Daily Management Review

BMI Research: Failure of Saudi Aramco’s IPO will mean failure of the Saudis’ economy


05/08/2017


If the Saudi Aramco IPO does not bring the desired funds, a planned project to diversify the kingdom’s economy will not be able to move forward as planned, BMI Research’s report said.



BroadArrow
BroadArrow
However, investors are clearly set on a successful IPO despite everything.

"The IPO will become the litmus test of foreign investors' confidence in Saudi Arabia. The IPO’s success will be crucial in determining the kingdom’s economic and political trajectory over the next decade. It will also help increase investor confidence, increase transparency in the securities arena and allow rapid monitoring of the economy’s diversification process, while at the same time strengthening the political capital of Muhammad bin Salman", the paper said.

The IPO is planned to be held in 2018 on the TADAWUL domestic exchange, as well as in another stock market. Riyadh has not yet decided which foreign stock exchanges will participate in the listing of Aramco, but New York, London, Toronto and Hong Kong already expressed their desire in the process.

The "Vision 2030" plan was presented a year ago, after two years of low oil prices contributed to a drop in government revenues and made large holes in the national budgets of the Gulf countries.

Dependence of the kingdom's profits on fossil fuels makes it particularly vulnerable to fluctuations in oil and commodity markets. Diversification is needed as soon as possible if they continue to finance subsidies and social services, to which Saudi citizens have long been accustomed.

Saudi Arabia will retain full control over oil wells and production of Aramco even after selling 5% of state shares, Crown Prince Mohamed bin Salman said earlier this week.

The country’s authorities plan to hold Saudi Aramco’s IPO in the framework of the plan of Crown Prince Mohammed bin Salman to create the world's largest sovereign investment fund and reduce the economy’s dependence on hydrocarbons.

As noted in the report of the Grantham Research Institute and the Carbon Tracker Initiative, the peak demand for oil will be in 2020, as alternative energy sources and electric vehicles are gaining popularity. This makes position of oil producers precarious.

Even members of the government of Saudi Arabia are doubting results of Aramco’s IPO. Last week, Bloomberg’s source said that the company could be estimated at about $ 500 billion under current conditions, since a significant portion of the money goes to paying taxes. Another source familiar with the IPO talks said that the cost could be less than $ 1 trillion, based on Aramco's ability to generate cash flow. Sale of 5% of the shares, thus, will bring at least $ 25 billion.

source: bloomberg.com






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