis has indicated that the growth benefit of past government investment in the Gulf region has been quite small. The PIF’s governor, Yasir al-Rumayyan, has suggested that PIF investments are more efficient in the sense they have an economic multiplier – the amount that gross domestic product increases for each riyal invested – of between 1 and 2 compared to 0.3 for the central government. If this is the case, it is good news for the Saudi economy, although there is insufficient information available to confirm this claim.

Can the PIF’s Targets Be Met?

There is little doubt the PIF can reach its targets for assets under management. Indeed, they could be reached overnight with the transfer of additional Aramco equity to the PIF – 10% to 12% to meet the 2025 asset target and 40% to 45% to meet the 2030 target. The PIF could also revalue land it has received from the government, some of which is held on its books at a nominal value of 1 riyal. As the Neom, Qiddiya, and Red Sea development projects mature, it would be quite reasonable for the PIF to revalue these lands, even if it will be difficult to derive an accurate value given the unique nature of the assets.

Yet while these transactions would help the PIF meet its targets for assets under management, they would not help it finance new investments in the domestic economy. For this, sizable new capital injections of around 1 trillion riyals ($270 billion) could be needed by 2030. A rough calculation suggests that it may be possible to raise this sum from the sources that have been tapped in the past – foreign exchange reserves, government reserve deposits, proceeds from the Aramco IPO, and borrowing – but doing so would likely entail accepting higher economic and financial risks.

• Foreign Exchange Reserves

Saudi reserves are estimated to be around 560 billion riyals ($150 billion) above the level standard IMF metrics for reserve adequacy would suggest are needed. Saudi Arabia, however, experiences high volatility in its export revenue because of its reliance on oil and has a fixed exchange rate. It is therefore prudent to keep a higher level of reserves to guard against the possibility of a sharp and prolonged downturn in the global oil market.

• Government Reserve Deposits

Standard metrics are not available for the minimum size of Saudi government deposits, but if it is assumed that covering three months of government spending is appropriate, this would suggest a transfer of around 80 billion riyals ( $21 billion) from these deposits could be possible. Again, the inherent volatility of the Saudi economy means that any reduction in deposits – which are already much lower than a decade ago – would increase risks to the fiscal position if oil prices were to drop sharply.

• Second Aramco Share Sale

Selling a further stake in Aramco is possible, although the Israel-Hamas conflict, growing concerns about climate change, and potential obstacles to an international issuance make this more likely to occur on the domestic market. This could constrain the size of any issuance given the domestic market is smaller than those in London or New York.

• Borrowing

The PIF’s Islamic bond issuance in October raised just over 13 billion riyals ($3.5 billion), and demand heavily exceeded supply. Given the PIF’s low debt, there is considerable scope for additional borrowing, although the authorities will need to carefully manage the overall public sector borrowing envelope given potential future demands from the central government and other public sector entities. Also, notably, investment financed by borrowing increases both the assets and liabilities of the PIF – only if the rate of return on investment exceeds the cost of debt will borrowing result in an increase in net assets.

There may be other sources of capital the PIF can access. Saudi Finance Minister Mohammed Al-Jadaan has suggested that fiscal surpluses could be transferred to the PIF, although prospects for surpluses are currently slim –  in the 2024 budget, the Ministry of Finance projects a fiscal deficit in each of the next three years. Other sources of capital may also be available, although the lack of transparency across the broader public sector makes them difficult to identify. Lastly, the General Organization of Social Insurance has considerable foreign and domestic assets that are invested to meet current and future pension liabilities. It is essential that these assets continue to be kept separate from the PIF and that the pension fund’s investment decisions remain independent.

Investment Targets

There is little doubt that the PIF can meet its 2025 and 2030 asset targets, but whether they are met or not should be of little concern to economic policymakers. What matters for the success of the Vision 2030 economic transformation agenda is investment in the domestic economy. The PIF’s annual investment target should be prioritized over its target for assets under management, and the size of its domestic investment should be regularly disclosed to track progress toward the target.

Finding the capital to finance the PIF’s domestic investment plans, however, may be challenging and could entail accepting a higher degree of economic and financial risk. The costs and benefits of new capital injections and additional borrowing will need to be carefully assessed to ensure that unnecessary risks are avoided in the quest for growth. Indeed, the PIF cannot be looked at in isolation from the rest of the public sector. The finalization of ongoing work to introduce a comprehensive public sector asset-liability management framework is essential to help manage the risks that could emerge as the PIF continues its rapid growth.