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December 03,2021 | 1003 0

The U.A.E has long been regarded as a financial hub for its middle eastern neighbor Saudi Arabia, having taken greater steps towards attaining hegemony with Dubai International Finance Centre (DFIC) in 2004. Nonetheless, Riyadh is challenging Dubai and a strong factor in challenging this hegemony will be the world’s biggest IPO of Saudi Arabia’s Aramco – estimated to be valued anywhere up to $2 trillion. In terms of international bank engagement HSBC already have a strong presence in Saudi Arabia through its local unit ‘HSBC Saudi Arabia’. And in June 2017 Goldman Sachs applied for an equity trading license in addition to facilitating Saudi Arabia’s first ever international Bond sale in October 2016 [1] Such aims to financialize by Saudi Arabia have led analysts to predict that banks such as HSBC, J.P Morgan will be the winners when it comes to leading advisory roles for Aramco’s IPO. While banks such as UBS and Merrill & Lynch have been left out due to the lack of an entrenched lending relationship with Saudi Arabia. A key factor in the success of the country’s latest diversification plan named ‘2030’ will be the reform of its financial sector. In order to develop a thriving economy, the Kingdom will need to implement key changes to its :bond markets, equity markets and financial system as a whole.

To improve economically, Saudi Arabia will need to improve its banking sector and develop a thriving Small to Medium Enterprise sector. At the moment, access to capital for SMEs is extremely limited and local liquidity constraints . Local liquidity restraints present in Saudi are problematic, considering that 25% of the country’s employment comes directly from SMEs. However, banks will not lend unless the domestic capital markets improve. While the state central bank provides the monetary base it is the commercial banks that transfer this into the real economy. For SME’s to flourish asset liability matching is extremely important. This includes the process of managing use of assets and cash flows to meet company commitments, in turn reducing the firm’s risk of loss due to not paying a liability on time. This will improve if more financial instruments are offered to the banks. For this to happen the equity and bond markets will have to improve in tandem with the banking sector.

The domestic equity markets will eventually grow with $200 billion worth of privatizations across a range of sectors based off the vision 2030 diversification plan. In addition to this the size of the IPO will affect stock exchanges around the globe as the Tadawul, Saudi’s stock exchange has a total market capitalization of $470 billion. The local stock exchange will not be able to absorb the whole deal. As a result, Aramco will be listed on foreign stock markets to avoid stock market’s liquidity becoming concentrated in local markets. New York, London, Hong Kong are the three stock exchanges in the running, and in an unusual move Aramco has asked for draft prospectuses for all three options. With an expected valuation of $2 trillion dollars, a sole listing in London would add 50% to the market capitalization of the London Stock Exchange (LSE) instantly (LSE listed companies has a combined market capitalization of the order of $4 trillion in February 2018).

On a local level many analysts have failed to mention the possibility of how this move will transform the Saudi economy by providing cash flows invested by governmental agencies. This will give policymakers the opportunity to steer the upcoming economic growth/transformation by directly involving citizens and creating an equity fund that offers Saudi’s a chance to invest in the states future and subsequently their own will transform the state.

Local bond markets also need to mature for vision 2030 to succeed. Saudi Arabia’s fast growth and an export industry based on cash created a demand for credit that banks could not match. Capital markets domestically in Saudi Arabia could not keep up. As a result, Saudi Arabian entities will have to enter international capital markets to fulfill its funding needs for the next three years. One of the factors that can help improve local bond markets is the ease of settlement. High custody charges are commonly issued by brokerages if the bonds are held in small domestic markets. Nonetheless Saudi Arabia could potentially let its domestic bonds settle in euroclear. This would lower custody charges and by the time the domestic market grows these fees will eventually reduce.

The Saudi government has taken steps forward to address issues within the domestic banking system by establishing an SME authority in 2015 and more recently asking regulators to assess the impact of Aramco’s IPO on local markets. This is a step in the right direction and will ultimately help Riyadh challenge Dubai as a regional hub.In the longer term the integration of Saudi Arabia into the global financial system can only be a good thing, but concerns remain over the pressures of performing the world’s largest IPO.

1. http://www.bondsloans.com/news/article/1551/exploring-the-next-frontier-in-the-gcc-capita
2. https://www.bloomberg.com/news/articles/2017-10-24/everyone-from-goldman-sachs-to-hsbc-wants-a-piece-of-saudi-banking
3. https://www.euromoney.com/article/b12kp8s76cl69z/saudi-accelerates-capital-markets-reform
4. https://uk.reuters.com/article/us-saudi-economy-cma/saudi-arabia-to-give-foreign-investors-full-access-to-parallel-stock-market-idUKKBN1CV0FQ
5. https://www.ssga.com/investment-topics/general-investing/2017/transforming-saudi-arabias-capital-markets.pdf (main)
6. http://vision2030.gov.sa/en/node/6
7. https://www.breakingviews.com/considered-view/aramco-ipo-beggars-neednt-feel-like-losers/
8. https://www.nytimes.com/reuters/2018/01/17/business/17reuters-saudi-aramco-ipo-fees.html
9. https://economictimes.indiatimes.com/markets/stocks/news/how-saudi-aramco-ipo-could-impact-global-markets/articleshow/57366901.cms
10. https://uk.reuters.com/article/aramco-ipo-regulator/saudi-regulator-asked-to-study-local-market-impact-of-aramco-ipo-idUKL8N1PJ0QW
11. https://www.reuters.com/article/us-saudi-hsbc/hsbc-plans-saudi-growth-thanks-to-kingdoms-unprecedented-transformation-idUSKBN1AO1PZ
12. https://www.argaam.com/en/article/articledetail/id/432862