The recent news that the Kingdom of Saudi Arabia is postponing the planned IPO of Saudi Aramco stock to 2019 is both a challenge and an opportunity. Saudi Arabia, under increasing pressure to reinvent itself as a part of Vision 2030 and in response to domestic pressure, must begin right-sizing its balance sheet from being a single-cylinder oil-based economy. The opportunity is to not only do away with the planned IPO, but to turbocharge it by using an initial coin offering (ICO) as an efficient pathway to market, saving $200 million in investment banking fees in the process. In so doing, Saudi Arabia will not only be in line with Vision 2030 in terms of embracing a low-friction technologically advanced future. It can very well raise more than a $1.5 trillion, at once creating a closed-loop digital economy that can automatically reinvest in climate resilience, carbon buybacks, gender parity or national reinvention among other options.
The case to make these changes grows increasingly urgent as the U.S. (now a net exporter of oil) and the world sees a wave of innovations shifting from a carbon-based energy matrix, to one increasingly reliant on renewables. The economic backdrop for these changes and the case for greater economic resilience is quite stark. Part of what is driving the great moderation in Saudi Arabia, which has been laboring under the economic strain of low-cost oil, is the fact that the country needs to quickly diversify its economy. At the center of this challenge is the state-owned oil conglomerate Saudi Aramco, which is seeking a public offering at a time when major institutional investors are divesting their portfolios of fossil fuels. Notwithstanding this investor retreat from “dirty” assets, a Saudi Aramco IPO may be the largest in history although darkening clouds of doubt loom on the horizon. An ICO on the other hand may be larger still in terms of dollars raised and and more strategic in terms of long-term impact.
Taking this commodity-based listing down a path to liquidity using a traditional public offering may not yield the best outcome for Saudi Aramco or the Kingdom. Following the model where sovereigns are increasingly turning to cryptocurrencies or, more aptly, asset-based tokens or ICOs, offers an efficient route to market. An oil-backed digital asset could create a virtuous cycle that can not only help shield the Saudi economy, it can help shift the world’s energy sources away from a heavily polluting carbon economy – of which Saudi Arabia is at once a key actor, beneficiary and in the crosshairs of man-made climate change.
Venezuela’s tragic case serves as a canary in the coal mine – or oil well – for countries operating on a single commodity-driven cylinder. In no small measure, internal political turmoil, combined with capital constraints and low oil prices are the reasons why Venezuela has faltered as a country. While Saudi Arabia has considerably more resources than Venezuela, the long range outlook, especially in a world that is shifting its energy matrix, combined with the fact that the U.S. is now a net exporter of this commodity, means that diversification may very well be the only path to preserving the political stability as well as quelling the scent sent of Jasmine from the Arab Spring that still lingers over the region.
Where Venezuela’s foray into sovereign-backed cryptocurrencies with the recent launch of the Petro was in part borne out of desperation due to economic collapse. Saudi Arabia’s opportunity to embrace this model could stem from a position of strength and national digital transformation. An asset-backed ICO of this magnitude would not only set a new paradigm for right-sizing a country’s balance sheet, it can also demonstrate that low-friction economics are not solely the domain of innovative entrepreneurs, but innovative sovereigns as well.
Saudi Arabia is unaccustomed to being thought of as an enfeebled economy, yet that has increasingly become the case in recent years. Much as the fallacy of perpetual property appreciation felled the U.S. economy during the Great Recession, Saudi challenges with economic diversification, combined with simmering social and sectarian tensions, has put the country’s relative stability at risk. With 90% of Saudi revenues derived from the sale of oil, sustained oil price declines represent a grave risk to the country. The dramatic and sustained drop in oil prices in 2014 and 2015 prompted rating agencies to downgrade the country’s sovereign debt with a negative long-term outlook. By late in 2015, some observers were even predicting the eventual disintegration of the House of Saud.
For a country that has enjoyed budget surpluses for much of the last decade and relies heavily on national paycheck persuasion to keep its often-restive population at bay, darkening economic clouds are an ill omen for the Kingdom, the Middle East and the world. According to the International Monetary Fund (IMF), for Saudi Arabia to maintain a balanced budget, it needs oil to sell at a price in excess of $106 per barrel. If the average price of a barrel of oil were to remain at or below $50 for an extended period, the IMF forecasts that the Kingdom will run out of cash by 2020. That a country can have a marginal cost of production of $3 per barrel yet base its national budget on $106 per barrel, highlights the perils of presuming economic constants.
The rising tide of the Arab Spring was in many ways overcome by the investments Saudi Arabia (as a rentier state) made in its citizens to calm their dissatisfaction with the country’s heavy personal restrictions and high youth unemployment. In 2011, the population benefited from approximately $93 billion in public spending as an inducement not to take to the streets, as their cousins in other Arab nations did by the millions. This financial inducement, combined with a swift crackdown on public dissent, largely spared the Kingdom the fate that had been visited upon other countries in the region during the uprising. An empty public purse will make it very difficult to restrain this sentiment in the years to come. Reinvention of the kind espoused in Vision 2030 is not only ambitious it is urgent.
The strain of economic pressure, leadership transitions following the death of King Abdullah in 2015, along with military misadventures in Yemen have taken a toll on the Kingdom’s usually cool diplomatic demeanor. Building a nation or a business under the assumption of certain economic constants – such as a $100-dollar barrel of oil, steadily growing consumer spending and constantly rising home values – is a perilous approach. How Saudi Arabia contends with years of pent up internal frustration, royal internecine fighting, and waning influence in a tattered Middle East is sure to exacerbate regional instability and conflict. Long range planning is as important as economic diversification and Saudi Arabia has a unique opportunity to fund Vision 2030 by embracing new pathways to reinvention and economic diversification. Issuing an asset-backed digital currency at this scale, supported by the current lifeblood of the global economy, would not only herald a new era for cryptocurrencies, it would help auger a new Saudi Arabia and change the world.