snapshots

Saudi Arabia: The Freezing of the Aramco IPO Serves as a Reality Check for the Crown Prince

4 MINS READAug 23, 2018 | 20:10 GMT
The Big Picture

After oil prices fell, Saudi Arabia and other oil-producing countries were forced to look at ways to cut spending while putting reforms in place to stabilize their economies over the long run. Saudi Arabia enshrined this strategy in its ambitious Vision 2030 plan. But as oil prices have recovered, the impetus behind the painful reforms has lessened. And now some plans, such as the Saudi Aramco IPO, are being shelved.

What Happened

Reuters reported Aug. 22 that the initial public offering of stock in the Saudi Arabian Oil Co. had stalled and that the panel of financial advisers that had been working on it had been disbanded as Riyadh looks at alternatives. But while it appears to be down, the IPO of the national oil company may not officially be out. Saudi Energy Minister Khalid al-Falih said that the government still aims to go through with the sale when market conditions are right. For now, however, it's evident that the Saudi Aramco IPO — the centerpiece of funding for Crown Prince Mohammed bin Salman's lofty Vision 2030 plan for reform — is unlikely to move forward any time soon.

An Expected Development

Despite no official announcement of a halt in the IPO, Riyadh had shifted the focus of its reform efforts away from the stock sale several months ago. There has been little news this year of progress on a sale contrasting with the steady drumbeat of reports in 2017 that detailed Saudi Aramco's work with bankers, with independent oil and gas auditors on its reserves, and on the necessary regulatory and fiscal changes that would be needed to support the sale. Originally, the proceeds from the sale had been earmarked to funnel capital into the country's Public Investment Fund (PIF), which is making strategic investments in several other sectors, including raising its stake in Tesla, Inc., to nearly 5 percent this year and putting $45 billion into the $100 billion SoftBank Vision Fund.

A Reality Check for the Crown Prince

Although Saudi Arabia is not attributing the IPO's stallout to internal challenges and constraints, the lack of recent progress on it does serve as another reality check on the crown prince's reform efforts. There has been considerable debate within Saudi Arabia about whether the sale was warranted and about whether selling off even a small stake of the kingdom's crown jewel was too risky. Once the market deemed the crown prince's lofty $2 trillion valuation for the stock too high — investors concurred that it was worth $1.4 trillion at most — he lost the momentum he needed to push past the internal disagreements. In addition, the crown prince sought to list the company in New York, where it would be subject to U.S. Securities and Exchange Commission (SEC) rules. A further risk arose from U.S. court cases brought under the 2016 Justice Against Sponsors of Terrorism Act (JASTA), which strips away sovereign immunity in international terrorism cases. In March, a judge threw out a Saudi request to dismiss one of the lawsuits filed under that statute.

A Change in Plans

With the IPO off the table, Riyadh has been looking at alternatives to support its sovereign wealth fund. The most promising thus far, amid discussion of much smaller IPOs of different companies, involves Saudi Aramco acquiring the PIF's 70 percent stake in Saudi petrochemical firm SABIC, worth $70 billion. Saudi Aramco is reportedly preparing a $40 billion to $60 billion bond issuance to help finance the acquisition. That bond offering, coupled with the SABIC acquisition, would funnel the cash into the PIF's hands. The PIF is also looking at taking out a loan worth up to $12 billion.

Slowing Reforms, Accelerating Economy

While the country's future reform efforts surrounding the IPO have languished, the Saudi economy overall has turned a corner thanks to higher oil revenue and other reforms that involve boosting non-oil revenue. For the first half of 2018, Saudi Arabia has hit 62 percent of its 2018 target for non-oil revenue. This quick growth has kept the kingdom's fiscal deficit at just $11.1 billion for the first half of the year. And Jadwa Investment, a Saudi investment bank, expects the country's budget deficit this year to be less than $30 billion and about 3.8 percent of gross domestic product. That figure is a far cry from the deficits of more than $50 billion that kingdom has run in recent years. These improvements have allowed the country to slow some of its reform efforts and also expand its spending overall. For 2018, Saudi Arabia has already shifted from an austerity budget toward an expansionary one, and improving fiscal conditions will allow it to continue to do so in its 2019 budget, which will be finished in December.

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