Thursday, 19th October 2017

Aramco IPO doubts cast further gloom over Saudi reform plans

In the run-up to the latest effort to establish Saudi Arabia’s credentials as a forward-looking hub for investment, clouds are gathering over the recession-hit economy and the government’s commitment to reforms set out by Crown Prince Mohammed Bin Salman Bin Abdelziz (MBS) in his Vision 2030 strategy. The Future Investment Initiative conference, which is being staged by the Public Investment Fund in Riyadh on 24-26 October, comes at a time when strains on the local economy are showing up ever more clearly. That is prompting a seemingly continual revision of targets and policies, including that of the planned stock market listing of up to 5% of Saudi Arabian Oil Company (Saudi Aramco)’s equity.

The kingdom’s economy has fallen into recession this year, with two consecutive quarters of negative growth – a fall of 0.5% in Q1 2017, followed by a drop of 1% in Q2 17 (GSN 1,045/9). The near term outlook isn’t much better, with the International Monetary Fund (IMF) trimming its growth forecasts for this year and next. The IMF repeated its view that the government should ease off on its austerity drive (GSN 1,037/8). In its latest World Economic Outlook – published to coincide with the mid-October IMF/World Bank annual meetings – the IMF predicts Saudi GDP will expand by just 0.1% this year and 1.1% in 2018. “The growth performance over 2017-2018 is on the weak side, barely growing this year in Saudi Arabia, picking up a bit next year,” said IMF Research Department deputy director Gian Maria Milesi-Ferretti on 10 October.

The IMF has been warning about the impact of economic reforms, the austerity drive and lower oil revenues for some time. Earlier this year, it said Riyadh’s aim of wiping out the budget deficit by 2019 or 2020 could harm the economy. Finance minister Mohammed Al-Jadaan now seems to have taken these views on board. He told Bloomberg on 12 October that the government might slow down some of its planned reforms, including subsidy removals, and delay the balanced budget plan. “We will move with our schedule, but areas where we think actually we can adjust the reforms so that they’re not as aggressive, we will,” Al-Jadaan said.

The government has reversed course on a number of reform efforts over the past year, notably reinstating some public sector benefits and indicating it was revising some targets in the National Transformation Plan 2020 (GSN 1,043/1). Each time it trims reform plans, however, it chips away at the wider credibility of the entire economic agenda set by MBS.

The biggest element of that strategy – the listing of a 5% chunk of Aramco – could be the next in line for revision. According to an article in The Financial Times on 13 October, citing sources the FT said were familiar with discussions inside the company, the international listing might be even be shelved. There are two main problems: the likely value placed on the company and the wider scrutiny it would face from investors. The $2trn valuation previously cited as MBS’s target for the initial public offering (IPO) is widely seen as unachievable, but anything too far away from that figure will cause the heir apparent embarrassment. In addition, IPO investors’ demands for transparency could be troubling for the Saudi state, whose methods for estimating the level of oil reserves Aramco has access to and how its revenues are spent will come under close scrutiny.

Nonetheless, money raised from a share sale would help to underpin the government’s wider economic reform efforts. The FT suggested that a private placement could substitute for an IPO, possibly with investors from China, was now looking more likely than the London or New York listing which has been expected to deliver the ‘world’s largest IPO’. Reuters then reported that PetroChina and Sinopec had written to Aramco to express interest in buying a 5% stake directly. The abandonment of the high-profile international IPO would be a set-back for MBS, but a private placement of shares – recycling some of China’s huge reserves and potentially pulling in sovereign wealth funds from other friendly (and discrete) countries – may be preferable to no deal at alls. A smaller amount might then be listed locally on the Saudi Stock Exchange (Tadawul).

Meanwhile, there are abundant signs of the continued negative impact of the austerity drive. London-based consultancy Capital Economics says consumer spending and investment is on the slide, with the value of imported goods dropping by more than 4.5% of GDP since early 2016. Remittance outflows have also fallen by 2% of GDP – a symptom of fewer foreign labourers in work in the kingdom due to slower project spending.

Among moves to ease the difficulties, Saudi Arabian Monetary Authority (Sama) governor Ahmed Al-Kholifey says the central bank may increase the maximum allowable loan-to-deposit ratio in a bid to boost growth. To truly revive the economy, the government also needs events like the Future Investment Initiative to prompt significant new, non-oil investment into the country too.

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