Postponed Aramco IPO Hampers Mohammed Bin Salman's Efforts to Transform the Kingdom
On 22 August, following a direct intervention by King Salman himself, the Saudi government shelved plans to publicly float 5 percent of Saudi Aramco. The IPO was intended to raise as much as USD 100 billion in capital for the Public Investment Fund (‘PIF’), a Saudi sovereign wealth fund that Mohammed bin Salman (‘MbS’) has earmarked for a central role in Vision 2030. As part of Vision 2030, the initiative launched by MbS in 2016 to modernise the Saudi economy, the PIF aims to invest USD 400 billion into non-oil assets at home and overseas by 2020.
Instead of the Aramco IPO, the Saudi government has proposed to raise USD 70 billion for the PIF through a more convoluted strategy whereby Saudi Aramco is to purchase SABIC, a giant petrochemicals business currently owned by the PIF. Although viewed as little more than creative state accounting by some observers, the plan will nonetheless go some way towards plugging the hole left by the postponed IPO.
But the transfer of funds to the PIF does not obscure the fact that the postponed listing represents a stumbling block to Vision 2030. The message seems to be that the Saudi government is not yet ready to expose Saudi Aramco – a vital means of wealth transfer amongst the ruling class – to the transparency and governance standards required of a publicly-listed company.
Furthermore, simply using the PIF to fund billions of dollars’ worth of state projects is not tantamount to structural economic reforms that would make the kingdom a more attractive and vibrant business environment. The World Bank’s ease of doing business rankings for 2017 indicate that Saudi Arabia offers one of the least conducive environments for business in the Arabian Gulf; only Yemen ranks lower.
MBS has not shown any signs of becoming the liberalising force some suggested he would be
This problem does seem to have been recognised by MbS and the other architects of Saudi’s economic renewal. The IMF recently praised the Saudi government for its efforts at structural reforms, such as the introduction of a sales tax and the passing of a bankruptcy law, which came into effect in August. The government is also planning to privatise state businesses worth an estimated USD 9 to 11 billion in the next three years.
Whether Vision 2030 can ultimately transform the Saudi economy will hinge upon whether the government can continue to push through similar reforms.
Particular attention should be paid to improving the banking system. Banking services in Saudi Arabia are exclusive to state firms and businesses belonging to prominent families with close ties to the ruling Al Saud family. Small and medium-sized enterprises reportedly receive just 2 percent of bank loans.
Property law represents another area requiring significant efforts at reform. Saudi Arabia’s land registries are opaque and vulnerable to manipulation. Members of the Al Saud ruling family have been known to expropriate land indiscriminately for their own use. Today, start-ups find it difficult to obtain real estate in cities where significant quantities of commercially-zoned land belonging to political and merchant elites is left idle. Companies without any property assets to use as collateral face further obstacles in receiving financial banking.
Such reforms are desperately needed to win back foreign investment. Saudi Arabia had net capital outflows totalling USD 80 billion in 2017 and JP Morgan, an American bank, estimates that this number will fall to USD 65 billion in 2018. The Organisation for Economic Co-operation and Development published a report in 2016 stating that Saudi Arabia has the most restrictive environment for foreign investors out of the G20 countries. Again, there are signs the Saudi authorities are responding. For example, the government is set to allow foreign investors to wholly own businesses in some industries without having to cede equity to a local partner.
MbS has also not shown any signs of becoming the liberalising force some suggested he would be, potentially deterring some investors. Although MbS has overseen the opening of public cinemas and an end to the ban on female drivers, these measures have been offset by a harsh crackdown on internal dissent. The crown prince’s anti-corruption purge last year was touted as a move to clean up business in the kingdom but it has not really had this effect; many investors are increasingly concerned about the arbitrary expropriations from private businesspersons.
It is also apparent that MbS’ boldness and ambition have not paid off in the foreign policy arena. He has led an unpopular and costly military campaign in Yemen and initiated a trade embargo with Qatar which shows no signs of being resolved.
These trends all suggest that MbS’ grand strategy to change his country may be faltering. King Salman’s instructions to delay the Aramco IPO follow a similar intervention earlier this year to check his son’s power. In July, King Salman stated that his country would not endorse any plans to recognise Jerusalem as the capital of Israel, despite earlier indications to the contrary by MbS.
In spite of this, opportunities abound in the kingdom for global financial institutions; American banks JP Morgan and Morgan Stanley will miss out on potential fees worth around USD 200 million on the Aramco IPO but they are already reported to be working on the SABIC deal. And in the last year, US bank Citigroup has set up an office for its capital markets business in Saudi Arabia, as has boutique investment bank Evercore in anticipation of a wave of privatisations.
There is widespread acceptance within Saudi Arabia that the country must change in order to survive and thrive in a post-oil global economy. Although MbS’ brash and radical approach to reform appears to have faltered slightly, it is ultimately a question of when, not if, the country will open up fully to foreign investment.