Market reform, Aramco IPO in focus as Saudi seeks to reassure investors

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Saudi Arabia is pressing on with capital markets reform and its planned IPO of Aramco in spite of drone attacks on its oil facilities that briefly spooked markets. Virginia Furness reports from Riyadh.

Saudi Arabian government ministers attending a Euromoney conference in Riyadh on Wednesday made little mention of last weekend's drone attacks on two Saudi oil facilities. The emphasis was on downplaying any impact on the country's economy one day after Saudi Aramco had reassured investors that its initial public offer was still on track and lawmakers had approved capital market reforms.

While the drone attacks ‒ claimed by Houthi rebels based in Yemen but blamed on Iran by the US ‒ have shaken an already fragile geopolitical situation, Saudi officials are keen to press ahead with the country's attempts to attract foreign investment to the economy as it looks to diversify its revenues away from oil.

"The Saudi government is facing tension," said commerce and investment minister Majid Abdullah Al-Kassabi. "Within all of this we are still safe and we are still attracting investment.”

On Tuesday, Aramco's chairman, Yasir Al-Rumayyan, said that the country would carry out within the next 12 months its planned initial public offering (IPO) of Saudi Aramco, which operated the facilities that were attacked. The statement set for the first time an official ‒ if still vague ‒ timeline on a deal that is deemed to be integral to the opening up of Saudi capital markets.

Markets have largely shaken off the initial impact of the attacks, with the local Tadawul All Share Index up 0.65% on the day at the time of writing, having fallen by as much as 3% on Monday. Brent Crude has also recovered from recent highs and was quoted at $63.74 a barrel at 13:45pm London time on Wednesday.

Commenting on the snap-back in Saudi equity prices, a Riyadh-based head of institutional equities said: “Net-net it is as if nothing has happened. People needed to see the public statement yesterday to see how bad the damage was.”

Virtuous circle

Two IPOs have been completed on Saudi Arabia’s stock exchange this year, marking key developments in the Saudi domestic equity market, but any further progress is likely to rest on completion of the sale of Aramco, said Samba Bank’s chairman Ammar al-Khudairy.

“You have all heard the announcements [about Aramco], with that hanging around, people might take a pause and wait for it to clear the system,” he said.

“One of the big pluses of the Aramco IPO is when you get a mega IPO, it attracts new liquidity into the stock market. Once that comes in, all sorts of virtuous things start to happen; more IPOs and better valuations.”

A more immediate boost to Saudi’s stock market is expected to come on Thursday when the fourth tranche of Saudi’s inclusion in the FTSE Russell Emerging Market Indices is completed, bringing with it $1.8 billion of passive funds.

Also, Saudi lawmakers on Tuesday approved a raft of measures to protect investors in the country's capital markets. The reform package includes a more efficient dispute resolution process, and will allow the introduction of a separate judicial structure to govern capital markets, Saudi Capital Market Authority chairman Mohammed El-Kuwaiz said on Wednesday.

But while the reforms are seen as a step in the right direction, bankers say any major progress in opening up Saudi markets is predicated on the successful IPO of Aramco.