By Ovunc Kutlu
NEW YORK (AA) – Saudi Arabia is attempting to strengthen its stock exchange through an initial public offering of its state-owned oil company, experts told Anadolu Agency on Wednesday.
Deputy Crown Prince Mohammed bin Salman announced plans last week to lower the country’s overdependence on oil.
Selling less than 5 percent of shares in Aramco in an IPO in the coming months will partially generate revenue for a planned sovereign wealth fund that seeks to be the world’s largest with $2 trillion.
But the IPO is also considered as a way to boost the Kingdom’s stock market, Tadawul, in order to attack foreign investment.
“The Saudi government would not float a portion of Aramco on the Tadawul if it was not in the spirit of encouraging the further opening of the domestic equity market,” said Dr. Florence Eid-Oakden, chief economist at the London-based Arabia Monitor analysis firm.
“The floating of a portion of Aramco would certainly increase the size of the stock market quite significantly,” she told Anadolu Agency.
Tadawul currently tops other Mideast stock markets, including Qatar, Abu Dhabi and Dubai — by a market capitalization of more than $400 billion, although it only recently opened to foreign investors in mid-2015.
“Since opening to foreign direct investment in June 2015, 11 overseas investors have now received their licenses as qualified financial institutions to trade on Tadawul. We expect more of this to come, independently of the listing of Aramco, but such a listing would most boost the market significantly further,” Eid-Oakden said.
The timing and valuation of Aramco will shape the IPO’s affect on Tadawul, she said. “It is too early to determine this now, but the impact would be large.”
Salman also stated last week that he expects Aramco to be valued around $2 trillion.
The market capitalization of Aramco, which has the world’s largest proven crude reserves and production, could exceed that, however, there are still hurdles that need to be overcome.
Like any other publicly traded company, foreign investors would expect transparency, from the company’s board of directors about its structure.
As the crown jewel of the Kingdom, the company is controlled by the Saudi royal family. Although experts said that less than 5 percent in stocks being publicly offered would not diminish Riyadh’s control, they emphasized some steps are required.
“For Aramco to get external funding, it needs to put in a governance structure that is in line with corporate world expectations,” according to Sarwant Singh, senior partner at the Texas-based research and consulting firm Frost & Sullivan.
“I do agree that Aramco’s IPO will make a significant share of [Tadawul],” he told Anadolu Agency, while noting that less than 5 percent in stocks being publicly offered would not “compromise the clout of the Saudi family.”
Eid-Oakden also said a 5 percent stake would not limit the control of the Saudi royal family within the company, but pointed to structural reforms Aramco could undertake.
“A corporate governance structure would start to offer more transparency on the workings of Aramco, which is an important development independently of the degree of control by the royal family, for the time being,” she said.
Moreover, other Saudi family-owned businesses and companies could follow in Aramco’s footsteps as well.
Singh said most bankers in the region believe the process is “a gold rush,” while investors and bankers in the Middle East are “boosting their strength and getting aligned to family run businesses, as there is a realization that hundreds of diversified family businesses will also divest loss-making businesses and get into new ones.”
Aramco could also be eventually traded on the U.S. stock market, the world’s biggest stock exchange with market capitalization around $18 trillion.
If and when that happens, Singh said, Aramco would “replace Apple as the world’s largest valued company on the stock exchange by a mile or two.”
Apple’s market capitalization stands at around $520 billion.
