Saudi Arabia’s successful bond sale: Harbinger of grander things to come: For whom?

By Pascale C. Siegel

October 29, 2016

On 19 October 2016, Saudi Arabia wooed international financial markets raising $17.5B in its first international bond sale; a good omen for a government that wants to sell off 5% of its economic flagship, Aramco, in the next year. Should investors have confidence in the upcoming IPO?

For its first foray into the global market, KSA showed that it was a player to be reckoned with. Having concluded the largest ever bond sale for an emerging market, KSA is looking to build up market confidence in its ability to see a successful Aramco IPO in late 2017 or early 2018.

Aramco is the largest oil supplier and holds the largest oil reserves in the world. Saudi authorities estimate its value to be between $2T and $3T. Auctioning off 5% of the company will yield KSA between $100 and $150B, generate hundreds of millions of revenues for underwriters, and tease investors looking for good value. It would make Aramco the largest IPO ever. For memory, the current record-holder, Alibaba garnered $25B in 2010.

But will buying Aramco be a smart investment?

This past week’s success in the global market should not overshadow serious risks associated with the IPO. Saudi Arabia’s system of governance remains opaque. So is Aramco’s. Little is known of its books, operational structures, or reserves. The economy is on a perilous transition path. The social contract that has enabled the Saud to govern since the mid-1930s is fraying. The business and legal environments are strikingly different.

Yet, Aramco could still be a good value and the government’s economic plan could open new opportunities for those who know how to untangle Saudi Arabia’s mysteries. Such a decision will require a solid understanding of the country – its political, economic, social, technological, legal, and environmental landscape – to identify opportunities and mitigate risks.

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