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Key takeaways • Incentives are key to support the US$2.7trn 10-year domestic investment program, but a funding gap constrains implementation. • Past precedents suggest the Shareek program could be a highly beneficial scheme to banks if the terms are right. • Saudi Aramco could maintain dividends for minority shareholders while limiting government dividends to support investments. Macro - investment program puts focus on diversification We estimate the overall investment program announced by the authorities aims to increase domestic non-central government investments from the SAR4trn (US$1.1trn) level realized over 2009-2018 to SAR10trn (US$2.7trn) over the next decade, an ambitious 150% increase. This confirms the focus on economic diversification and a shift in the growth model towards capital accumulation. The broader public sector (including the Public Investment Fund (PIF), Saudi Aramco and Sabic) are likely to take the lead, but the persistent funding gap suggests targets are unlikely to be met. Right incentives key to boost investments Incentives to support domestic investments by large companies could be key to minimize costs within the Shareek SAR5trn investment partnership program. Dividend cuts could be on the table, but likely on a case-by-case basis. The Shareek program does not mention funding avenues for the investment targets. This could suggest there could be leeway to negotiate plans and funding with the government. However, the returns on government-mandated investments would be key to monitor. Cautious energy policy to underpin Aramco and the budget A possible reduction of Saudi Aramco's dividend to the sovereign, but a desire to minimize the impact on fiscal oil revenues suggests energy policy could be geared to support oil prices. Planned stable central government spending over 2021-30 potentially exposes the budget to oil price volatility if fiscal discipline loosens. Sell-downs of Aramco or PIF stocks could help fund investments. The inclusion of Sabic in Shareek suggests domestic petrochemical feedstock prices could remain competitive. Banks - precedents show Shareek could be positive Past precedents (covid-19 schemes) suggest the Shareek program could be a highly beneficial scheme if the terms are right, in our view. If banks are asked to reduce dividends to allow greater lending, incentives could include access to low-cost and long-duration deposits (to augment margins), loan guarantees against more risky Small and Medium-sized Enterprises (SME) debt, and potential regulatory concessions. Saudi Aramco - at the centre of the investment program Saudi Aramco could easily maintain and even enhance the dividends for minority shareholders, while limiting the government portion of the dividends in favour of higher investments. Aramco's robust balance sheet is likely to allow it to accommodate additional leverage to support any government-sponsored projects, especially if accompanied with the right tax incentives and support programs.
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