Economic Analysis - Aramco IPO: Scenarios And Implications - FEB 2018

BMI View: While our core view remains that the Saudi government will move forward with an IPO of state-owned oil company Saudi Aramco, regulatory challenges and the sheer size of the listing pose significant risks. A decision not to list the company internationally, opting instead for a domestic listing only, a private placement or cancelling the listing , would raise significant doubts among foreign investors on the kingdom's business environment and commitment to reform.

The initial public offering (IPO) of Saudi Arabia's national oil company Saudi Aramco, which is a central tenet of the kingdom's Vision 2030 socio-economic transformation plan, will be a crucial indicator of the government's commitment to reform. The fall in oil prices since H214 has forced the Saudi government to take a number of bold economic measures, in order to reduce reliance on oil proceeds (both in terms of economic production and government revenue). In particular, Saudi Arabia's ambitious diversification plans, led by Crown Prince Mohammed bin Salman, are expected to be funded by foreign investment into the kingdom. As part of Vision 2030, Mohammed bin Salman promised a number of key reforms, including facilitating foreign participation in the stock market, generating an additional USD100bn a year of non-oil revenue through to 2020, and increasing the share of the non-oil sector in the economy to 60% by 2030. Listing up to 5% of Saudi Aramco was another of these promises, and its implementation will therefore have a key impact on investor sentiment towards commitment to reform.

Our core view remains that the government will move forward with the IPO, with a combination of an international listing in New York, London or Hong Kong and a simultaneous domestic listing on Saudi Arabia's Tadawul. Aside from the financial benefits, an international IPO would be symbolically hugely important, boosting investor sentiment toward the country's prospects for reform. That said, the required level of transparency and improvements to governance are still significant challenges on the path towards an international listing, suggesting potential for alternative scenarios - where the government does not list internationally - cannot be ruled out. Below we consider our core view and some of the alternative scenarios, highlighting their potential impact and considering what each would say about the government's commitment to reform.

IPO Key To Reduce Decades Of Oil Dependence
Saudi Arabia - Brent Prices, GDP Growth & Government Revenues
f = BMI forecast. Source: IAEA, SAMA, BMI

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