Saudi Aramco's Debut IPO Could Support The Sovereign's Net Asset Position

November 17, 2019:    S&P Global Ratings said today that Saudi Aramco's forthcoming IPO on the Saudi Stock Exchange (the Tadawul) could enable the sovereign to further strengthen its net asset position.

And, if subsequently effectively deployed, the funds raised could be used to support longer-term economic growth in Saudi Arabia (unsolicited; A-/Stable/A-2). Saudi Arabia currently fully owns Saudi Aramco, which is the world's largest company by a significant margin. It plans to sell about 1%-3% of the company through an IPO.
 
We understand that the bulk of the funds raised will go to the government or the Public Investment Fund, potentially adding to the sovereign's already strong fiscal net asset position of 72.7% of GDP.

Productively deployed, we believe the assets could also help maintain growth potential through our three-year ratings horizon. Public investment in Saudi Arabia is forecast to remain quite high, even though the sovereign has implemented some fiscal belt-tightening. Government's expenditure is intended to support the non-oil economy and private sector demand. Our current forecast for average GDP growth is 1.6% per year in 2019-2022.
 
Our ratings on Saudi Arabia continue to be supported by its strong external and fiscal asset positions. The ratings are constrained by high geopolitical risks, sizable fiscal deficits, and the limited transparency of its institutional framework and the reporting of government assets. (see "Saudi Arabia 'A-/A-2' Ratings Affirmed; Outlook Stable," Sept. 27, 2019).

Saudi Arabia will remain by far the largest shareholder in Saudi Aramco and plans to retain control over the company's business and financial strategy. We continue to consider that the overall credit profiles of Saudi Arabia and Saudi Aramco are closely linked. As a result of the recent bond and forthcoming equity offerings, there has been an increase in financial and operating disclosures.

In our view, this has improved transparency and is supportive for investors. The move is also an important milestone for the development of capital markets in Saudi Arabia. The IPO will also help to benchmark Saudi Aramco against regional and global peers.