Failed Aramco IPO Could Tank Saudi Diversification Plan

If the initial public offering of Saudi Aramco should fail to raise desired funds, the kingdom’s planned economic diversification project would be unable to move forward as planned, according to a new report by BMI Research.

The report, compiled by a company owned by Fitch Ratings, said the IPO could be a “game changer”, but said that investors seemed lukewarm towards the historic listing, Oilprice reported.

 “The IPO serves as a very public litmus test over overseas investor confidence in Saudi Arabia,” the report read. “The success of the IPO will be crucial in determining the economic and political trajectory of the kingdom over the coming decade. As a central tenet of Vision 2030, a successful public market listing would boost investor confidence; increase transparency in the equities arena; and fast-track the diversification process of the economy, while simultaneously bolstering Deputy Crown Prince Mohammed bin Salman’s political capital.”

The IPO is scheduled to take place in 2018, with listings on the domestic Tadawul exchange as well as one other stock market. Riyadh has yet to decide which foreign exchange will host the Aramco listing, but New York, London, Toronto, and Hong Kong all want in.

The Vision 2030 plan was announced a year ago, after two years of low oil prices had destroyed government revenues and caused massive holes in national budgets across (Persian) Gulf countries (Saudi Arabia, Kuwait, the United Arab Emirates, Qatar, Bahrain, and Oman).

The KSA’s reliance on fossil fuel profits make it especially vulnerable to fluctuations in oil and commodities markets. Diversification needed to occur sooner, rather than later, if they are to continue funding the subsidies and welfare services to which Saudi citizens have become accustomed.

Saudi Arabia will continue to have full control over the oil wells and production of Aramco even after the sale of public shares that total 5% of the company, Mohammed bin Salman said earlier this week.

“The wells will still be owned by the government. The company only has the right to benefit from the wells. This is the same as before and there are no changes to that,” said the prince on state television, as quoted by Bloomberg.