Saudi Arabia’s foreign reserves are depleting thick and fast and there is no tonic insight and this signifies two major challenges for the country. Firstly, it is the price of oil, which is making the colossal impact on its economy and given that there is no diversification in place and the 80% of the economy is dependent on its oil revenue. Finally, there is a much gigantic threat of domestic unrest taking place, as the government tightens its belt around its budget and more harsher budgets will be announced. So, considering an option of doing an IPO for its biggest oil firm- Aramco is considered as a more unwavering option.
This IPO will comfort the government to reduce the stress on its foreign reserves and it also makes the country’s position more sturdier to withstand lower oil prices and combat against all the new players on the market. There is no qualm that Saudi Arabia’s cost of oil production is tremendously low and it can afford to pump more oil at current or lower price levels, but the problem or hindrance was on the budget deficit position. The country was heavily relying on its foreign reserves and this was fashioning more instability for the current Saudi government.
Therefore, an IPO for its biggest oil firm- Aramco is the most appropriate route and big banks are lining up to get the piece of this pie. We think that it is nothing, but a strategical move by the Saudi government and a very clear message to the markets that the oil war is going to get intense and the only thing they care about right now is saving their market share and nothing else. All the rumors that Saudi economy may not be able to survive or local domestic unrest will flare up more can all be answered by using this strategy and the country will have more than enough money to become the king of the ring once again.
The current oil price without any doubt pressed the investor’s appetite for Saudi stock market and for foreign investment, as the country ‘s risk profile situation becomes even worse. The Chart below shows the risk profile for Saudi Arabia and it clearly shows that the situation has become worse.
Source: Bloomberg
But, if Saudi Arabia is thinking that they can keep Iran out of this equation by using the cash though this IPO, then certainly they have missed numbers in their calculations, because there is nothing going to stop them if they pursue the same strategy. Moreover, the risk profile for Iran has become a lot better and this is a positive sign to attract foreign investment.
DISCLOSURE & DISCLAIMER: The above is for informational purposes only and NOT to be construed as specific trading advice. responsibility for trade decisions is solely with the reader.
by Naeem Aslam