The Fuse

Panel: Investor Trepidation Could Slow Saudi Reforms

by Matt Piotrowski | April 27, 2018

Current oil prices are outside of the U.S. comfort zone of $40-$60 per barrel, providing motivation for the U.S. to take measures to counter OPEC.

Although Saudi Arabia is seeking to launch an IPO of its state-owned oil company and wants to overhaul its entire economy, foreign investors may balk at the opportunity.

Speakers at an event Thursday on the Aramco IPO hosted by the Daniel Morgan Graduate School of National Security in Washington, DC discussed the wide considerations and implications of Saudi Arabia’s ambitions and what they mean for the Kingdom’s politics and economy, global oil markets, and U.S. foreign policy and national security.

Panelists were clear that Saudi Arabia will need Western investment to transform its economy and reduce its dependence on oil revenues. However, there are hold numerous uncertainties about spending in the Kingdom that are making many investors hesitant to commit to such investments.

Paul Michael Wihbey, Partner at CAN-AM Strategic Advisory and Research Fellow at the Daniel Morgan Graduate School, highlighted the different risks for investors in his presentation. One major hurdle is geopolitical and security threats: Saudi Arabia is now the “epicenter” of four cold and hot wars. The Kingdom is currently in conflict with Yemen, Syria, Iran, and Qatar. Wihbey asked: Why invest in an economy that could be involved in a number of wars for the foreseeable future? Adam Seitz, senior research associate and instructor for Middle East Studies at the Marine Corps University, noted that oil infrastructure in the Kingdom and shipping lanes are mostly safe, but the attacks by Yemen’s Houthi rebels have become more sophisticated as they have improved their delivery systems.

Saudi Arabia will need Western investment to transform its economy and reduce its dependence on oil revenues.

Another major issue for investors to consider is the country’s high debt levels and the fact that one-third of the Saudi budget is devoted to military and security requirements. “How is [this spending] sustainable without high oil prices?” said Wihbey, who asked whether the Kingdom is leading OPEC and Russia to cut production and increase prices so it can sustain its bloated military budget.

Wihbey also expressed doubts that a $50-$100 billion IPO can “kick start” a 12-year, $4 trillion economic and social development plan. Saudi Arabia wants to implement vast social and economic reforms and create six million jobs for the country’s youth population. The IPO is essential for Crown Prince Mohammed bin Salman’s (MBS) Vision 2030 to go forward. However, as Brigadier General Tom Consentino, COO of Business Executives for National Security pointed out, the country has a “hand-to-mouth economy” and needs to reform infrastructure, education, and its citizens to realize its goals. He emphasized that without an influx of Western investment, the Saudis might not achieve their objectives. The IPO’s launch has already been delayed because of difficulty in determining where to list it and its valuation would likely be lower than desired.

The IPO’s valuation is linked to the oil price, which is problematic given the market’s volatility. Wihbey estimated that oil needs to trade above $100 per barrel to reach the $2 trillion valuation that Saudi Arabia is seeking. “The problem is you have to sustain the oil price at that level to sustain the investment,” Wihbey said, pointing out that when oil was above $100 per barrel in 2008 and 2014, the price eventually fell sharply. “The push for higher oil prices, engineered by Saudi Arabia, is not sustainable from an economic point of view, based on precedent,” he said.

“The push for higher oil prices, engineered by Saudi Arabia, is not sustainable from an economic point of view, based on precedent.”

Wihbey highlighted President Trump’s tweet last week that called out OPEC for its market manipulation, reinforcing that it was a direct warning to the Saudis. Current oil prices are outside of the U.S. comfort zone of $40-$60 per barrel, providing motivation for the U.S. to take measures to counter OPEC—whether through economic, fiscal, or geopolitical means.

Not all participants were doubtful about Saudi Arabia’s potential to revamp its economy. Rula Manasra, former manager at Conoco and now with Lynx Intelligence, said that a majority of Saudi citizens are in favor of MBS’ widespread social and economic reforms, which have the ability to create a “renaissance throughout the region.” At the same time, however, she emphasized that the growing youth population creates the urgency of creating new jobs. Not finding work for this segment of the country could precipitate internal strife and instability.

Recent news reports have said that Saudi Aramco’s listing will unlikely go ahead this year as originally planned, and that any foreign flotation would occur in 2019 at the earliest. There also have been doubts since MBS announced his plans to sell five percent of Aramco that the IPO will go forward at all.

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