Saudi Arabia needs to pursue plans to create its first sovereign wealth fund (SWF) to offset volatile oil export earnings and achieve the much-needed fiscal stability in the long term, according to analysts.
The world's oil powerhouse could also use return from that fund to finance possible deficits in its budget and stave off a repetition of its massive domestic borrowing when oil prices were low 10 years ago.
Although the planned SWF will initially have a small capital compared to other Gulf funds, the Kingdom could build on the success of those funds, mainly the UAE's SWF, in managing its financial system and shun excessive borrowing.
Saeed Al Shaikh, chief economist at the Saudi National Commercial Bank said: "The Abu Dhabi Investment Authority (Adia) has proved a great success in stabilising the UAE's revenues and managing fiscal balances."
Early this year, Saudi Arabia said the creation of the SWF is awaiting endorsement from King Abdullah bin Abdul Aziz and it would have an initial capital of SR20 billion (Dh19.8bn). In its first stages, the fund will be administered by the Kingdom's Public Investment Fund (PIF) but the government has not specified its targeted markets.
According to the PIF's Secretary-General Mansour Al Maiman, the new fund will focus on "maximising long-term rates of return".
"A key feature of the new SWF's strategy would be diversification – asset class, sectoral and geographic," he told Saudi newspapers.
The idea of having SWF emerged in 2007 and gained momentum following a sharp rise in Saudi Arabia's income and a wave of acquisitions made by SWFs from the Gulf and other regions in global financial institutions reeling from the fallout of the US sub-prime crisis.
Analysts saw the Saudi move to set up a SWF as part of an ongoing programme to ease reliance on unpredictable oil sales, diversify its economy and achieve sustainable growth to ensure sufficient jobs for its fast growing population.
While its massive oil wealth allows it to play a crucial role in stabilising the oil market, the Kingdom appears to be reluctant to replay the role of a swing producer it had adopted in the past, according to the Arab Petroleum Investment Corporation (Apicorp).
"Saudi Arabia has some options to stabilise oil revenues. The first is to balance the oil market to ensure price stability. But the Kingdom seems reluctant to re-take a swing producer role but plays a major role in Opec policies," said Apicorp, an affiliate of the Organisation of Arab Petroleum Exporting Countries (Opec).
In the absence of other major financial resources, Saudi Arabia was forced during 1990s and early 2000s to borrow heavily from local banks to cover a persistent budget deficits caused by low oil prices. Its cumulative debt of nearly SR700bn in 1999 exceeded its gross domestic product before it began its decline.