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The future lives here: Middle

East 2017
Regional outlook
The future starts now

By David Strevens, Head of Sales - Middle East and Africa, Bloomberg


The Middle East finds itself at the heart of debt issuance and increasing sophistication of the
fascinating times. Its markets represent an oasis of issuance process. Government issuance is no
relative calm in a desert of global ruction, where longer a small concern, and hard currency
populism has robbed markets of stability. In this issuances have been welcomed by grateful
report we examine what the future holds for the investors. The report also examines Saudi Arabia,
region, as its countries plot an exciting course of where some market evolutions can be seen most
economic evolution. starkly. We will examine its economic strategies to
diversify away from oil and the progress of the
Across the Gulf Cooperation Council (GCC) there
Aramco IPO. Finally, insight from Bloomberg New
are plentiful reasons for optimism, from pace-
Energy Finance (BNEF) reveals the developments in
setting GDP gains to a financial services industry
the regions production of and thirst for renewable
that is outgrowing the rest of the world. According
We will look at the vaulting ambitions of the region energies.
to economists contributing to Bloomberg, GDP
as evidenced by the rapid development of
growth in the GCC will be 1.6 percent in 2017 and For investors and financial players operating in the
international financial centres. Just as the
2.5 percent in 2018, led by 3.3 percent gains in Middle East, the horizon is ripe with promise, for
sophistication of the regions markets is
both the UAE and Qatar. The regions growth in connecting to global ideas and markets. Thats why
developing, so too is the need for understanding of
2018 will outperform that of major countries in the Bloomberg sees the region as being so vitally
regulatory change in other parts of the world. We
rest of the world. important to the worlds economy. A great number
provide insight from an exclusive Bloomberg event
of opportunities lie ahead. We look forward to
For the GCCs financial services industries, the in Dubai that sheds light on market-readiness for
helping you harness them through use of the very
picture is even brighter. There are 89 financial the largest piece of regulation ever to hit Europe
best data, analytics and technology.
services companies in the Bloomberg GCC 200 MiFID II.
Index. In the last five years, the total assets of these David Strevens, Head of Sales, Middle East and
The report explores some of the market evolutions
firms have grown 40 percent, compared with 9 Africa, Bloomberg
underway in typically oil-dependent GCC countries.
percent growth of the 252-membered MSCI World
The regions fixed-income markets are undergoing
Financial Index.
great change thanks to an increased appetite for
Gulf financial markets:
New realities push for further
transformation

By Ebru Boysan, Bloomberg Market Specialist


Developing financial markets has been the policy objective of countries in the Banking
GCC region for the last few decades. The GCC is home to some highly capitalized banks by global standards, such as
QNB of Qatar and First Abu Dhabi Bank (the post-merger of NBAD and FGB of
Shaken by few global and local crises of their own, Gulf countries have overseen
the UAE).
steady development of their markets, at a more leisurely pace compared with the
rest of the world, thanks to the regions bountiful natural resources. The sectors assets have grown 281 percent in the last 10 years; in all countries
there is high concentration of banking assets controlled by top banks, though in
However, the recent decline in oil prices is pushing the countries to evolve and
Bahrain and Saudi Arabia concentration is less. Banks are predominantly
deepen their markets, and while significant progress has been made, challenges
controlled by domestic investors, due to long-term legacy restrictions on foreign
remain. Of special interest in the region is Vision 2030 in Saudi Arabia, which
holders and limited access to GCC cross-investments.
presents an accelerated series of capital market and economic reforms expected
to have an impact on the region as a whole. While banks have been in favorable funding conditions when the economic
environment has been bullish and oil prices have been high, the reversal of such
In this article we examine how developments are being made across the region,
conditions poses a risk in lending as banking sector liquidity has tightened post
on a market-by-market basis.
the oil price decline.

During the recent financial crises of the last decade, banks in the region
maintained resilience largely thanks to support from Government and Sovereign
Wealth Funds (SWFs).

Saudi Arabia is one Gulf country taking concrete steps to attract foreign banks
and institutions to attract foreign capital.
Equity capital markets
Stock markets have not yet reached their full potential due to strong government
ownership of local assets and delays in removing restrictions on foreign
investments.

Qatar and the UAE lead reforms in opening their markets to foreign flows, and
received MSCI Emerging status in 2014. Saudi Arabia is going through fast-track
changes and is expected to achieve MSCI Emerging status in 2018. The kingdom
has made many reforms, from the removal of foreign investor restrictions to the
easing of QFI rules for overseas access to equity markets. At present, GCC equity
markets are still heavily driven by domestic retail and institutional flows. Volumes
are fragmented across many exchanges with few listings, with the exception of
Tadawul (the Saudi Stock Exchange). The Saudi Stock Exchange (Tadawul) has
discussed the possibility of a cross-listing initiative with GCC stock exchanges as
part of an ongoing series of reforms. The ambitious Saudi Arabian privatization
plans, including the Saudi Aramco IPO, may provide enough incentive for
regional exchanges to collaborate.
Debt capital markets
GCC countries main revenue is in USD (oil), which has enabled them to keep
local currencies pegged (with the exception of the Kuwaiti dinar). With budget
surpluses largely stemming from this strong oil revenue, debt securities
(especially domestic currencies) have long remained the least developed
financial segment in the Gulf, yet transformation is underway.

Investors have welcomed hard-currency issuances due to the strong credit


fundamentals of the GCC countries. The regions debt-market evolution has been
different to most of the world, where issuance usually takes the form of
government-issued domestic currencies. Government debt markets in the Gulf
have traditionally been small; for example, Kuwait and Saudi Arabia issued their
first USD-denominated debt in 2017 and 2016 respectively. With the exception of
2009, which was the time of the Dubai property crisis, nongovernment entities led
issuances up until 2016. After the oil-price decline however, government issuance
increased, climbing to $40 billion.

Ahead of its peers, Bahrain started issuing government debt through its central
bank, followed by Qatar and Kuwait. The bonds are issued in the primary market
and held to maturity by local banks. Elsewhere, under Vision 2030, Saudi Arabia
has established a Debt Management Office with a new domestic bond issuance
program. The UAE faces additional challenges due to its lack of a federal debt
law and has thus lagged behind its peers in domestic government bond
markets. Going forward, the creation of liquid domestic debt capital markets will
be one of the most interesting challenges for GCC countries.
Islamic finance
Although the Gulf is home to the highest number of Islamic financial institutions
Which area's transformation is most key to the
and assets, it has lagged behind in standardization and the creation of a development of Gulf financial markets?
framework for its industry. In the last decade, however, the Gulf contributed to
the growth of international Islamic capital markets through USD Sukuk issuance. Banking

A challenge remains not only in creating GCC standardization amongst Islamic Government ownership of assets
institutions but also in facilitating activity between conventional banks and Islamic
banks. Conventional banks face no restrictions in the Islamic market, other than Debt capital markets
complying with the Islamic legal framework required by Islamic counterparts, but
resultant transactions (relative to their conventional forms) can be complicated.
Standardization of Islamic finance markets
Additionally, a lack of standardization amongst Islamic banks means that their
conventional counterparties can find compliance with different requirements
Regulation
more difficult still.

However, due to their more conservative approach to risk, Islamic banks may SEE RESULTS
have extra liquidity and can serve as a critical source of borrowing to their
conventional counterparts. The liquidity landscape has not encouraged
development in this area, but with the changing environment such integration
will become more critical. In the absence of standardization, central banks may
play a vital role as federal regulators to create standardization and frameworks
not only at country level, but across the Gulf as well.
Role of regulators: stronger regional and global integration
GCC states are members of the most important international organizations in
financial regulation, including the IMF and UNCTAD. Saudi Arabia is a full
member of the G20 and, by extension, the FSB and Basel Committee. With
regards to banking supervision, and in particular capital and liquidity
requirements, all GCC members ensured compliance with Basel II and
announced their intention to implement Basel III. With the exception of Kuwait,
all GCC states are also full members of IOSCO, ensuring international standards
for securities-market legislation.

As the region continues to transition through a period of transformation, global


markets are monitoring closely to discover their full potential. The low oil price
creates a common direction for change, but divergence on economic
fundamentals has created differences in the urgency of implementation going
forward.
Ambitions abound in the
Gulfs financial hubs

By Yousef Gamal El-Din, Anchor, Bloomberg Television


There was a time when the word infrastructure The low-tax benefits can be found throughout the
lacked excitement. That's history. The Gulf has While there are financial Gulf. What Dubai has been able to do is pioneer a
captured the imagination of the world through a industries elsewhere, in terms of strategy that proved to be a persuasive model to
series of engineering feats, be it skyscrapers, size and scale, Qatar, Saudi bring banks, asset managers and other financial
airports or even shopping malls. And the next big Arabia and the United Arab groups within its jurisdiction: a legal and regulatory
challenge has long been in the making: Its about structure outside the existing courts system of the
Emirates immediately stand out.
making finance feel truly at home. country.

While there are financial industries elsewhere, in The DIFC has its own independent courts, run
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terms of size and scale, Qatar, Saudi Arabia and the along common-law lines that ensure foreign
United Arab Emirates immediately stand out. In the report, Dubai is classified as a global leader companies have an alternative option to the Sharia-
on par with London, New York and Hong Kong. dominated legal system of the country. This is often
By most benchmarks, Dubai is leading the pack.
Since it opened in 2004, the DIFC has made the called the off-shore approach.
The recent Global Financial Centre Index,
most of the emirates infrastructure, its airline
published twice a year by the London consultancy The other UAE contender, the Abu Dhabi Global
connectivity and attractive lifestyle.
Z/Yen Group, consistently ranks the Dubai Market, followed a similar path when it launched in
International Financial Centre (DIFC) as the top hub 2014. Although Dubai has enjoyed a head-start
in the region. over its neighbor, the capitals deep pools of oil-
generated liquidity could provide it with a long-
term advantage.
Doha, home to the Qatar Financial Centre (QFC), Bahrain held the financial centre crown in the
also possesses large reserves of energy-derived region for many years, but the civil unrest that came
capital, but has opted instead for on-shore status with the Arab Spring in 2011 has deterred new
a center integrated into the Qatari legal system, in global institutions from setting up. It is important to
order to give financial institutions streamlined note, however, that Bahrain remains an important
access to the banking and asset management business hub, especially for Islamic finance.
resources in the local economy.
As competition intensifies, the struggle will come in
Although it's the largest economy in the Gulf by far, the form of building the necessary scale and depth
Saudi Arabia has only recently moved in earnest to convince more foreign investors to join the ride.
towards opening up to foreign investment. For now, the Middle Easts ambitious developments
are amplifying the region on the world stage and
A brand-new financial district near the capital the That is already changing and will only accelerate
allowing international investors access to some of
King Abdullah Financial District has now been with the huge explosion in financial activity
the fastest-growing financial markets.
largely built, at a cost of an estimated $10 billion. expected as part of Vision 2030. Part of the plan for
Many financiers who are keen to do business in the economic diversification includes the privatization
kingdom have opted for the suitcase banking of Saudi Aramco, which could turn out to be the
model, travelling from their international biggest initial public offering in history. Its also
headquarters in the West or Asia, or from nearby likely to prompt a raft of multi-billion dollar IPOs.
Dubai. The prospect of rich fees and the wider
opportunities of a post-oil future might well
persuade global financiers to build their presence
in Riyadh.
Saudi Arabia
economic reform

By Bloomberg Intelligence Analyst Philipp Chladek, with

contributing Analysts Mark Bohlund and James Evans


Saudi reform must merge youthful daring with religious
tradition It's also a generational change aimed at modernizing
society without sacrificing the nation's conservative
Saudi Arabia's ambitious efforts to rebuild its economy, led by Deputy Crown
Prince Mohammed bin Salman, aren't only about reducing income dependence
Islamic values.
on oil exports and increasing cost-efficiency. It's also a generational change
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values. How the 31-year-old prince, together with his mostly young advisors,
reconcile reforms with the country's traditional and conservative establishment
will be the main challenge.

The key economic reform is the privatization of the national oil company Aramco.
Sovereign wealth fund PIF will become the owner of the oil monopoly, making it
the world's biggest investor. Most other sectors will be affected as well, notably
defense, mining, renewables, chemicals, retail and industrials.
Cutting youth unemployment is a key goal of Saudi Youth unemployment rates (ages 15-24):
economic reforms
While efforts by Saudi Arabia's government to modernize its economy and make
it more cost-efficient are primarily aimed at reducing its reliance on oil-export
income, social goals are also on the agenda. The country's youth unemployment
is rising and, at more than 30 percent is significantly above that of peer
economies such as Iran, where 24.8 percent of the population aged 15 to 24 is
without a job. Increasing the participation of local young people in Saudi Arabia's
economy will be a priority.

Companies Impacted: One of the government's goals set out in its National
Transformation Plan is to create 450,000 jobs by 2020. The country relies on
foreign workers in the private sector. Expanding the share of Saudi nationals
would lift productivity, as they are more likely to retain their jobs for longer.
Reducing reliance on foreign workers to lift Saudi Saudi Arabia must diversify its economy away from oil
productivity price
One way Saudi Arabia could raise its productivity is to increase the share of Saudi The price of oil has a disproportionate influence on Saudi Arabia's economy,
nationals in the private-sector workforce. While 10 million expatriates work in the which is cause for concern given environmental issues and fuel-efficiency gains
country, both in the skilled and unskilled segments, Saudi nationals are that may cap global demand growth. Following the Paris climate agreement, the
predominant in the public-sector workforce. Domestic employees are more likely kingdom's current push to maximize oil output can be interpreted as an effort to
to remain in their positions than expatriates, who tend to return to their home sell as much as possible while demand exists. While Saudi Arabia is well-placed
countries after a few years of untaxed pay, so overall worker productivity would to diversify its power mix through solar energy, in practice, progress has been
increase. slow.

Saudi Arabia has cut ambitious targets for renewable energy to 9.5 gigawatts of
clean energy by 2030 from 41 gigawatts of solar installs by 2032. The kingdom
also has an interest in building a solar-energy supply chain, such as in polysilicon,
leveraging its chemicals expertise.

Source: Saudi Arabia Central Department of Statistics


Current account balance, oil price
Which of these areas will be most challenging for
Saudi Arabia to address?

Dependency on oil and diversification into other energy sources

Reliance on foreign workers

Youth unemployment

Government ownership of assets

SEE RESULTS
Saudi reforms may be slowing fall in foreign reserves
The Saudi government's first steps toward making its expenditure more
sustainable in a low oil-price world have shown results, with a halt to the
drawdown of foreign reserves. Fuel subsidies have already been reduced and the
government plans to introduce VAT for 2017-18. The kingdom thus aims to
conserve its foreign assets and create the world's largest sovereign wealth fund.
This means that the government may avoid taking certain measures, such as
liberalizing the riyal trade, or cutting public salaries.
MiFID II: Is the
Middle East ready?

By Joe McHale, Head of Regulatory Affairs, Bloomberg EMEA


Just the facts
Europes financial industry is gearing up for a new
At a recent event organized by Bloomberg in Dubai, representatives from the
regulatory environment. regional financial industry discussed the new regulation and the potential
implications for their businesses.

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MiFID ll will have a significant impact on the entire trading lifecycle due to the
much tougher conduct-of-business standards and increased amount of trade and
transaction reporting required. Massive investment in staff and IT is underway in
MiFID II, the Markets in Financial Instruments Directive, comes into effect in order to upgrade specialist legal, compliance and reporting systems to
January 2018, and while European sell-side and buy-side firms have been demonstrate compliance with the new rules. Alicia Kedzierski, Deloittes Global
grappling with the implications for some time, many firms outside the EU are Regulatory Specialist, explained that non-EU firms will be impacted directly if
playing catch-up. The potential sea-change in the way EU firms carry out they have branches or subsidiaries in Europe. However, they will likely be
business - among themselves and with their counterparties globally - requires a impacted indirectly any time they are transacting or trading instruments with
strategic re-think for many institutions and, almost certainly, investment in new European firms or clients.
systems for all.
For example, in order to continue servicing European clientele, non-EU banks
may face pressures to upgrade their systems across the board. And to service EU
professional clients on a cross-border basis, non-EU investment managers need
to register with ESMA and be subject to the same standards as MiFID firms,
based upon the EUs regulatory equivalence and reciprocity determinations.
Moreover, MiFID ll could become a global regulatory benchmark as many global
firms will take a strategic approach to implementation and adapt their
compliance systems and processes to the toughest standard. Even the
prerequisite step of researching (and understanding) the regulations, before
adding or amending procedures, seems daunting.
Dj vu
What do you think MiFID II's greatest impact will be
Many of the regions institutions have been here before. John Morton,
for non-EU firms? Bloombergs MiFID ll Market Specialist, explained at the event that MiFID ll will
force non-EU investment managers to market to EU clients in a compliant manner
KYC (Know Your Customer) and Suitability
in much the same way as the Alternative Investment Fund Managers Directive
does; a piece of regulation that banks in the Middle East are familiar with and
Research management and compliance have successfully integrated into their processes. So it should be possible to
achieve compliance, especially using third-party solutions to keep costs down,
Record keeping provided the will is there.

While compliance project teams from European banks and funds have been
SEE RESULTS
gearing up over the past year and a half to meet MiFID ll requirements, full
compliance on day one will be a challenge for many firms, especially mid-tier and
smaller institutions. The EUs complex institutional setup, where some aspects of
new regulations are still under deliberation, is partly a cause. But unlike their U.S.
peers, regulators in the EU lack the same powers to provide regulatory
forbearance and delay the start of requirements. So, the pressure is now really on
ahead of the January go-live deadline.

On the same page?


The reaction of compliance officers attending the Dubai event varied. Some cited
a lack of clarity because of the delay on the part of EU regulators in releasing
guidance related specifically to non-EU firms. Others were less concerned than
some by the significance of MiFID ll given their limited interaction with European
firms and clients.
On the whole, this diversity of views is not a case of regional institutions burying
their heads in the Middle Eastern sand. Most recognize that the regional
investment management sector, both buy-side fund managers and sell-side
equity brokerage and research companies, are all impacted to some extent.
These regional firms are already witnessing their European counterparties
initiating requests for data, a signal that tools and solutions to satisfy the exacting
reporting standards of MiFID ll will soon be necessary for financial firms across
the Middle East.
Renewable energy
in the Middle East

By Elena Giannakopoulou, Energy Markets Economist, Bloomberg New Energy Finance


Regional energy overview Renewable energy landscape
The Middle East and North Africa region has seen electricity demand rise 6-8 While renewable energy remains underdeveloped in the Middle East, countries
percent annually for the last ten years, which is among the highest growth rates in in the region continue to make headlines with competitive tenders that set
the world. To meet this demand, Middle Eastern countries have committed to record-low solar and wind energy prices. For example, Dubai and Abu Dhabis PV
major capacity expansion plans. In 2015, the UAE, Saudi Arabia, Qatar, Kuwait, auctions logged $30/MWh and $29/MWh respectively in 2016, with the regions
Bahrain and Oman collectively added approximately 7GW of net utility-scale world-class resources, continuously declining costs of solar and wind systems
power capacity. and availability of cheap financing being among the most important factors
behind these low bids.
Additionally, almost all Middle Eastern countries have been implementing
energy-subsidy reforms in the last three years. The elimination of fuel and Moreover, net importing countries (NICs) are pushing renewable energy
electricity subsidies in particular will help relieve the fiscal pressure that both development to diversify the import-dependent energy mix and address the
energy importers and producers are experiencing, and it will also reveal the true power deficit. Saudi Arabia, the biggest power market in the region, renewed its
cost of fossil-fuel electricity generation, facilitating the competition with commitment to clean energy by launching Vision 2030, a new roadmap for
renewables on an economic basis. restructuring the economy from state-driven to private-sector led. Jordan has
also made significant progress in opening its market and attracting interest from
private developers, and the UAEs green energy commitment is supported by
climate considerations and the paucity of domestic gas reserves.
Asset-finance investment in renewables There are, however, different challenges and constraints that they need to tackle
to continue to spur growth of renewable energy:
Middle Eastern governments have prioritized investments in renewable power
generation to meet rising electricity demand. By 2015, renewable energy
Risks
investment had ballooned to almost 12 times its 2004 levels, despite the plunge
Currency devaluation, bureaucracy, local content requirements and the lack
in fossil-fuel commodity prices.
of commitment on behalf of energy producers are the major challenges
Between 2004 and 2016, almost $3 billion was invested in renewable energy in renewable energy is facing in the region.
the region, with 90 percent of investments going into solar. Solar power The establishment of a solid regulatory framework and the restructuring of
investments notably topped $1 billion for a second year in 2016, totaling to $1.6 the power sector are major barriers to overall development in the region.
billion, which is almost 140 times greater than investments in 2014 ($11.2
Energy-exporting countries still lag behind in the development of renewable
million). Countries in the Middle East are also some of the hottest markets for
energy.
solar thermal electricity generation worldwide, as it offers firm turbine-generated
power and 4-12 hours of storage capacity. Political instability and the risk of currency devaluation are major concerns
for private investors; this leaves international institutions as the only source of
Overall, Middle Eastern countries are prioritizing capacity expansion plans to financing available.
meet rapidly rising demand for electricity.
Opportunities
Renewable energy investments hit a record in 2015, despite the plunge in
fossil-fuel commodity prices. The strong activity was mostly driven by solar Between 2004 and 2016, almost $3 billion was
installations, with solar thermal accounting for about half of it.
invested in renewable energy in the region.
Middle Eastern countries are shifting away from feed-in-tariffs and towards
competitive auctions, and they continue to set global benchmarks for solar
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PV prices at $29/MWh, and Dubai followed at $30/MWh.

The declining costs of solar and wind systems, coupled with energy subsidy
reforms, are creating a new energy and economic reality in Middle Eastern
economies. Today, a solar plant generates electricity more cheaply than a
baseload gas plant in countries that import LNG. In countries that heavily
subsidize fuel prices, like Saudi Arabia, solar energy is the cheapest way of
meeting power-demand peaks.
Aramco looks for cash,
80 years after first Saudi
oil gusher

By Anthony Dipaola, Middle East Energy Correspondent, Bloomberg News


More transparency on reserves and cashflow, as well as the recently announced Saudi Arabia first struck black gold in March of 1938 at the Dammam Number 7
reduction in income tax, are key to attracting foreign investors to the IPO of well in the desert near the state oil companys present-day headquarters on the
Saudi Arabian Oil Co., according to analysts and investors. The deal is likely to Persian Gulf.
be pushed ahead with the backing of Deputy Crown Prince Mohammed bin
Now the kingdom is looking for a new gusher, eight decades after that first
Salman, though the government may struggle to secure the $2 trillion valuation
discovery this time by wooing foreign investors to buy into state-owned Saudi
he proposed.
Arabian Oil Co. The kings influential son, Deputy Crown Prince Mohammed bin
Salman, is championing a sale by the end of next year of as much as 5 percent of
the company known as Saudi Aramco, which he values at more than $2 trillion.

Saudi Arabia is courting investors as the worlds biggest oil exporter seeks to
diversify the economy by building new industries to create jobs. Selling part of
Aramco will underpin the overhaul. To tap those funds, the kingdom needs to
show it can do more than just sell crude.

Saudi Arabia is all about oil its still the lifeblood of the country, said Olivier
Jakob, Managing Director of Zug, Switzerland-based energy consultant
Petromatrix GmbH. The Aramco sale has to be a success if the kingdom is
going to raise the cash needed to diversify the economy, Jakob said. Its about
the credibility of the country.
The biggest questions surrounding the regions most anticipated initial public
offering are how much Aramco is worth and how much oil it has. The country is
currently conducting its first independent audit of oil reserves, which it quantifies
at about 260 billion barrels. Aramco is still sorting out where and when to list its
shares, and details like these will determine whether investors flock or flee when
the company hits the market.

If Aramco were to achieve the crown princes target for the IPO, it would be the
worlds biggest company by far about three times the size of Apple Inc. and six
times larger than Exxon Mobil Corp. But some analysts reckon that Aramco wont
raise a fifth of what the prince wants. A 5 percent sale of a $2 trillion company
would bring in about $100 billion, dwarfing the $25 billion snared by Chinese
Internet retailer Alibaba in the worlds largest initial public offering in 2014.
Urgent reform Long-term return
The need to reform the economy gained urgency when Brent plunged from $100 In a turbulent market, Aramco needs to be transparent to ensure that investors
a barrel on average from 2010 through 2014 to less than half that amount. Saudi earn long-term returns. That means sharing three key pieces of information, said
Arabia isnt alone among Middle Eastern oil producers in cutting government Neil Beveridge, a Hong Kong-based analyst covering oil and natural gas
spending by reducing subsidies and delaying projects. It is running deficits and companies at Sanford C. Bernstein & Co. Aramco will need to report its financial
drawing down financial reserves even as it leads the Organization of Petroleum performance, disclose the size of its oil and gas reserves and provide a picture of
Exporting Countries in cutting crude output to curb a global glut and shore up how much investors can expect for their money.
prices.
The company has said it will release its 2017 financial results, including the
The government targets a balanced budget by 2020, and it forecasts a deficit for audited reserve data, before the IPO. The independent review of Saudi oil
this year of 7.7 percent of gross domestic product, down from 11.5 percent in reserves is very reassuring, Energy Minister Khalid Al-Falih said in February. The
2016. The International Monetary Fund lowered its Saudi growth forecast to 0.4 share sale could come in the second half of next year, Aramco Chief Executive
percent from 2 percent in January. In the meantime, the kingdom has burned Officer Amin Nasser said in January.
through about $222 billion in financial reserves since August 2014, when oil
Stock exchanges worldwide are vying for the honor of hosting the Aramco IPO.
income swelled its cash pile to a record $746 billion.
Bourses in Hong Kong, Singapore and Tokyo have all courted the Saudis, and
King Salman bin Abdulaziz visited Asia in February and March. China offered to
buy a stake in Aramco through its sovereign investment fund and largest energy
company, people familiar with the situation said in March. Singapore made a
similar offer, people familiar with those talks said in February. Both groups of
people asked not to be identified because the talks are private, and companies
involved declined to comment.

While an Asian listing is an option, Aramco could also sell shares in New York or
London along with the main listing in Riyadh, where the Saudi Tadawul exchange
is located, Aramcos Nasser told Bloomberg in January.
Tax concerns
Without more clarity, investors will have scant information on which to base their
valuations of the company. Aramco could be worth as little as $400 billion, Wood
MacKenzie Ltd. told clients at a briefing in February, according to two people
who attended that event. Part of the reason the consultant valued the company at
so much less than the Saudi government has to do with the high tax burden on
its earnings, according to these people. Wood MacKenzie declined to comment
at the time.

Our most likely scenario is that the IPO will happen, but proceeds will come
below the governments expectations, Raphale Auberty, an analyst at Fitch
Groups BMI Research, said on March 14. The level of transparency over reserves
and management will be crucial to generate sufficient investor interest, and
therefore boost the valuation of the company.

Taxation and government involvement in corporate decision-making are among


reasons why state oil companies usually trade at a discount to their privately
owned peers, Beveridge said. The big question is how much Aramco will be
taxed, he said.

Aramco currently pays a 20 percent royalty on its revenue plus an 85 percent tax
on income. Under plans set out on March 27, the companys income tax rate will
be cut to 50 percent, retroactive to January 1 this year.

The reduction meets one of the requirements set out by analysts for the IPO. The
Saudi government needs to reduce the rate to bring it more in line with other
listed oil and gas companies, said Mohamad Al Hajj, equity strategist at EFG-
Hermes Holding, in early March. A range of 40 to 50 percent would be more in
line with the typical tax rates applied on global oil and gas producers.

While Aramco will derive most of its value from oil, Energy Minister Al-Falih says
the company he led before joining government is ploughing cash into becoming
one of the largest refiners and chemical makers and also exploring for natural gas
to power the countrys industrial growth.

The benefit of having oil and gas has long been considered a birth right to many
Saudis, said Peter Salisbury, a senior research fellow at the Royal Institute of
International Affairs, also known as Chatham House. The Saudi leadership has
signaled theyre wiling to make radical changes. Prince Mohammed has made a
series of strategic bets, and each of them has to come through to make his plan
work.
Thank you for reading!

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