Riyadh – Mubasher: The delay of state-run Saudi Aramco’s local and international initial public offerings (IPOs) is expected to take its toll on the oil-rich kingdom’s economic diversification plan, Moody's Investors Service said in a report on Monday.
The Saudi government had previously announced that it would raise around $100 billion, or 13% of the GCC nation’s 2018 gross domestic product (GDP), from the share sale of the world's largest oil producer.
The oil giant Aramco’s IPO, billed as the world’s largest offering, was the centrepiece of the crown prince’s “Vision 2030” reform plan, intended to diversify the kingdom’s economy and invest more heavily in infrastructure.
Moody's said that “economic diversification envisaged by the government will either need to be scaled back or financed by higher direct or indirect public sector debt issuance” after the government has backtracked on its plan to float a stake in Aramco on stock exchanges.
Though debt financing would maintain the Saudi economic diversification agenda and support long-term growth prospects, further reliance on debt issued by state-run firms would raise contingent liability risks, the New York-based ratings agency said.
Moody’s added that this ultimately would place a negative pressure on Saudi Arabia’s credit profile.
The Saudi economy’s long-term growth relies on the success of reforms in line with the government’s Saudi Vision 2030, which also aims to slash the kingdom’s dependence on hydrocarbon revenue and create new jobs for Saudi nationals, according to the report.
Banking on funding originally anticipated to come in part from Aramco offering proceeds, the Public Investment Fund (PIF) is set to invest $22 billion in government-sponsored megaprojects, including the Neom City in the North West area of the kingdom and transportation infrastructure and housing developments.
Moody's noted the PIF could plug some of the funding gap by selling its 70% stake in the Saudi Basic Industries Corporation (SABIC) to Aramco, in a consideration worth around $72 billion.
Aramco, however, would have to “finance most of the purchase with debt, leaving broader public sector debt levels about the same as if PIF or the government directly raised debt to finance the investments,” it added.
On 24 August, the PIF, which has been charged with helping to deliver the Vision 2030 reform plan announced by the government in 2016, raised a $11 billion syndicated loan.
The move indicated that the Saudi government preferred to tap capital markets for funding instead of trimming spending or speeding up privatisation of other state-run companies in a bid to raise additional funds, the report said.
“Although the government has said it remains committed to the Aramco IPO, the delay in listing reflects the complexities the government faces in opening up its public sector, suggesting that progress in its broader privatization strategy will be gradual,” Moody's highlighted.