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Aramco IPO's Local Push May Test Saudi 'Vision'

Aramco IPO's Local Push May Dim Saudi 'Vision'

(Bloomberg Opinion) -- As international investors, bankers and executives gather in Riyadh this week for Saudi Arabia’s signature investment summit, the kingdom’s plans for selling shares in its state-owned oil company, Saudi Aramco, will be high on the list of talking points. 

Aramco’s journey to the public market has been less than smooth. The latest wrinkle came earlier this month when international investors’ skepticism over its desired $2 trillion valuation forced a delay in the initial public offering. Despite the setback, Saudi Arabia is determined to push ahead with the Aramco IPO this year. Saudi television news channel Al Arabiya reported Tuesday that the sale process will begin on Sunday, with shares of Aramco set to start trading on the local stock exchange on Dec. 11.

Given the high possibility of a disappointing international response, Saudi Arabia needs — and is counting on  — robust demand from its own citizenry if Aramco is to achieve anything close to the valuation it wants. And indeed, it’s seeking investments from some of the kingdom’s wealthiest families, among others. There’s a potential downside, though, as some of the non-traditional tactics being used in this local sales push could undermine a key goal of the sale.

Many Saudis, with the kingdom’s explicit encouragement, are planning to participate in the IPO. In fact, the Saudi Arabian Monetary Authority (SAMA) expects as many as 7 million local investors to buy in to the offering, and Bloomberg News reported that some Saudi citizens are even planning to take out loans in order to purchase shares in Aramco. Saudi banks are making efforts to accommodate the high interest among retail investors, and regulators are trying to make it easier for them to do so. According to Reuters, SAMA has been checking in with local banks to ensure that they have the necessary liquidity to handle the demand for loans and even exploring how to ease lending restrictions.

On the one hand, the IPO presents a good investment opportunity for Saudi citizens. Aramco is a strong company; it’s long been seen as the crown jewel of the kingdom, so it makes sense for individuals to buy Aramco shares — that is, if they can afford it and it doesn’t subtract from other business ventures or investments. But taking significant amounts of capital from retail investors and putting it into shares of Aramco may work against Saudi Arabia’s efforts to diversify and expand its economy. That, after all, is one of the kingdom’s main motivations for going ahead with the IPO.

As it is, Saudi Arabia faces challenges in meeting the targets called for in Crown Prince Mohammed bin Salman’s “Vision 2030” plan for modernizing the economy and stoking development beyond the oil sector. A recent IMF forecast revealed the Saudi economy is still very much tethered to the oil industry, despite efforts to stimulate the manufacturing, tourism, entertainment, technology and logistics industries. And yet, the Saudi government is encouraging citizens to buy in to the Aramco IPO. According to a Financial Times report, participation in the IPO is being pushed as a “patriotic duty.”

The prospect of up to a third of Saudis committing capital to the purchase of Aramco shares represents a misallocation of private wealth. Saudis are unlikely to purchase Aramco shares for short-term speculation; in fact, Aramco itself is exploring ways to reward retail investors who hold on to their shares in a preemptive effort to reduce volatility once the stock starts trading, according to Bloomberg News. Thus, if they spend their disposable income or savings on Aramco shares or on interest payments for these loans, they won’t be putting that wealth toward economically stimulating ventures.

Beyond that, a situation in which too many unsophisticated retail investors finance their purchase of shares could become a problem for the Saudi economy and individual investors. Back in 2006, irrational exuberance on the part of Saudi retail investors buying on margin helped fuel a precipitous rise in shares on the Tadawul, the kingdom’s stock exchange. Capital from high oil prices also helped fuel the surge, but then when oil prices suddenly plummeted, stocks on the Tadawul crashed. Saudi retail investors who bought stocks on margin suffered losses. Though the Saudi Capital Market Authority has since installed stopgap measures to help prevent a similar crash, retail investors who take out debt to buy shares in Aramco still run the risk of financial difficulties.

The Saudi system does include ways for the Aramco IPO to stimulate the local economy. The 2018 Aramco charter permits the company to grant shares to employees. This would be an effective, simple and quick way to inject wealth into the private economy while helping to diversify away from oil. Indeed, it appears that such a plan may be in the works, though employees aren’t likely to receive shares in the company until after the IPO, according to Energy Intelligence.

The average annual income in Saudi Arabia is just over $20,000, according to the World Bank. Aramco could give each employee more than one year’s average salary in Saudi Arabia by granting less than $1.5 billion worth of stock. Once Aramco completed its public offering on Tadawul, employees would be able to sell shares on the market and access that wealth to use in the economy.

Employees, with their newfound fortunes, could spend more, invest more and help their families. Money gained from selling their employee shares in Aramco could and likely would be put toward domestic tourism and recreation, relatives’ small businesses, or real estate investments. These personal windfalls could even become the genesis of engineering or manufacturing business of their own, helping to boost private employment and further move the economy away from oil.

The Saudi Aramco IPO presents a historic opportunity for citizens to invest in their country’s most valuable asset. But sinking too much local capital into the offering risks impeding Saudi Arabia’s greater economic ambitions.

To contact the editor responsible for this story: Beth Williams at bewilliams@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Ellen R. Wald is president of Transversal Consulting and a nonresident senior fellow at the Atlantic Council's Global Energy Center.

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