Saudi Aramco's 5% flotation ‘needs effective planning’

Updated 09 October 2016

Saudi Aramco's 5% flotation ‘needs effective planning’

JEDDAH: Well-placed industry sources confirmed on Saturday that Saudi Aramco will sell shares in the “entire business” and not just in its refining or distribution operations.

As reported earlier, the company plans to sell a stake of approximately 5 percent — a move that, experts say, could value the company in the trillions of dollars and could result in its overtaking Apple Inc. as the world’s largest listed company.
The 5 percent sale was first announced by Deputy Crown Prince Mohammed bin Salman in April; it is part of Saudi Vision 2030 which aims to reduce dependence on oil revenues.
The oil giant will decide “very soon” on the list of investment banks and advisers to handle the flotation, Saudi Aramco CEO Amin H. Nasser told Bloomberg in Bahrain two days ago.
“We are listing a part of the entire company, and not just downstream,” he said, referring to operations including refining and distribution.
Industry sources pointed out that Energy, Industry and Mineral Resources Minister Khalid Al-Falih too had spoken in the past about the 5 percent “including all operations of the company.”
“The company is readying internal financial statements in preparation for the IPO,” an industry source told Arab News.
In the Bloomberg interview, Nasser exuded confidence and said the IPO was going very smoothly.
“We are on target,” he said. “We have made a lot of progress so far.”
The company plans to list shares on the Saudi stock market and is also considering bourses in London, Hong Kong and New York, Nasser said.
The company seeks to double its total production capacity for natural gas, including shale gas, from 12 billion cubic feet per day over the next 10 years, he said.
“We are one of the few companies that is still investing. We will continue to invest in our core business. Our rigs are increasing, and our overall activities are too,” he said.
“Gas is very important to fuel industries, especially in the petrochemical sector,” Nasser said.
The use of gas in power-generation and manufacturing also frees up more crude oil for export, he added.
The CEO’s comment was met with instant approval from oil industry experts.
“Saudi Aramco’s flotation, in my opinion, can be a success if planned well,” Tamer El Zayat, senior economist at the National Commercial Bank, told Arab News.
“Ostensibly, the CEO’s announcement reflects the Saudi government’s keenness to integrate its economy with the global one,” El Zayat added.
“Selling shares in the entire business and listing on international bourses will require accountability, transparency and adopting international standards and practices, which will bode well with investors,” he said.
“Yet, timing will be crucial, especially that global capital markets might be facing a bout of uncertainty and additionally to avoid draining domestic liquidity, in already a dire state,” El Zayat said.
He said that although the process of opening the Saudi stock market to qualified foreign investors had faltered so far, attracting SR1 billion till date, Saudi Aramco flotation in my opinion can be a success if planned well.”
Local economists see Saudi Aramco’s partial privatization plans as a boon for the private sector and the non-energy areas of the Saudi economy.
Analysts estimate that Saudi Aramco generated higher revenues than Apple and Microsoft combined in 2014, before the oil crash that began in the middle of that year.
Saudi Aramco outlined a plan known as In-Kingdom Total Value Add (IKTVA) last year, when the CEO said the company would spend more than $300 billion over the next 10 years, of which 70 percent would be local content.
One of IKTVA’s goals is to double the percentage of locally produced energy-related goods and services to 70 percent of the total spent by 2021.
Local economists see Saudi Aramco’s partial privatization as a boon for the private sector and the non-energy areas of the Saudi economy.
“The partial privatization and listing of Aramco will surely attract foreign investors, boosting portfolio inflows,” Jadwa Investment said in a recent report.
The revenue the IPO brings in will be funneled into the Public Investment Fund.
The fund’s aim is to finance strategic investments at home and abroad, which could give a much-needed boost to straggling Saudi industries outside the energy sector.
Analysts expect the restructuring of the PIF, with its new mandate of investing 50 percent of its non-Aramco assets abroad, will contribute to significantly increasing the equity investment component of portfolio returns in the future, thus helping to diversify current account inflows.
In a recent address to attendees of the Oxford Energy Seminar in London, CEO Nasser outlined some key factors that will play a role in what he described as a “bright horizon” for the company, for the Kingdom, and even perhaps for the energy industry in general.
Nasser also discussed Saudi Arabia’s Vision 2030 in his speech, describing it as “a comprehensive blueprint for the Kingdom’s future” envisioning a strong, thriving Saudi Arabia built on a diversified and sustainable economy, and a nation capable of competing at a global level while offering full, high-quality employment to its people.
In summing up and looking at the overall market ahead, Nasser expressed a sense of optimism for the industry.
“We view current market challenges as a passing storm set against an otherwise bright horizon,” he said.


Lebanon’s credit ratings show reform urgency

Beirut is struggling to deal with waste and corruption in its public finances. (Reuters)
Updated 10 min 10 sec ago

Lebanon’s credit ratings show reform urgency

  • Fitch warns Beirut needs major capital inflows to fund twin budget and current account deficits

BEIRUT: Lebanon is committed to economic reforms and will overcome its crisis, the finance minister said after Fitch downgraded the country’s credit rating to CCC while S&P kept it
at B-/B. Minister Ali Hassan Khalil said the ratings reports showed the urgency for reform, which the government has long put off. “There should be no slacking for a single moment,” he told Reuters. Lebanon is grappling with one of the world’s heaviest public debt burdens at 150 percent of GDP and years of low economic growth. Government finances, riddled with corruption and waste, are strained by a bloated public sector, debt-servicing costs and subsidizing the state-power producer.
Lebanese leaders have warned of financial crisis without changes. The impetus to enact reforms has grown with the slowdown of deposits into its banking sector, a critical source of finance for the state.
The government is now trying to put public finances on a more sustainable path with a deficit cut in the 2019 budget and a plan to fix the state-run power sector, which bleeds funds while inflicting daily power cuts on Lebanese. Fitch said its downgrade of the country’s credit rating to CCC from B- reflected “intensifying pressure on Lebanon’s financing model and increasing risks to the government’s debt servicing capacity.” Lebanon requires substantial capital inflows to fund its large twin budget and current account deficits, it added.
“We will deal responsibly with the reports,” Khalil said. “We are confident we will be able to get out of the crisis.”
S&P Global affirmed Lebanon’s credit rating at B-/B and said the outlook remains negative. It considers Lebanon’s foreign exchange reserves sufficient to service government debt in the “near term.”
The report said it expects Lebanon to make progress on reforms to improve investor confidence given the weakness of foreign currency inflows. However it said it too could lower its rating in the coming 6 to 12 months if banks deposits and central bank foreign exchange reserves continue to fall.

FASTFACT

150% - Lebanon has one of the world’s heaviest public debt burdens at 150 percent of GDP

“Continued weakness in foreign currency inflows and the use of (the central bank’s foreign exchange) reserves to meet government debt-service could test the country’s ability to maintain the currency peg,” the report said. The Lebanese pound is pegged to the dollar. Moody’s downgraded Lebanon’s rating to Caa1 in January.
Markets have been pricing in the risk of a sovereign credit rating downgrade in recent days.
The latest downgrade would have no “material impact” on investor holdings of Lebanon’s bonds as the debt was already rated non-investment grade, said Jan Dehn, head of research at emerging markets investment manager Ashmore Group. “The government has done more on the reform side than many Lebanese governments in the past.”
Economists have questioned whether the government’s efforts were enough to meet its goals. The IMF said last month the deficit would likely be well above the government’s target of 7.6 percent of national output. In 2018, it was over 11 percent.
Nassib Ghobril, chief economist at Byblos Bank, said the current situation should be a “wake-up call” for politicians to form a credible plan that would result in an investment grade rating.
Ghobril said cutting the deficit was a good step, but the government must do more to trim expenditures instead of “the easy way out” by raising taxes and fees. “They have to restructure the public sector; they have to fight tax and customs evasion, not in words but in actions.”