Riyadh considering Saudi Aramco IPO
London - With a gloomy economic outlook for the Gulf region, courtesy of falling oil prices, Gulf Cooperation Council (GCC) states are working on new initiatives to weather the economic storm. The latest such effort is the possible launch of an initial public offering (IPO) for stock in Saudi Arabia’s Aramco, worth an estimated $2 trillion-$7 trillion, which would make it the world’s most valuable company.
“This is something that is being reviewed and we believe a decision will be made over the next few months. Personally, I’m enthusiastic about this step,” Saudi Deputy Crown Prince Mohammed bin Salman bin Abdulaziz told the Economist.
Saudi Aramco issued a statement confirming it has been studying various options, including a possible IPO.
“This [IPO] proposal is consistent with the broad and progressive direction pursued by the kingdom for reforms, including privatisation in various sectors of the Saudi economy and deregulation of markets, which the company strongly supports,” it added.
The Aramco announcement came on January 7th, the day Saudi Arabia’s stock exchange had its biggest dip in three years and the other GCC markets were all in the red, which analysts attributed to weak oil prices, China’s economic woes and Saudi-Iranian tensions.
Abhishek Deshpande, an analyst at Natixis, said discussion of a Saudi Aramco IPO showed the kingdom’s determination to address the economic consequences of low oil prices.
“It could be a very big step forward and also means oil prices will stay low for a while,” Deshpande said.
With the realisation that crude oil prices, which reached an 11-year low by January 8th, will not be recovering in the near future, GCC countries look to ease the problem by introducing economic reforms and legitimate efforts at diversifying their economies beyond the energy sector.
At the end of 2015, Saudi Arabia cut government spending after posting a record $98 billion budget deficit for the year. Additionally, the kingdom introduced a number of measures, including an increase in domestic petrol prices of more than 50%. Water, electricity, diesel and kerosene prices also increased.
The austerity measures are expected to save the kingdom around $7 billion annually according to Riyadh-based Jadwa Investment. The firm said savings from the kingdom’s hike on diesel are estimated at $2.75 billion and petrol levies are expected to save an additional $2.5 billion.
A recent report by the McKinsey Global Institute highlighted that Saudi Arabia has the potential in the next 15 years to double its gross domestic product (GDP), increase real household income about 60% and create as many as 6 million jobs. This would provide an additional $800 billion — the equivalent of Turkey’s economy — to the kingdom’s GDP. However, that expectation is dependent on Saudi Arabia supercharging its non-oil sectors.
Leading the way in terms of economic reforms in the rest of the GCC is the United Arab Emirates, which in August 2015 became the first council country to remove transport fuel subsidies. By linking gasoline and diesel prices to global oil markets, government economists estimate the move will save around $7 billion annually.
The UAE is in a better position to weather the oil glut than some of its Gulf neighbours as its economy is more diversified. According to the International Monetary Fund the UAE’s non-oil sectors contribute almost 69% of GDP.
Oman, the region’s biggest oil producer that is not a member of the Organisation of the Petroleum Exporting Countries (OPEC), announced plans to cut government subsidies by nearly two-thirds. The government estimates a deficit of 13% of the country’s GDP for 2016. As a consequence, the country’s cabinet approved fuel subsidy reforms, spending cuts and raised taxes.
Kuwait and Bahrain have lifted subsidies on diesel and kerosene and Kuwait plans to soon end subsidies on petrol.
GCC states have also edged closer to introducing a value-added tax (VAT), although that might take a few years to implement, experts said.