Saudi Prince’s Long 2017 To-Do List Starts With Aramco IPO Prep

  • Prince Mohammed bin Salman unveiled Saudi Vision 2030 in April
  • Taxes, foreigner fees, Citizen’s Account expected this year

How Big a Deal Is the Aramco IPO for Saudi Arabia?

Saudi Arabia’s Deputy Crown Prince Mohammed bin Salman has a daunting to-do list as the real work begins on his plan to transform the world’s biggest oil exporter into an economy no longer reliant on crude.

“2017 is a reality check,” said John Sfakianakis, director of economic research at the Gulf Research Center. "We’re done with the announcements. Now it’s the teeth that need to show behind the actual plan. The global investor community will be looking at that."

From planning potentially the world’s biggest initial public offering to rolling out taxes and protecting Saudis from the impact of spending cutbacks, here are six developments to watch this year:

Shielding the Poor

The Citizen’s Account is a program meant to soften the impact of austerity measures on low- and middle-income Saudis. It will start with 20 to 25 billion riyals ($6.7 billion) of disbursements this year, and increase to 60 to 70 billion riyals by 2020.

Registration opened Feb. 1, and more than half of Saudi Arabia’s 20 million citizens have already signed up. With the government planning to begin payments later this year, newspapers and social media have reflected the widespread confusion over eligibility. Should Uber drivers report their side-income? Can ministers also sign up? What about professional soccer players?

The program goes to the heart of the implied social contract in Saudi Arabia, where the Saud family has traded generous spending on its subjects for absolute loyalty for more than eight decades.

“You have to assume that there will be mistakes,” said Crispin Hawes, London-based managing director at Teneo Intelligence. “You just have to make sure they’re not so egregious that they dilute the process of political authority.”

Saudi Arabia reviewed other countries’ experiences and developed plans “aimed at hedging against possible errors,” a senior source in the Council of Economic and Development Affairs said in a written statement to Bloomberg, adding that the plans are based on a conservative numbers to ensure adequate coverage.

Click here to read the Saudi statement in full.

“In case we detected that the program did not cover an entitled category, we will adjust it and pay them retroactively to achieve justice in coverage and support,” the source said in the statement.

Taxes

The government is also planning new taxes as it seeks to balance the budget. In April, it will impose an excise tax on “harmful products,” doubling the price of tobacco and energy drinks and putting a 50 percent levy on soda.

The new levies are a prelude to a planned 5 percent value-added tax in 2018, which will have an even broader impact on the cost-of-living for Saudi residents. Riyadh-based Jadwa Investment Co. expects inflation to rise toward the end of this year, as Saudis front-load purchases ahead of the new tax.

Subsidy Cuts

The government began a multiyear program of gradual reductions to fuel, water and electricity subsidies with a surprise announcement in late 2015, sending Saudis rushing to gasoline stations to fill up.

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Energy Minister Khalid Al Falih said in December the next round of cuts will happen before the end of the year. “The intent is to do it soon enough,” he said.

Foreigner Fees

From July, the government will charge an unprecedented monthly fee for foreign workers with dependents in the kingdom. The levy will increase each year until it reaches 400 riyals per month per dependent by 2020.

While potentially popular among locals -- slogans like “Saudi is for Saudis” are spreading on social media as the economy slows -- private sector reaction may be more challenging for the government. Large Saudi-owned businesses including the construction conglomerate Saudi Binladin Group “are massively dependent on low-cost foreign labor,” Hawes said.

Stimulus

Introducing the expatriate fee and other measures in a way that doesn’t “choke the economy” will be difficult, Sfakianakis said. Growth slowed to 1.1 percent last year from 3.4 percent in 2015, according to a Bloomberg survey of economists, and will decelerate further to 0.9 percent this year.

The government is responding with a stimulus package of 200 billion riyals through 2020. Commerce Minister Majid Al Qasabi said in December that target areas would be announced within three months.

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“The financial reforms are expected to cause some slowdown in economic growth,” the Saudi source said in the statement. “However, the state is working to cushion the slowdown” with higher higher government spending, the settlement of delayed payments to contractors and the easing of export restrictions, among other measures.

“The future of oil should not be taken for granted, so these measures are just necessary,” said Fahad Nazer, a consultant to the Saudi Arabian embassy in Washington, D.C., who does not speak for the government. “Probably in the minds of some people they’re moving too fast, but frankly in the minds of others they should be moving even faster.”

Listing a Giant

Much of the groundwork for the 2018 listing of as much as 5 percent of Saudi Arabian Oil Co., known as Aramco, must be done this year. There’s growing debate about the potential market valuation, and a profitable IPO is critical to overhauling the economy; it’s the anchor for a sovereign wealth fund meant to generate enough income to dominate state revenue by 2030.

Saudi Arabia’s $2 Trillion Aramco Vision Runs Into Market Reality

As with the taxes and subsidy cuts, the IPO carries potential political risks -- from foreigners buying a stake in the Saudi economy’s crown jewel to a clear picture of Aramco’s financial health becoming visible for the first time.

The IPO “is not so much the elephant in the room as the entire herd of elephants,” said Hawes at Teneo Intelligence. The government will also have to win the “internal arguments” on why the listing is necessary, he said.

The IPO will be organized “to maximize the economic benefits of the kingdom,” the government source said. “Saudi Arabia will not give up on its majority ownership of Aramco, and will not relinquish the control of it.”

Prince Mohammed’s to-do list “is ambitious but not impossible,” the source said.

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