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Economy

Saudi Arabia will mobilize giant fund to reduce oil reliance

Targeting $1tn in assets, PIF seen becoming world's largest sovereign wealth fund

Saudi Crown Prince Mohammed bin Salman, right, and IMF Managing Director Christine Lagarde, left, spoke Tuesday at the Future Investment Initiative conference in Riyadh.   © Reuters

RIYADH -- Saudi Arabia will give its main sovereign wealth fund a greater role in creating an economy led by investment, instead of one dependent on oil.

The kingdom seeks to turn its Public Investment Fund into the world's largest sovereign wealth fund, raising assets to more than $1 trillion from an estimated $200 billion today. Established in the 1970s, the PIF is now tasked with investing globally in fields such as infrastructure and information technology.

The PIF is expected to play a key role in Saudi Arabia's investment drive. Crown Prince Mohammed bin Salman, a proponent of economic reform, unveiled plans Tuesday for a new city built around cutting-edge technology on the opening day of the Future Investment Initiative -- dubbed "Davos in the desert" -- a three-day gathering of investors hosted by the fund.

The roughly 3,500 attendees include Masayoshi Son, chairman of Japanese tech titan SoftBank Group, and BlackRock CEO Larry Fink. They appear to control as much as $22 trillion collectively -- more than one-quarter of global assets under management, by some measures.

This effort to woo investors comes amid a major push for privatization, including an initial public offering for state-backed Saudi Arabian Oil, known as Saudi Aramco.

Yasir al-Rumayyan, a managing director at the PIF, told attendees that the country's reform efforts are proceeding as planned, denying claims from some corners that schedules had to be revised.

Christine Lagarde, managing director of the International Monetary Fund, told attendees Tuesday that they all risked a future "dystopia" unless certain social problems such as climate change and inequality were addressed. She praised Saudi Arabia's pursuit of reform for the sake of future generations.

Fink expressed concerns about the future investment environment, noting that income inequality was driving populism worldwide.

A tough sell

Many investors are interested in the use of the money at the PIF's disposal, but show caution about direct investment in the country. Some see green-field investments like building factories in Saudi Arabia from the ground up as too risky.

SoftBank's Vision Fund, U.S. private equity firm Blackstone and a Russian sovereign wealth fund are among those that have successfully won deals for joint investments with the Saudis. Other asset management firms are getting more active in making the pilgrimage to the country in hopes of having funds entrusted to them.

But Riyadh faces difficulty in managing its piles of cash, as low interest rates have cut into yields throughout the investing world, leaving a limited number of targets that can be counted on for high returns. Lately, even public pension funds are taking more stakes in alternative assets, such as technology-linked private equity and real estate. The competition to snag promising targets is fierce.

Much of Saudi Arabia's economy centers on redistributing oil income to the public. And the path to reform will be difficult. Many measures such as eliminating subsidies and raising taxes will be painful to Saudis, and with crude oil prices in a long slump, the economy increasingly appears stagnant.

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