Strategy Note /
Saudi Arabia

SAUDI ARAMCO IPO delay: Much ado about nothing

    Hasnain Malik
    Hasnain Malik

    Strategy & Head of Equity Research

    Tellimer Research
    23 August 2018
    Published byTellimer Research

    The apparent delay to the Saudi Aramco IPO should not be seen as a retreat from Saudi Arabia’s commitment to reform. It rather shows the authorities’ ability to change course if circumstances change (and the higher oil price certainly qualifies as a changed circumstance), as the country’s reform program transitions from aspirational speech to detailed implementation.

    Saudi Aramco is already a well-run company, so privatisation was not a step toward efficiency gains. Moreover, Saudi Arabia has already got the nod for inclusion in MSCI’s benchmark EM equity index, and with it an influx of new international investors. Overall, we view the decision to put the IPO on hold as a pragmatic move, given the additional fiscal space that rising oil prices have afforded Saudi Arabia as well as other privatisation priorities.

    The importance of the reform of the political system from one of competing power centres across the royal family and the clerical establishment into one of highly centralised control is not that it enables a vision to be laid out, which has been done before, but precisely that it allows decisions to be taken quickly, plans to be revised if need be and priorities to be adjusted dynamically.

    Reform of this nature has not been attempted before. China reformed, the former USSR reformed, parts of Latin America reformed, South Africa reformed, Singapore and Dubai created; however, none of these are precedents for what is being undertaken in Saudi, which has its unique social, domestic political, geopolitical and economic conditions. There is no blueprint or manual to follow.

    As the vision is translated into implementation, we should expect tactical changes like the IPO delay. Companies engaging in restructuring do this. Militaries conducting war do this. Why should not a country engaging in one of the most challenging, but necessary, restructurings attempt do the same?