Question

Discuss the idea of diversification in investments and how canSaudi Arabia's economy benefit from this concept?

For example

Diversification is a risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique contends that a portfolio of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio.

Saudi Arabia is stepping up plans to turn its sovereign wealth fund into a global giant. The Public Investment Fund is central to the government’s effort to diversify the economy away from oil, under a plan known as Vision 2030.

The Saudi ​Public Investment Fund seeks to become one of the largest sovereign wealth funds in the world. To achieve this, the Fund is building a world-class, diversified portfolio through investments in attractive, long-term opportunities at both the domestic and international level.

Answer 1

The idea of diversification in Investment is not to increase the return on Investment but to reduce the total amount of risk associated with that because the future is unpredictable. There is a famous saying do not put all eggs in the same basket. The economic activities of Saudi Arabia in the past has been heavily dependent on the petrolium sector. More than 80% of the revenue contribution is made by petrolium sector to the GDP of Saudi Arabia. But in recent years, due to technological innovation like electric cars,oil prices and other disturbances due to the conflict in the region the government has come to terms that heavily relying on one sources of revenue is not good for the overall health of the economy. Under the Initiative of The nationla transformation programme, the government wants to triple the non-oil revenue to around 530 billion Saudi Riyadh. In recent years a number of steps has been taken, like

• Investing in mining and tourism Industry and creation of jobs in that sector
• Investing in technological statup funds like Jack Ma vision fund.
• Increasing the Indirect taxation while reducing the free handouts given

The diversification of sources of revenue in an economy is very important specially for a country like Saudi Arabia, altough it has huge amount of oil reserves and sufficient foreign exchange reserves but the oil prices are fluctuating very much due to regional conflict and global market condition.If the world economy faces recession the oil market is heavily impcated and it will impact the revenue of the government. The diversification also gives the government an opportunity to keep check on the expenditure and focus more on capital expenditure which in future can generate more revenue.