13 December 2019

 

Full Report

Predictions

  • Riyadh will use successful listing of Aramco on domestic stock exchange to bolster support for Vision 2030 and continue pursuit of foreign IPO
  • USD 25.6 billion raised through listing will not be sufficient to fund major Vision 2030 projects, leading to delays of high-profile developments
  • Crown Prince’s long-term commitment to social and economic reform will present growing commercial opportunities for foreign firms in coming years

 

Analysis

The national oil firm Saudi Aramco began trading on the domestic Tadawul exchange on 11 December, with its share price quickly surging by the maximum 10% permitted to USD 9.39, giving Aramco a valuation of USD 1.88 trillion. Shares briefly hit USD 10.32 the following day, sending Aramco’s valuation to USD 2 trillion, before subsiding to USD 1.96 trillion by the close of trading on 12 December. The company’s Initial Public Offering (IPO), which closed on 5 December, raised a record USD 25.6 billion from the sale of a 1.5% stake in the company and gave Aramco an initial valuation of USD 1.7 trillion.

Crown Prince Mohammed bin Salman (MbS) views the Aramco IPO as vital to securing funding for his Vision 2030 reform programme, but his initial plan to list 5% of the company’s shares on a foreign exchange – with the aim of raising USD 100 billion based on a USD 2 trillion valuation – was scaled back due to difficulties in securing significant foreign investor interest (see our 29 November Report). To compensate for this, MbS heavily promoted the IPO domestically, exerting significant pressure on Saudi businesses and wealthy families to acquire shares, and encouraging Saudi citizens to invest out of a sense of patriotic duty. Riyadh’s regional allies Kuwait and the UAE also invested heavily. This led to the IPO being 4.7 times oversubscribed, and likely contributed to the surging share price on its first two days on the Tadawul.

Kingdom of Saudi Arabia: A poster of the Crown Prince of Saudi Arabia Muhammed Bin Salaman MBS on Saudi Flag promoting the Vision 2030

MbS will view Aramco’s IPO as a success, particularly given it eventually reached the promised USD 2 trillion valuation, albeit only after trading had begun. The IPO also marks the clearest economic achievement of Vision 2030 so far, with many other high-profile projects struggling to secure significant foreign investment. In particular, MbS will hope that Aramco’s surging share price will support his efforts to promote its attractiveness to international investors ahead of a foreign listing, which remains the Crown Prince’s ambition. MbS will hope the success of the domestic listing lends momentum to such plans, with reports on 11 December that Riyadh is considering a listing in Asia. That is likely because of potentially less stringent regulations compared to London or New York, but also reflects the importance of Asian markets – namely Japan, China and South Korea – as buyers of Saudi oil. It is also possible that MbS considers Asian firms to be less deterred than Western investors by the reputational risks associated with Saudi state companies, given accusations levelled at Riyadh over ongoing human rights violations and the murder of Saudi journalist Jamal Khashoggi last year.

However, significant legal and regulatory requirements mean that a foreign listing of Aramco’s shares will be a prolonged process. Moreover, the IPO’s raising of USD 26.5 billion will not be sufficient to fund major Vision 2030 development plans, with the flagship Neom megacity project alone estimated to cost USD 500 billion. Such funding constraints, as well as the continued reticence of foreign investors, will result in delays to some Vision 2030 projects. That said, MbS is focused on a long-term approach to economic diversification and is committed to his reform programme, while the economy is set to grow in 2020 (see our accompanying Saudi Arabia Report). There will consequently be growing commercial opportunities for foreign companies across various sectors in Saudi Arabia in the coming years, despite setbacks to more prominent and high-cost Vision 2030 projects.

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