Saudi Arabia’s central bank faces biggest overhaul in decades

Saudi Arabia’s central bank is set for its most significant changes in decades as a new law comes into force this month that analysts say will formalise Crown Prince Mohammed bin Salman’s efforts to divert more of the kingdom’s oil wealth to back his grandiose investment plans.

The reforms — in which supporting economic growth will become part of the Saudi Arabian Monetary Authority’s mandate and the bank reports directly to the king — could diminish its role of investing the nation’s hard currency surpluses in favour of the sovereign wealth fund chaired by the crown prince, analysts say.

It also underscores the kingdom’s radical shift from being a conservative investor to a more aggressive and higher-risk approach favoured by Prince Mohammed, King Salman’s favourite son and the nation’s day-to-day ruler.

Mohammed al-Jadaan, the finance minister, told the Financial Times that the changes would not affect Sama’s core responsibilities, including maintaining sufficient reserves to protect the riyal-dollar peg and financial stability, as well as regulating and supporting the financial sector.

“We have a clear proposal of how the surpluses are distributed. One is to rebuild our buffers with the central bank and [two], to rebalance our debt if needed, so if it goes beyond a certain level we can bring it down,” he said. “Third and fourth, is a distribution between the national development fund [NDF] and the PIF [sovereign wealth fund] because that is the money we want to invest long term.”

The NDF, which was set up in October 2017 to oversee state development funds, is also chaired by Prince Mohammed and manages more than $80bn of assets. Analysts estimate Sama needs about $300bn to protect the riyal peg from speculation. Sama’s foreign reserves fell to about $444bn in the middle of last year.

Jadaan insisted that the changes to Sama — the first to the central bank’s law since its creation in 1952 — were designed to modernise the legislation, bring it into line with international standards and provide the institution with greater independence, because some of its responsibilities, such as issuing bank licences, have been handled by the finance ministry.

In recent years, Sama, the traditional custodian of the kingdom’s wealth and predominantly invested in US bonds and similar low-risk assets, has been overshadowed by the public investment fund or PIF.

The PIF has become the dominant force in Prince Mohammed’s economic arsenal. It has been tasked with investing more actively overseas in pursuit of higher returns and wants to swell its assets under management from $400bn to $1tn by 2025. Its mandate is much broader than its peers in other oil-rich states as it straddles foreign investing, the development of megaprojects and new industries. Sama transferred $40bn to the PIF from its foreign reserves as the fund went on a spending spree during the global market turmoil in the first quarter of 2019.

Jadaan, a PIF board member, said it would not be the “norm” for the fund — which has pledged to invest $200bn in Saudi Arabia over the next five years — to receive transfers from Sama’s reserves. The PIF had sufficient funding and would get additional financing from privatisations and any further listing of Saudi Aramco, the state oil company, he added.

Describing the PIF as the government’s “asset manager”, he said: “If you need more return, you need more risk, but it has to be a calculated risk.

“What you will see is we are becoming wiser than putting $70bn in a bank account that generates very limited returns. We need to balance what you need as cash, what is highly liquid and what you need for the long term,” Jadaan added. “What you need for the long term will go to the NDF and PIF.”

Alexander Perjéssy, lead analyst for Saudi Arabia at Moody’s, said the big question was whether the central bank changes would “decrease transparency” because the PIF “provides very little disclosure”.

“It will be much harder to know what is invested in liquid offshore assets versus what has been ploughed into domestic diversification initiatives [by the PIF],” he added.

Jadaan said Riyadh was moving towards a more consolidated approach to managing its resources and assets. “We are working on the asset liability management programme where we can show what is the government position — liquid assets, illiquid assets, investments and liabilities,” he added. “That will then defuse the discussion about is it the PIF, is it the NDF, is it the central bank? It will provide clarity on what is the government’s financial position, which is a lot stronger than people think.”

Ravi Bhatia, a director at S&P Global Ratings, said the demarcation between Sama’s reserves and PIF assets would be “something one will have to watch”, adding: “The question is are they going to get good returns and grow assets steadily over time, or are we going to see a more risky approach?”

Last month, Fahad al-Mubarak, who has an investment banking background, was appointed to a second stint as bank governor.

“The crown prince wants to accelerate the country’s development away from oil, asap,” said a senior Gulf-based banker. “He is in a hurry and needs supporters where he wants them to invest as fast as he can.”