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28 November 2019

Saudi Aramco's IPO unlikely to have direct fiscal effect, says Fitch

The effect on Saudi Arabia's external balance sheet will depend on the nature of the Kingdom’s sovereign wealth fund investments and the sources of financing for the initial public offering (IPO).

Bloomberg/Simon Dawson

by Kudakwashe Muzoriwa

Fitch Ratings said that Saudi Aramco’s public share sale will have little direct fiscal effect but could help offset the economic impact of renewed government austerity measures by allowing the Public Investment Fund (PIF) to boost domestic investments.

The IPO is projected to generate between SAR 90-96 billion ($24-26 billion) or three per cent of the Kingdom’s GDP at the indicative valuation range of $1.6-1.7 trillion and these proceeds will be used for domestic as well as foreign investments. 

Fitch expects PIF's investment focus to be mainly domestic, which could help non-oil growth, although there is some risk of the private sector allocating capital to the IPO at the expense of other domestic investments.

The Kingdom’s sovereign wealth fund’s capacity to invest is also being strengthened by the sale of a 70 per cent stake in SABIC to Saudi Aramco for $69 billion agreed in March 2019 and PIF debt issuance and dividends from its listed domestic equity holdings.

The PIF’s domestic investments include a large theme park complex outside Riyadh, tourist developments on the Red Sea coast and Saudi Arabian Military Industries, a defence company launched in 2017 that is a key pillar of the Saudi Arabia's industrial development strategy.

However, the rating agency said that the timeline and economic impact of announced PIF projects is uncertain. The use of IPO proceeds for PIF investments abroad or domestic investments with high import content could put pressure on Saudi Arabia’s official foreign exchange reserves, said Fitch.

The Kingdom reserves, which are forecasted at about $500 billion at the end of 2019, have increased only slightly in the last two years despite large current account surpluses and debt issuance. This is partly because PIF and other public sector entities have bought foreign assets.


RELATED STORIES: Saudi Aramco Fitch Ratings Public Investment Fund SABIC





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