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|23 August, 2018

Saudi Aramco IPO delay not likely to impact on economy, says economist

Capital Economics says progress with other reforms has remained slow

Image used for illustrative purpose. An Aramco oil tank is seen at the Production facility at Saudi Aramco's Shaybah oilfield in the Empty Quarter, Saudi Arabia May 22, 2018.

Image used for illustrative purpose. An Aramco oil tank is seen at the Production facility at Saudi Aramco's Shaybah oilfield in the Empty Quarter, Saudi Arabia May 22, 2018.

REUTERS/Ahmed Jadallah

Further delays to the process of listing Saudi Aramco either domestically or on global markets is unlikely to have an impact on the country's markets or its wider economy, according to Capital Economics.

The London-based firm said in a note issued on Thursday that "We don’t think another delay would have a significant direct impact on Saudi Arabia’s economy or financial markets in the near-term.

The firm pointed out in its note that the timeline for the Kingdom's IPO "has already been pushed back quite far". A listing of the company at least on the Saudi stock exchange, Tadawul, had been due to take place this year.

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It also said that the main stumbling block for the initial public offering (IPO) of a 5 percent share of the state-owned oil giant "still  seems to be Crown Prince Mohammed bin Salman’s $2 trillion valuation placed on Aramco", but added that the kingdom's need for revenue from any deal had reduced, given that its finances had improved.

"A bigger problem, in our view is that we have seen little in the way of progress in other areas needed to raise productivity, such as education reform, privatisation in other parts of the economy, and higher investment. Indeed, the latest direct investment figures show a worrying decline in inflows.

Hasnain Malik, the Dubai-based head of equity research and strategy at Exotix Capital, argued in a note sent to media on Thursday that a delay to the IPO process "demonstrates not that there is a lack of commitment to reform but rather the ability to change course if circumstances change, and the higher oil price certainly qualifies as that".

"Saudi Aramco is already a well-run company so privatisation was not a step toward efficiency gains. Also Saudi Arabia has already got the nod for inclusion in MSCI’s benchmark Emerging Market equity index, and with it the influx of new international investors.”

Reuters reported on Wednesday that Saudi Arabia had called off the proposed listing of Aramco on Wednesday and had disbanded the advisory team that had been put together to deliver the deal.

However, in a statement issued to media on Thursday, the kingdom's minister of energy, industry and mineral resources, Khalid Al Falih, said that the government "remains committed to the IPO of Saudi Aramco at a time of its own choosing when conditions are optimum".

"This timing will depend on multiple factors, including favorable market conditions, and a downstream acquisition which the company will pursue in the next few months," Al Falih said.

He also pointed out that internal preparations had been made within the company for a listing, and that reforms were being made within the kingdom to pave the way for the listing, including reforms to its tax laws and the drafting of a new, long-term concession to the company.

"This is all positive progress on what is a complex process, preparing the company and the Kingdom for what will ultimately be a global landmark market offering of unprecedented quality and scale,” Al Falih said.

Proceeds from the IPO were due to be used by the kingdom's Public Investment Fund to fund the kingdom's ambitious Vision 2030 plans, but a plan was revealed last month for Saudi Aramco to buy a stake in the kingdom's petrochemicals giant SABIC from the Public Infrastructure Fund, which Saudi Aramco's chief executive Amin Nasser said would affect the timing of its IPO process.

(Writing by Michael Fahy; Editing by Lena Rahbany)

© ZAWYA 2018

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