After only raising $25bn from the Saudi Aramco IPO, plans to transform the economy of Saudi Arabia are under pressure.
For years the proposed IPO of the Saudi Arabian state oil monopoly Saudi Aramco was delayed. This was because the Crown Prince, Mohammad bin Salman, valued the company at $2tn. Oil markets and leading analysts valued the firm at approximately $1.5tn.
Eventually the Crown Prince lowered his sights. However, the lower valuation and reduction in share offering – only 1.5% instead of 5% of the company – failed to conjure the hoped for demand among potential investors.
The Crown Prince made a huge political bet on the IPO working and funding economic reform. Now that looks increasingly unlikely even though the extra funds will certainly buy time on a short-term basis.
Performance shows need for successful alternatives to Saudi Aramco IPO
The underwhelming performance poses serious problems for the desert kingdom. Funds are desperately needed to diversify the economy away from oil and to cover the costs of the sizable budget deficit.
Just to break even the oil price must be at least $85 per barrel, a level it has not been at for five years.
Worryingly, the $25bn from the IPO is only expected to cover the fiscal deficit for six months. Dubbed Vision 2030, the plan to diversify the economy through massive investment will not benefit from the sale.
Bringing about the required change in the economy to avoid serious issues looming on the horizon is now going to be much harder than the ruling House of Saud has so far anticipated.
The state must now work on alternative means of funding the massive changes being targeted.
Focusing on bringing about foreign investments is the most practical option. Even though in 2018 foreign direct investment rose from $1.4bn to $3.2bn, that performance is still far below the peak of 2008 when $39bn flowed into the country.
Even a tenfold increase would not reach the 2008 level. However, the economic gain would be far reaching provided the funds were being ploughed into the non-oil economy.
Economic reform will increasingly depend on private investment, which will be hard to achieve
Unless the oil price surges and interest for buying shares in Saudi Aramco rises, economic diversification will increasingly depend on private investment from foreign companies.
For many countries this would not present major difficulties. However, the political structure of the oil state would demand reforms to convince foreign investors the country was worth the risk.
Doing so means moving quickly, something the House of Saud is not typically accustomed to doing. It took years to get this far, so further progress is likely to be difficult to come by.
Now the state will be reliant on existing reforms working quickly to convince international markets, investors and governments that Saudi Arabia can expand rapidly the non-oil economy.