By Sam Bridge
Ratings agency says giant IPO could help offset the economic impact of renewed Saudi government austerity measures
Saudi Aramco's IPO 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, according to Fitch Ratings.
The ratings agency said in a new research note that the IPO's effect on Saudi Arabia's external balance sheet will depend on the nature of PIF investments and the sources of financing for the IPO.
Fitch said the IPO could generate proceeds of around SR90-96 billion ($24-26 billion or 3 percent of GDP) at the indicative valuation range of $1.6-1.7 trillion.
These proceeds will flow to the PIF, which will use them for domestic and foreign investments. The funds will be small relative to medium-term financing needs, the agency noted.
Fitch added: "We expect 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. PIF's capacity to invest is also being augmented by the sale of a 70 percent stake in Saudi Basic Industries Corporation (SABIC) to Saudi Aramco for $69 billion agreed in March, PIF debt issuance and dividends from its listed domestic equity holdings.
"This could mitigate the impact from renewed central government austerity. October's pre-budget statement signalled an intention to refocus on budget discipline... This would be negative for economic activity, although we think the government may struggle to achieve the envisaged cuts."
Fitch also said that using the IPO proceeds for PIF investments abroad or domestic investments with high import content could put pressure on Saudi Arabia's official foreign exchange reserves, although this would be offset to the extent that the IPO attracts new foreign capital or repatriation of foreign assets by Saudi residents.
Fitch said growing government net debt was one driver of its downgrade of Saudi Arabia to 'A'/Stable in September, alongside regional geopolitical and military tensions. It remains a negative sensitivity.