What do you think of the recent regime change in India? You recently commented that the Indian PM is very impressive. What did you have in mind when you said that?
I have been following the developments in India for a long time now. Though the country is a big force to reckon with, the past few years saw some stagnation creeping in and, in that sense, the nation needed a big jolt. Hence, I believe the mandate that Modi has got is massive. For the first time in decades, the country has a government in majority, which means Modi can rule the nation quite authoritatively. He has already put in place some rules and regulations to jumpstart the economy.
While the US will always be a superpower, China is coming up strongly and the only other nation that can counter China in terms of economic growth is India. Both have over 1.3 billion people and in 20 years, India will overtake China’s population. The per capita GDP of China and India was around $4,000-5,000 two decades ago but today, China is double of that. At 1.3 billion people, a doubling of a per capita GDP of $4,000 is huge. In that sense, India needed a transformational leader. I hope Modi will bring this change. I like India and I want it to balance the rising power of China.
Are there any concerns in this part of the world over the PM’s past?
Someone who doesn’t know the history of Modi and India wouldn’t see what is going on. Remember, the US didn’t give Modi a visa but succumbed to reality when he became the PM. President Barack Obama put the past behind and welcomed him and the whole world saw Modi’s reception at Times Square. Now, clearly alluding to the oft-repeated charges of Modi being anti-Muslim, let’s keep in mind that the courts have vindicated him. Actually, no one knows about the incident [post-Godhra riots] in West Asia and, to be honest, nobody discussed it in Arab meetings. So, for those who knew about it, the matter is dead. And for those who don’t know anything about it, let’s keep it in the grave.
Do you foresee any risks to India’s growth story?
No matter what local policies are enacted by the PM, India is still linked to the global growth story. So, no matter what you do locally, what happens around the world will still make a difference. But I believe that Modi is the right man for the job. He has come with a huge mandate. He is authoritarian but we will have to wait and see whether that is a good or bad thing. But I am convinced [that Modi will deliver]. I have never tweeted for any head of state except him.
India has been a big beneficiary of the plunge in the price of Brent crude but what is driving the steep fall?
I have been talking about the inevitability of a correction in crude oil for the past three years. Unfortunately, not many oil-producing countries in the Gulf paid heed to it. The price of oil has gone down from its recent peak of $120/barrel to around $50, which is a 60% fall. But the point is not that I have been vindicated. What is relevant is that the Gulf countries are highly dependent on oil and the vanguard of these countries is Saudi Arabia. The country is in a difficult position as it has the most buoyant economy in West Asia and its dependence on oil is extreme, at over 90%.
Clearly, Saudi Arabia has to look swiftly and expeditiously to find alternatives to finance its budget. At existing prices and with our expenditure budget staying constant, the country will have to tap into its reserves. Unfortunately, Saudi Arabia has already used $50 billion of its reserves. I believe reserves should not be used to bridge the gap between a government’s income and expenditure. However, for consuming countries such as the US, Europe and India, it is like a tax break. Especially for India, which is heavily dependent on oil imports. So, for consuming countries, falling crude price is good news and for producing countries, it’s not. As a Saudi, I never wanted the price to be $120 per barrel because it was exorbitant. But at the current level it is pretty much on the edge.
Eventually, market forces will decide the right price of oil. But I’m sure we’re never going to see $100 anymore… it was artificial. But do not buy the idea that Saudi Arabia is colluding with the US to reduce oil price to put Russia or Venezuela on its knees because, if we do that, we would be the ones who will end up on both our hands and knees. The Saudi minister of oil has explicitly stated that we will never use oil as a political tool to put pressure on other nations.
But is this steep drop justified?
Just like any other commodity, oil, too, is driven by supply and demand. What is happening right now is that there is an oversupply. The US is producing more oil, Russia is also producing at its peak and Iraq, despite the fighting in the north, is producing and exporting a lot of oil from the south, which is under the government’s control. On the supply side, fracking of oil and gas is happening in a major way in the US and Europe. On the demand side, China and India are slowing down. A 5% GDP growth for a population of 1.3 billion is not good enough. Similarly, Europe is fighting its own battle. Germany is barely managing to grow. This combination of weak demand and excess supply is pushing down the oil price.
Reports seem to suggest that the break-even price for oil in Russia is $100 and for Saudi Arabia is $82-84 a barrel. It makes sense for Saudi Arabia to moderate the price once in a while to keep competition at bay, or is that thinking flawed?
I don’t buy it. One theory suggests that Saudi Arabia should lower the price to below $80 so as to render fracking uneconomical since its break-even is around $80. But the fact is that with technological advancement, the price of fracking has come down from $100 to $90-$80 and with incremental R&D it can go down further to $50-$60. The point is that we can’t just chase down fracking and render it unfeasible. Because every time you go down, you will find more technology that will pull the price down further. So, I think it is a very dangerous game to play. I think that consuming and producing countries did meet with Saudi Arabia in one big meeting, but there was no follow-through on that.
We have to try and find the best level of price that is good for both parties. We clearly cannot manipulate supply and demand. It is a time bomb for us as 90% of our budget is funded by oil revenues. Other Gulf regions, too, are dependent on oil, but to a lesser extent. In Qatar, it is 60% and for other countries, it is a little lower. Saudi Arabia is a huge economy with a $1 trillion budget. So, a 10-20% reduction in the budget will hurt us real hard. Having said that, we’ll live with $50 temporarily and it will be interesting to see how much new supply will come on stream, as at the current level, many new projects will be rendered economically unfeasible.
Is there a conscious attempt by the Saudi government to look at non-oil revenues, if you perceive the situation akin to a time bomb?
When the price of oil was at $100, it was not a problem. But at the current level, they have no choice.
What alternative sources of revenue can they look at?
One source is the sovereign wealth fund (SWF), the second is religious and cultural tourism and the third is non-oil minerals. We may not be in the league of France, Greece, Spain or Portugal but at least we can have a few million people coming every year, not just for tourism but also religious tourism, wherein they live in the country for a few months every year. But Saudi Arabia will not see an influx of too many rich people, as there is no direct correlation between being rich and being religious. We also have historical places of interest for general tourists.
Number three, which is already happening, is reducing the dependence on oil by extracting more natural resources such as gold, silver, zinc and platinum. A project called the northern promise (the Waad Al-Shamal project) is already underway. We have to compete where we have an edge. For instance, we can’t compete on agricultural products, as we are not an agrarian economy.
How does one explain Saudi Arabia’s reluctance to set up an SWF?
This is the worst-kept secret; the philosophy of the Saudi government is to keep all its reserves on a short-term basis. So, one can dip into it whenever the need arises. If there is a deficit of $30 billion, take out the $30 billion from the reserves. My position is: do not touch the reserves as the money is not for us or our generation, it’s for our children, grandchildren and great-grandchildren. You have to live within your means. If the price of oil goes down, cut down on the expenditure instead of dipping into reserves. Even as a company, in the event of a contingency, you either borrow or cut down on expenses. That’s a philosophy I adhere to. But their [Saudi Arabia] approach is more short-term oriented.
Sovereign wealth funds in West Asia are sitting on billions of dollars but are largely investing the money in treasuries and other low-yielding securities. What would it take for them to aggressively chase high-growth assets, for example, investing in India?
It’s true that sovereign wealth funds in our region are not as active as they should be. Their earnings are anywhere between 0.5% and 1%. That’s not good enough. Let’s take the case of Saudi Arabia’s sovereign wealth fund. Let’s assume Saudi Arabia has $2.5 trillion. If you take $2 trillion of that, you get 1% on that, which translates into $20 billion. If you earn 5%, it is $100 billion and at 10% it will be $200 billion. I am not saying invest aggressively and speculate. But if you are prudent, making conservative and lucrative investments, 5% return can be made easily. So, that is a missed opportunity. I am aggressively pushing the government to activate the SWF and earn at least 5%. This will be another support to our budget. Don’t touch the reserves, instead rely on annuity income, to put it simply.
In a situation where different economies are at different levels with respect to their budgets and the requirement to balance their budgets vary, are there any conflict points that might emerge that could make Organisation of Petroleum Exporting Countries (OPEC) less effective in the future?
We are seeing that some countries such as Venezuela, Algeria and Iran are thinking of reducing production. Saudi Arabia learnt its lesson in the ’90s, when it reduced production only to find other countries coming in and filling that gap. It was a double whammy as Saudi Arabia not only lost its market share but the price of oil went down further. So, right now, Saudi Arabia is playing hardball somehow to say that we will not reduce production unless it’s a concerted and unified effort whereby all [producing members] simultaneously reduce production in a uniform manner. Saudi Arabia will not unilaterally slash its output.
So, you do not see any threat to OPEC?
This is not the first time that OPEC’s destiny has been brought into question. There have been several instances in the past when it faced an existential crisis. Having said that, what is happening now is one of the crucial tests in OPEC’s history. The crash in the crude oil market has been severe and swift. This is a major development. OPEC’s destiny rests on the decision it makes. If there is no consensus on reducing production and there is too much infighting among member countries, then we will see early indications of its demise. Although it’s a cartel, I am against its demise. Oil as a commodity is far too crucial for producers and consumers to be left alone like that. These are still early days to judge, though.
How is the Arab world dealing with the fallout of the Arab Spring?
The so-called Arab Spring has failed. Its demise followed the exit of Mohamed Morsi of the Muslim Brotherhood in Egypt and the final nail in the coffin came about when many of the old guard won the election in Tunisia. While the Arab Spring has failed, the reasons behind it still remain. The movement did impact five Arab republics — Egypt, Libya, Tunisia, Syria and Yemen.
It is a wake-up call to the monarchies and republics in the Arab world to rectify the situation by involving the youth through democratisation, which means involving them in the decision-making process, and by having more freedom of speech and press. Because these days, thanks to social media, the youth are very well-informed… each person is like a minister of information. So the Arab world should draw a lesson and enact laws that will establish a lot of what I have said.
Do you see geopolitical disturbances in the Arab region settling down or aggravating further?
Iraq is in turmoil. Syria is in turmoil. Libya is in turmoil. Yemen is in turmoil. The situation in Israel and Palestine, too, is far from stable. That’s on the pessimistic side. On the optimistic side, look at the Gulf region. For example, take the case of Jordan, which is in the middle of turmoil with Syria, Israel and Palestine around it, but there is stability in the country. Amazingly, the eight Arab monarchies, too, are doing pretty well. However, what took place in the brethren countries should be a wake-up call for everyone. The monarchies have proven their resilience, but they should now build on it and not take it for granted.
How do you view Dubai’s economic model — it hardly has any oil and has positioned itself as a trading, tourism and retail hub?
You can’t take one city state and generalise the observation. Dubai is a part of the UAE. Also, remember that Dubai had faced a major crisis and without Abu Dhabi’s help, it would have crashed. Without the billions in support, Dubai’s economic success would have disappeared completely. Even with that good business model, they had a major crisis and it was petroleum-based Abu Dhabi that saved the day. But I think they tried to expand and go beyond their limits and that model failed. But once they went back to their core tourism-led model, they succeeded again.
Is there a limit to that growth?
Dubai has a good business model linked to its tourist attractions and its airline. These are very important ingredients. They have a small population and if small is beautiful, in Dubai’s case, it’s gorgeous. They have huge potential and I think they can expand more. In fact, all the seven city states that make up UAE are trying to attract more people and investments.
Looking at the investing environment, what makes you hopeful and what worries you?
Of the three things that make me very optimistic, the first one is increasing globalisation. Many of my companies have a global reach. Take the case of Citigroup, which is truly a global bank. HSBC was competing with it but right now it is recalibrating. Standard Chartered Bank is getting smaller as well. Similarly, News Corp is the only global media company and in the hotels space, we have Four Seasons.
Twitter, of course, is global. Although some look at globalisation negatively, we are happy about it. Second, I am optimistic about the concerted efforts made by leaders across geographies, be it Europe, West Asia, Africa, India or China, to propel growth. More growth means higher revenues, higher income and better stock return. Third, from an investing perspective, there will be more opportunities around the world as economies get out of recession and enter a new growth phase.
On the negative side, the world is still unstable. Ukraine is facing an issue. There is tension in West Asia. Ebola is disruptive for economies and businesses not just in Sierra Leone, Liberia and Guinea but also in Mali, Niger and Algeria. It disrupts the economic ecosystem in those countries. So, though it is a disease, it hurts. Russia is being penalised by the West. The Rouble has crashed 50% and inflation is up. There are pockets of instability in the world. Number two is terrorism. An act of terrorism can wreak havoc in any society or region. The third and final worry is: what happens if global recovery fails to materialise?
Getting back to your business, what is your strategy now?
Kingdom Holding Company is a unique entity. We are a holding company with only 20 people. Though we never get involved operationally, we have a presence in diverse sectors such as financial services, e-commerce, real estate, hotel management, aviation, media publishing, entertainment, private equity, healthcare, education, consumer goods and agriculture. All our investments are at pre-crisis levels. Our business model is to buy into managements, knowledge, experience, know-how and back them, be it in hotels (Four Seasons), media (News Corp), banks (Citigroup) or social media (Twitter).
I have a philosophy in business; I call it 3+3+1. At the macro level, you need to have a vision, a strategy to implement that vision and a plan to implement that strategy. At the micro level, you need to have initiative, you need to be very ambitious and you need to take risks. And the 1 stands for professional corporate governance. These days, we see a lot of companies with controversial boards or owners. For me, corporate governance is very important. For example, even though I own the floor where I am sitting, I have leased it for just 1 Saudi Riyal to my own company. I don’t take any salary from the company. Work ethics are crucial to sustain a business.
Given your exposure to News Corp, how do you see the media business evolving? Digital is proving to be a threat both to the print and broadcast media. What history tells us is that, usually, the leader in a particular business is never able to make a successful transition whenever a sector sees a paradigm shift.
Clearly, the Internet is a big disruptor. Netflix disrupted the DVD space and eventually many media companies were absorbed by Netflix. Barnes & Noble was devastated by Amazon. Now, the online retailer has entered into an agreement with Hachette, the publisher. Kodak was demolished by the digital camera. But now digital cameras are under threat from mobile phones. Xerox was a noun but it is now a verb. Copying has undergone a sea change. Cassettes and CDs were made irrelevant by Apple. Fax has made way for email. Coming back to the question, there is no doubt that newspaper circulation is plateauing not just in the US but in other parts of the world as well.
I am not going to say that traditional media is finished but, clearly, the trend will be digital over the next 30-40 years. There is no doubt about that. People are finding ways to go digital but you cannot recoup all that you lose. So, you are right. None of the big newspapers, be it The New York Times, the Washington Post or The Tribune, have found a viable business model. The only exception is The Wall Street Journal and I am not saying this because we own it. WSJ is the only newspaper that has managed to maintain its stability and achieve a small growth. But a digital future is inevitable. Just about everything that we do in our daily lives is going digital.
Interestingly, within the digital space itself we are seeing huge disruption. Google Plus is competing with Facebook. Android is fighting iOS. Amazon came up with a phone called Fire, though it was a big failure. Eventually, the consumer will be the winner.
Would you advice staying away from media companies in this environment?
It depends upon what kind of media you are alluding to. We have invested more than a billion dollars in Fox Networks and own a 7% stake in it. It has good content, which is important. We talked about means of distribution, for example Twitter and Facebook. But content is still important. Netflix cannot stream anything without content. So, if you have invested in content, there is definitely a life expectancy that goes beyond that of traditional media outfits such as newspapers, for example.
As an investor, to what extent are you willing to back the management, given that Euro Disney has been loss-making.
Most companies I invested in are profitable but some do face a crisis at a certain point in time. So we have to support them. Let me tell you the genesis of the crisis in Disney. Euro Disney made a business model based on an assumption of 16 million annual visitors and a certain average spend by each tourist. But guess what happened? Following the slowdown in the European economy, the amusement park saw only two million visitors and the expenditure per person, too, went down by 20%. So, it was a force majeure and, in such cases, you have to support the management.
Why do companies perform badly? It’s either owing to cyclical reasons, or because of bad management, or due to competition. In this case, it was a cyclical event. So, it was not the management’s fault and we had to support them. But if there is competition, we have to intervene and see how we can rectify the matter. Hence, when we enter a company we ensure that competition is minimal in the domain that it operates in. That is reflected in the way we have invested in News Corp, Twitter and Four Seasons, all of which have huge entry barriers.
Warren Buffett, the world’s greatest investor, is a big fan of moats himself and it is widely believed that you admire him too.
Warren Buffett is not my role model, he is my friend and so is Bill Gates. In fact, both our [Buffett’s and my] business models are similar. We both have holding companies with a lean staff count (he has 24, I have 20) and we have focused investments. In the case of Bill Gates, we are partners in several charitable projects, including polio eradication in India, and we have also jointly invested in Four Seasons Hotels and Resorts. Bill Gates told me that India is a role model as it successfully eradicated polio despite a huge population. In smaller countries such as Afghanistan, Nigeria and Pakistan, the polio-eradication campaign has been a complete failure.
Despite Bill Gates being your business partner in Four Seasons, you have not signed The Giving Pledge.
It was offered to me by Bill Gates but I declined it. The reason: charity began on the day I started my business. Giving away, or zakat, has always been an integral part of Islam. For me, wealth is a god-given gift. I will sow back all that I have into my society and humanity for good causes. For example, I am associated with Reach Out to Asia, a charity initiative from Qatar focused on assisting community-development projects in Asian countries.
I emphasise on that and deemphasise religion because the last time I was in India, I saw a Muslim who was the president and a Sikh who was the prime minister. That’s commendable, considering India is a largely Hindu nation. You are a role model of how societies and religious communities can live together. The future of India is assured because there is civilised transfer of power in a democratic way and there is freedom of expression, unlike in China. In a country where political power is centralised in a communist state and there is a parallel laissez-faire capitalist economy, both will eventually clash.
That’s why growth is critical for China, as without that it will have internal skirmishes. Which is why China handled the Hong Kong protests deftly, as otherwise, it would have sent a wrong signal. Also, if they are too subdued, people in Shanghai, Beijing and other cities will rise in revolt. In those cities, there are millions of people and China would need more than an army to stop them. Hence, China is very prone to time bombs that India doesn’t have.
What kind of investing opportunities are you looking at and why have you not invested aggressively in India?
We have two types of investments: direct and indirect. For example, we have invested in Citigroup, which has a big presence in India. Four Seasons has a property in Mumbai. News Corp, too, has operations in India. Similarly, Twitter has millions of users in India. In other words, we are indirect investors in India. But we are open to investment opportunities that offer a clear win-win situation without barriers. In fact, India is closer to me than China. It is a lot like Europe and the US, where there are no barriers to investment.
Infrastructure is a big theme in India but still not a part of your portfolio, why?
Frankly speaking, we do not want to involve ourselves at an operational level. That is not our cup of tea. We are pure investors and are very cognisant of our size and limitations. More importantly, we invest very cleanly.