Last Update 22:10
Friday, 06 December 2019

Sucking off liquidity

As world markets anticipate next month’s initial public offering of Saudi oil giant Aramco, Sherine Abdel-Razek investigates its possible effects on Egypt

Sherine Abdel-Razek , Wednesday 6 Nov 2019
Sucking off liquidity
Saudi Aramco oil facility in Abqaiq, Saudi Arabia (photo: Reuters)
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Three years after the Saudi oil giant Aramco first revealed its plans to float a stake in the company, it published on Sunday a prospectus-like intention-to-float note setting 4 December as the date of the initial public offering (IPO).

Aramco said that the final offer price, as well as the percentage of the shares to be sold, would be determined at the end of the book-building period, with the prospectus to be released on 9 November.

While the offering will be listed on the Saudi Tadawol stock exchange, Aramco has plans for international listings, maybe in the London, Tokyo or New York stock exchanges in 2020.

The offering is stirring the world’s markets, not only because Aramco is a gigantic cash cow, the $111 billion it recorded as net income last year equivalent to that reported by Apple, Google and Exxon Mobil combined, but also because of the huge value of the offering comprising one to two per cent of the company, which would translate at its lower end to $20 billion, making it the largest IPO ever.

With 260 billion barrels of proven oil reserves, Aramco produces up to 12 million barrels a day, one in every eight barrels produced worldwide, with drilling costs estimated at $9 a barrel, the lowest globally.

The IPO is a cornerstone of Saudi Crown Prince Mohamed bin Salman’s Vision 2030 plan to limit the Saudi economy’s dependence on oil. Ninety per cent of both the Saudi government budget and the country’s exports stem from oil revenues.

Such a mammoth offering of a lucrative company in the region could have negative implications for liquidity, with Egypt included, however.

With LE700 to LE900 million in average daily transactions, the liquidity of the Egyptian market is already low, especially after the devaluation of the Egyptian pound in 2016.

The percentage of Arab transactions is 10 per cent, while foreign non-Arab transactions represent 25 per cent. “Those would be definitely attracted by the Aramco offering, especially with the incentives granted for interested investors,” said Amr Al-Alfi, head of research at Shuaa Securities Egypt.

However, Al-Alfi believes that the kind of investor interested in Aramco is different from the one who invests in local companies or in the local market.

“Some foreigners invest in the EGX30 Index as a whole or target certain sectors that have potential and do not exist elsewhere in the region, like the healthcare and education sectors, for example,” he said.

“Investors eyeing Aramco are mainly US-based funds or those buying in international indices like the MSCI and London FT where Aramco is included, and for whom Aramco is a must-have commodity in their portfolios. They are usually not interested in the Egyptian market,” he explained.

If some investors opt to liquidate their holdings in the local market to buy Aramco shares, this will not be an across the board selling spree, according to Al-Alfi, but it might affect companies that foreign investors are interested in, such as the Commercial International Bank (CIB), Al-Sewidy Electric and Eastern Tobacco.

 The fact that the CIB has reported good results this week could undermine the effects of any expected sell off, as more investors would be buying its shares due to its good performance, Al-Alfi noted.

The CIB posted a 23 per cent hike in its third-quarter profits compared to last year to reach LE3.18 billion on revenues of LE6.6 billion.

Fears of the effects of the Aramco IPO on the local market were first referred to three weeks ago by Mohamed Metwalli, CEO of NI Capital, a state-owned financial services company helping to prepare the Egyptian government’s IPOs pipeline.

Metwalli told Reuters that there would be a potential future delay in the offering of state-owned enterprises on the Egyptian bourse because of the Aramco IPO. “Right now, liquidity is being sucked out of the market because of anticipation of the Aramco offering,” Metwalli said.

This was seconded by Public Enterprise Minister Hisham Tawfik in an interview with the US financial firm Bloomberg last week.

“Aramco is the biggest IPO in the world, and we should take it into consideration when deciding the timing of our offerings. This is the message we have got from the investment banks,” Tawfik said.

Last year, the government said it planned to sell minority stakes in 23 state-owned companies, including Enppi and Banque du Caire, in an initial phase of privatisations that is part of a plan to raise up to LE80 billion.

After several delays, the government kicked off the programme with an additional 4.5 per cent stake sale in the already listed tobacco monopoly Eastern Tobacco in March, and the plan was frozen since.

While Abu Qir Fertilisers and Alexandria Container and Cargo Handling are both almost ready to sell stakes, Tawfik said the authorities would meet advisers “soon” to discuss the timings. Analysts said they would likely be after the Aramco offering.

“Aramco is a good reason for delay, but even if it did not happen the local offerings would not have taken place by now,” said Al-Alfi. “They have been repeatedly postponed for all kind of reasons.”

The IPO programme has been delayed due to the emerging markets slump, legal problems in the offered companies, the readiness of each company’s financial documentation, and in the case of some companies a downturn in the business cycle.

The introduction of Banque du Caire together with other state-owned companies on the bourse aims at creating new opportunities and increasing liquidity.

President Abdel-Fattah Al-Sisi proposed last week to float part of the military-owned companies.

“The offerings being prepared by the Egyptian state should include a chance [for] the Armed Forces companies. In this way, we will have opened a door for the Egyptian people and society to these companies,” he said.

Al-Sisi said last year that Egypt planned to offer shares on the stock market of a $1.1 billion cement plant owned by the military, but no steps have yet been announced.

*A version of this article appears in print in the 7 November, 2019 edition of Al-Ahram Weekly.

 

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