By Joaquin Robles
Joaquín Robles is a Bachelor in Business Science, with a specialization in Private Banking and Financial Counseling by the I.E.B. He is also an Account Manager at XTB
Fund managers in the Middle East are confident that the sale of state-owned Saudi Arabian Oil Co (Aramco) will shake the global equity market with an unprecedented initial public offering. This operation would turn it into the world’s most valuable company, valued at around $1.5 trillion.
Investors are focusing on Aramco as the most important event of the year, given that in addition to being worth $4.8 billion it is the continuation of great changes taking place in Saudi Arabia, where historical reforms have taken place in the social and economic sectors, as well as in the markets in recent years.
The Aramco IPO will be the confirmation of the beginning of a phase of structural reforms, as according to its leaders there will be other public offerings for state entities. The company’s market capitalization will double that of Apple, which is currently the most valuable company in the world, will be four times larger than Exxon Mobil Co. and account for at least one-fifth of the MSCI Emerging Markets Index valued at $5.8 trillion, a benchmark for emerging markets. At the same time, Saudi Arabia plans to create the largest sovereign wealth fund and sell hundreds of state assets, including shares in the stock market, football clubs, and flour mills. Aramco will be ready for its IPO in the second half of the year, CEO Amin Nasser said last week.
Saudi Arabia would obtain $75 billion for the sale of a 5 percent in Aramco in the initial public offering, a scenario under which it would be worth $1.5 trillion dollars, used to implement the planned reforms and alleviate dependence on oil. This is vital for the kingdom, especially in the midst of concerns regarding the long-term decline in oil demand. For the global oil markets, the initial public offering may provide more transparency, since an independent audit of the proven reserves will likely be required.
There is still no confirmation of when the IPO will take place. Saudi Oil Minister Khalid Al-Falih stated on Wednesday while at the World Economic Forum in Davos that the IPO will take place “when the time is right”. We hope that 2018 will be the right time, but ultimately we have to make sure the market is ready, he said, when asked if he was referring to a delay.
On January 10, Tadawul, the Saudi Arabian stock exchange, announced it had adopted a series of amendments to the Listing Rules, including an update of its independent Custody Model and the implementation of a Market Making program. The local regulator also provided more flexibility in trading limits required for qualified foreign investors. Saudi Crown Prince Mohammed bin Salman said in April 2016 that he expected the value of Aramco to exceed two trillion dollars.
Tadawul’s All Share index lagged behind developing economies last year, up 0.2 percent, compared to the 34 percent rise in the MSCI Emerging Market index. The Saudi indicator has increased by 3.5 percent in 2018, less than the developing country average of 8.4 percent. Saudi Arabia will likely be classified as an emerging market by MSCI and FTSE Russell this year.