Riyadh considering Saudi Aramco IPO

Friday 15/01/2016
Saudi Aramco oil facility in Dammam, 450km east of the Saudi capital Riyadh.

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.