Saudi Arabia's IPO Drama

Tracy Alloway (0:12)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway. My co-host, Joe Weisenthal, can't be with us today. But maybe it works out for the best, because today we are going to be focusing on a topic that is very close to something I've been doing for the past couple of years, which is living in the Middle East, in Abu Dhabi specifically.

And, my move to Abu Dhabi was in the spring of 2016, it coincided with a very, very big event in finance and markets. And that was when Saudi Arabia first started talking about the potential to list part of its giant state-owned national oil company, Saudi Aramco. Now fast forward two years later, we've seen those plans really start to get walked back and in the meantime, we've had all sorts of developments in Saudi Arabia, including a new Crown Prince, Mohammed bin Salman, the 32 year old Crown Prince. We've also had a diplomatic rift between the Gulf Cooperation Council nations, including Saudi Arabia and Qatar. So really, a action-packed two years when it comes to Middle East politics with Saudi Arabia, really at the center of it all.

I've now left the region, so just to bookend my time there, today, we are going to be diving into all things Saudi, and we're going to do that with one of the best analysts on the topic, I think. His name is Ayham Kamel. He is the head of Middle East and North Africa research over at Eurasia Group. So Ayham, thank you so much for joining me today.

Ayham Kamel (2:02)

A pleasure to be here, and thank you for hosting me.

Tracy Alloway (2:05)

So I got to say, when I think back to the start of, let's say, May 2016 and how much excitement we had over Saudi Arabia, the transformation of Saudi Arabia from an oil-dependent economy into potentially something different, and it was all pegged to the notion of the Saramco listing, things have changed so quickly over the course of two years. Just remind everyone why the Aramco IPO was important in the beginning and what the rationale was for actually doing the listing.

Ayham Kamel (2:44)

Well, I think, Tracy, the big attraction for the powerful leader of Saudi Arabia at the time, or the emerging new leader in the kingdom, Crown Prince Mohammed bin Salman, was to create a lot of excitement. He needed flashy ideas, he needed bold ideas to change the kingdom, to change its dependency on oil and transform what has been relatively a large scale economy that is outside the international system or international economy in many respects. It's a closed economy, the major players are domestic, and the dependency on the government and energy revenues was high. He needed to change that, and he needed to present ideas that would create a sense of excitement internationally.

Implicitly, the Crown Prince didn't only focus on the economics. I think that Mohammed bin Salman wanted to present ideas that would have him present Mohammed bin Salman as a young, bold leader capable of changing what the Saudi system has represented for many, many decades, transitioning away from a conservative kingdom into not necessarily a liberal one, but certainly a more open social society or open kingdom when it comes to liberal rights for women, when it comes for the rights of employment, when it comes to just social liberties.

Also economically, he wanted to change what was a stagnating engine. Oil prices were low. He needed the oil income from Aramco or from a potential sale of Aramco to fund other ventures in the kingdom.

Tracy Alloway (4:37)

This is something I completely forgot to mention in the intro, but of course, it was really a driving force of a lot of the stuff that we've seen happen in the Gulf. And that's the fact that in early 2016, of course, oil prices were still relatively low. Eventually, you had OPEC get together and agree to curb their crude production in order to boost prices. So kind of a different environment.

I'm still curious though, when it comes to the listing itself. You know, Mohammed bin Salman, MBS, as we often call him, he didn't have to pursue an IPO.

Did he? He had this big set plan, Vision 2030, that really set out how he wanted the Saudi economy to look like in 15 or 14 years time. So why the element of the listing specifically?

Ayham Kamel (5:31)

Well, I absolutely agree, Tracy. And in part, the vision was comprehensive. They didn't really need to make the IPO a core part of that plan. But oil prices were low and Mohammed bin Salman needed to find a way to generate income to invest in the local economy, to have the public investment fund, really the sovereign wealth fund of Saudi Arabia have more money to invest both domestically and internationally. And that wouldn't have been possible with oil around $40 or $50 a barrel. It's really the opaque, non-opic agreement, primarily a deal between Mohammed bin Salman and President Putin of Russia that allowed oil prices to jump high into the 70s and really touch the 80s. Today, Saudi Arabia doesn't necessarily need to rush with an IPO. They have the income. They're breaking even when it comes to their budget.