Saudi Crown Prince risks destroying his own script
The Saudi Aramco valuation should be determined by the markets
When Prince Mohammed bin Salman announced his plans to launch an initial public offering for Saudi Aramco, he said taking the world’s biggest oil company public would create “more transparency”. In theory, he was right. A well-managed IPO should subject the kingdom’s national champion to scrutiny like never before, forcing it to open its books and become accountable to outside shareholders. Three years on, Prince Mohammed, the headstrong de facto leader of the kingdom, is destroying his own script.
The Financial Times reported last week that the government is pressing wealthy Saudis to become cornerstone investors as part of a plan to achieve the $2tn valuation coveted by the Crown Prince. There is nothing unusual about securing anchor investors ahead of an IPO. But the fear is the heir apparent is determined to dictate the terms of the partial privatisation rather than leave it to market forces. The Saudi government denied putting pressure on families or individuals. Saying no to Prince Mohammed, however, would not be an easy option even if there were no coercion, given his propensity to detain or silence critics and rivals.
Indeed, some of the families being targeted had members locked up in an extraordinary anti-corruption drive that led to more than 300 princes, tycoons and former state employees being detained at Riyadh’s Ritz-Carlton. Many of those incarcerated in November 2017 were only released after transferring cash and assets over to the government.
The legacy of that shakedown is still being felt as a cowed private sector sits on its cash and nervously watches from the sidelines, rather than providing the investment Prince Mohammed needs to drive his economic reform programme and generate much-needed jobs for young Saudis.
The brutal murder of Jamal Khashoggi by Saudi agents a year ago exacerbated fears about the direction in which Prince Mohammed was taking the kingdom. As a result, foreign investors who had once been willing to overlook the crown prince’s autocratic style began to weigh the political risks of being associated with the nation.
All this has seriously undermined the crown prince’s ambitious (and necessary) economic reform programme. That, and the urgent need for cash to fund grandiose megaprojects, helps to explain why Prince Mohammed has injected fresh impetus into the delayed Aramco IPO with a planned sale of up to 3 per cent in Saudi Arabia.
He desperately needs an economic win and the IPO has always been at the centrepiece of his plans. Yet he has insisted that the valuation should be above $2tn, despite analysts cautioning that $1tn to $1.5tn is a more realistic outcome. The danger is that the crown prince thinks he can force an issue that should be determined by the markets.
Aramco is the world’s most profitable company and a well-run organisation. There should be plentiful demand for its shares — at the right price. But putting pressure on wealthy Saudis to buy into the listing raises the spectre of market manipulation. It threatens the integrity of what may be the world’s largest IPO before it has even begun.
Saudi Arabia’s Tadawul exchange was this year included in the MSCI Emerging Markets Index. That means passive institutional funds will have little option but to buy the stock. But active investors will have a choice, and should be extremely wary of any signs of price inflation. Prince Mohammed’s brash decisions have already damaged the economy he promises to reform. Even absolute monarchies should know they have no right to abuse the markets. They do so at their peril.