By K.S. Anthony on 21 June, 2017

Is The Shakeup In The Saudi Palace Paving The Way For A $2 TRILLION IPO?

This morning brought news of a sudden change of power in Saudi Arabia, but it also brought the Kingdom's economic future into clearer focus. King Salman upended history by naming his son, 31-year-old Mohammed bin Salman, as his new heir while simultaneously relieving his nephew, Saudi Crown Prince Mohammed bin Nayef, of both his place in the line of succession and his post as interior minister, the latter of which will be filled by 33-year-old Prince Abdulaziz bin Saud bin Nayef. The new Crown Prince, known as M.B.S., retains his position as defense minister, but was also appointed to the position of deputy prime minister.

Amidst the barrels of spilled ink, however, came additional news from Riyadh by way of Wall Street as Saudi's main stock benchmark, Tadawul All Share Index, gained 5.5% in a single day to close at 7334.87 – its largest gain since August 2015 – after MSCI announced that it was "launching a consultation on the potential inclusion of the MSCI Saudi Arabia Index in the MSCI Emerging Markets Index." MSCI's press release described a number of efforts put forth by the Kingdom leading to the possible promotion which would take effect in 2018.

"In September 2016, the Saudi Arabian Capital Market Authority (CMA) implemented a new version of "Rules for Qualified Foreign Financial Institutions Investment in Listed Securities". Major enhancements in this version included the increase of foreign ownership limit levels applicable to listed Saudi Arabian companies, the lowering of the minimum assets under management requirements applicable to Qualified Foreign Investors and amendments to the list of Qualified Foreign Investors eligible investor types. These changes have resulted in an increase in the number of Qualified Foreign Investors having entered the Saudi Arabian equity market as reported by the CMA and the Saudi Stock Exchange (Tadawul).

On April 23, 2017, Tadawul followed up by implementing a new market operating model. The new model includes, among other noted improvements, the expansion of the settlement cycle from T+0 to T+2, the introduction of a proper delivery versus payment (DvP) settlement provision, proper failed trade management, and the introduction of short selling and securities borrowing and lending facilities.

Following the introduction of these major enhancements to the accessibility of the Saudi Arabian equity market, MSCI will be consulting with international institutional investors to gather informed feedback on their practical experience of accessing the Saudi equity markets and in particular on the effectiveness of the recently implemented enhancements."

A statement by Tadawul Chairperson Sarah Al Suhaimi expressed confidence. “Saudi Arabia’s addition to the MSCI Watch List is an important milestone for Tadawul, and reflects the Kingdom’s significant progress in capital market reform in support of Vision 2030," Al Suhaimi said, referring to Saudi Arabia's socioeconomic blueprint which includes becoming an 'epicenter of trade and the gateway to the world.' "Potential inclusion in MSCI’s Emerging Market Index signals to international investors that the country’s capital market has attained greater maturity in terms of efficiency, governance and regulatory framework.” Tadawul's Chief Executive Officer Khalid Al Hussan was no less optimistic, citing the possibility of a highly desirable economic atmosphere should the country be reclassified as an emerging market. "With anticipated MSCI index inclusion now one step closer and a number of other favorable dynamics taking place in the Saudi market," Al Hussan said, "Saudi Arabia’s ongoing economic transformation through diversification and privatization and favorable demographics for sustainable growth makes it a uniquely attractive emerging market.”

HSBC has calculated that Saudia Arabia's upgrade to emerging market status could bring billions of dollars its economy. In an email to Bloomberg, Georges Elhedery, HSBC CEO for Middle East and North Africa, said that “Passive inflows into Saudi equities could draw approximately $9 billion. This has the potential to rise even further if active funds increase their allocations.”

Both events bode exceptionally well for what could be the largest IPO in history: the sale of Saudi Arabian Oil Company, known as Aramco. 

 Last September, Bloomberg reported that Tadawul's reforms in the hopes of MSCI reclassification were driven largely by the Saudi Arabian government's plan to sell up to 5% of Aramco, which, making over $1 billion a day, is the world's most valuable company. Last May, CNN Money's Alanna Petroff wrote that an Aramco IPO could be worth over $2 trillion dollars.

It is worth noting that that figure – $2 trillion dollars – was estimated by the dominant force behind the pending sale: the Crown Prince Mohammed bin Salman, then still deputy Crown Prince and defense minister. The proposed sale is part of the Saudi Arabian government's plan to diversify the largely energy-driven economy.

In order to fully succeed, however, foreign investors would be a must. "I don’t think local demand would be able to cover that size that they are talking about," Riyadh's Capital Market Authority Chairman Mohammad Al-Jadaan told Bloomberg. "But the international demand is there and “that’s why we’re making sure that we will be able to get foreign demand into the Tadawul."

Interestingly enough, immediately following the MSCI press release, Reuters quoted an unnamed MSCI executive as saying that the listing of Saudi Aramco will have "absolutely no bearing" on the decision to upgrade Tadawul.

Between the positioning of M.B.S. as the future ruler of Saudi Arabia and MSCI's positioning of Tadawul as a potential emerging market for next year, 2018 could prove to be very interesting for foreign investors indeed.

Cover photo via the Kremlin

Topics: International Business, Energy, UAE, Oil, Intelligence

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