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If Aramco IPO Falters, The Biggest Hurdles Could Be Political

This article is more than 5 years old.

Update: Late on Wednesday night, Saudi oil minister Khalid al Falih denied the Reuters report discussed below. He issued a statement, printed in Arab News.

Reports are coming in that the Aramco IPO is being scrapped. Neither the company nor the Saudi government has confirmed these reports. This is not the first time such reports have come out only to be denied or refuted by official company or government spokespeople. However, if true, it represents a drastic change in plans, so let’s look at the implications for the Saudi government and its economic transformation plans.

Politically, the implications for King Salman and his son, crown prince Mohammad are tricky. The crown prince has promised changes that are, so far, proving difficult to deliver on.

Prince Mohammad first spoke about the Aramco IPO in his first interview with the international press back in January, 2016. Almost from the start, an IPO was presented as a major component of his economic transformation plans, which also included a $500 billion planned city in the desert, major social reforms and the massive growth of the country’s sovereign wealth fund (called the Public Investment Fund or PIF).

Plans for the $500 billion tech city, called NEOM, seem to be in the air. So far it appears that only a few royal palaces have been built and no businesses are contracted to move in. Socially, Saudi Arabia has made it easier for women to work and start businesses as well as removed the ban on female driving. However, it has also arrested many prominent women’s rights activists without clear accusations and has silenced dozens of others.

The Public Investment Fund, which Prime Mohammad claimed would grow to between $2 and $3 trillion, remains underfunded at about $250 billion today. According to his plans, ownership of a publicly listed Aramco would be transferred to the PIF to make up the majority of that growth.

If the IPO is indeed called off, it would be difficult for Saudi Arabia to argue that Aramco’s valuation is anywhere near $2 trillion. Even if Aramco comes to be owned by the PIF and sells some of its shares privately (an option which has been discussed), Aramco as an asset would be fairly illiquid and would not allow the PIF any more flexibility in its other investment decisions.

Politically, Saudi Arabia has been touting the PIF both domestically and abroad as a powerful investment tool to achieve the country’s economic aims. For example, Tesla CEO Elon Musk recently claimed that the Saudi PIF had the capability to take his company private at $420 dollars a share. This was probably a vast exaggeration of the PIF’s financial capacity. Absent PIF ownership of Aramco and an Aramco public listing, Saudi Arabia will be hard pressed to grow the PIF and use it as a transformative tool.

Saudi Aramco

One theory of how the PIF will obtain cash is that Aramco is going to purchase about $70 billion worth of Sabic, a Saudi petrochemicals company, from the PIF. This would still only provide the PIF with a relatively small amount of cash. For comparison, Norway’s sovereign wealth fund is over $1 trillion.

Saudi Arabia already made a budgetary sacrifice for Aramco when it cut Aramco’s taxes from 85% to 50% to make the company more attractive to international investors. It is possible that Saudi Arabia will raise the tax on Aramco if it does not list publicly.

Some oil traders believed that Saudi Arabia would deliberately push up oil prices before Aramco’s IPO in order to obtain the highest possible valuation. A price point of around $70 per barrel was cited by some sources, however the Saudi oil ministry refused to comment on these rumors. Now, many analysts believe oil prices are on the rise as the markets prepare for the new U.S. sanctions on Iranian oil to begin in November. Both the WTI and Brent benchmarks for oil rose today, however this is largely due to a major draw in oil stocks in the U.S. and declining oil exports from Iran, rather than news of the Aramco IPO.

The king and his son wagered a great deal of their political capital on the ability to transform the country’s economy. In truth, Saudi Arabia’s economic future does not and never did depend on an Aramco IPO. However, the king and his son portrayed a public listing of Aramco as a key aspect of Saudi Arabia’s economic future. Walking back this promise in front of the Saudi people may prove challenging, particularly as Saudi employment continues to lag and the government’s repression of political speech and civic discourse grows more severe.

 

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