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Abu Dhabi, UAEWednesday 12 December 2018

Kingdom predicts wave of foreign funds to ease path of Aramco IPO

Tadawul chief says from technical and regulatory perspectives, the Saudi exchange is fully prepared to handle the offering

Saudi Aramco's Abqaiq oil facility in eastern Saudi Arabia. The firm's IPO is set to be the country's largest ever. Reuters
Saudi Aramco's Abqaiq oil facility in eastern Saudi Arabia. The firm's IPO is set to be the country's largest ever. Reuters

Saudi Arabia’s stock exchange expects an influx of foreign funds to smooth the listing of national oil company Saudi Aramco, despite concern among some analysts about whether the market can absorb the huge offer, the exchange’s chief executive said on Sunday.

“Foreign investors are putting in more money — every day we have improved liquidity capacity,” said Khalid Al Hussan.

The government has plans to sell about 5 per cent of Aramco, hoping to raise some $100 billion or more in what is likely to be the world’s biggest initial public offer. Saudi officials have said that in addition to Riyadh, Aramco may list on one or more foreign markets such as New York, London and Hong Kong.

Many private analysts think the $100bn target is too ambitious, but even a $50bn IPO could strain the Saudi market, which has a capitalisation of about $500bn — especially if the burden is not shared with a foreign exchange.

Saudi Arabia’s biggest IPO so far, the sale of a stake in National Commercial Bank in 2014, raised just $6bn. In January this year, an advisory council to the government asked the securities regulator to study whether the Aramco sale might destabilise the market.

Mr Al Hussan insisted, however, that from technical and regulatory perspectives, the Tadawul was fully prepared to handle the Aramco IPO, alone if necessary.

He said that foreign investors were not permitted to buy shares directly in the NCB offer. Now, rules have been changed to permit foreigners to take part in local IPOs.

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Mr Al Hussan also said last month’s decision by equity index compiler FTSE Russell to upgrade Saudi Arabia to emerging market status, and a similar decision which fund managers expect MSCI to make in June, would attract billions of dollars of fresh foreign money to the local market.

Regional investment bank EFG Hermes estimates Saudi Arabia could see fund inflows totalling $30bn to $45bn in the next two years if it reaches the foreign ownership levels of markets such as the UAE.

Some foreign money has started to enter the Saudi market in anticipation of a positive impact from the FTSE and MSCI decisions. Foreign investors, including qualified foreign institutions, have been buyers of stocks every week this year, purchasing a net $2.17bn, exchange data shows.

“What we have seen at the beginning of this year from foreign investor participation and the cash inflows and the number of registered QFIs in the market, gives us a very comfortable state,” Mr Al Hussan said.

He did not comment on the timing of the Aramco IPO. Officials originally said it would take place by the end of this year, but Saudi Arabia's Crown Prince Mohammed bin Salman told Reuters last month that it could occur at the end of 2018 or in early 2019, depending on market conditions.

If Saudi officials are relying on foreign fund inflows to facilitate the Aramco IPO, they may be tempted to wait until early 2019.

“Passive” funds benchmarked to FTSE indexes will only enter Saudi Arabia when its upgrade takes effect, in stages between March 2019 and December that year. Similarly, if MSCI decides to upgrade Riyadh, the decision would probably only take effect in mid-2019.

Passive funds may account for roughly a third to a half of foreign mutual funds entering Saudi Arabia in the next couple of years, fund managers estimate.