Aramco IPO looks set to underwhelm - Capital Economics
Middle East & North Africa Economics

Aramco IPO looks set to underwhelm

Middle East Chart Book
Written by William Jackson
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Preparations for the public listing of Saudi state oil company, Aramco, have stepped up a gear this month but the signs are that it is unlikely to be the blockbuster sale that the Kingdom once hoped for. When plans for the listing were first mooted in 2016, Crown Prince Mohammed bin Salman targeted a 5% listing (partly on an international exchange) and a valuation of $2trn. But investor interest has not been as strong as expected and it now looks set to be a largely Saudi affair – a 1.5% stake sale on the Tadawul with a $1.6-1.7trn valuation and a heavy reliance on local investors. It’s now touch and go whether the sale will beat the record IPO of $25bn set by China’s Alibaba and the proceeds would barely cover the budget deficit for a year. And plans for this sale to be followed by an international listing seem to have lost momentum.

  • Preparations for the public listing of Saudi state oil company, Aramco, have stepped up a gear this month but the signs are that it is unlikely to be the blockbuster sale that the Kingdom once hoped for. When plans for the listing were first mooted in 2016, Crown Prince Mohammed bin Salman targeted a 5% listing (partly on an international exchange) and a valuation of $2trn. But investor interest has not been as strong as expected and it now looks set to be a largely Saudi affair – a 1.5% stake sale on the Tadawul with a $1.6-1.7trn valuation and a heavy reliance on local investors. It’s now touch and go whether the sale will beat the record IPO of $25bn set by China’s Alibaba and the proceeds would barely cover the budget deficit for a year. And plans for this sale to be followed by an international listing seem to have lost momentum.
  • At the same time, our GDP Tracker suggests that Saudi Arabia’s economy contracted in year-on-year terms in Q3 as the drag from the oil sector intensified.
  • The UAE’s non-oil sector has struggled and concerns about the corporate sector’s debts are building. The past month has brought signs that the blockade on Qatar may be coming to an end. But we doubt that this would provide a meaningful boost to the economy.
  • Kuwait’s government infighting intensified this month, reinforcing our view that, despite the strong sovereign balance sheet, there is unlikely to be an agreement to loosen fiscal policy in order to support the struggling economy. Elsewhere, the latest activity figures show that the economies of Bahrain and Oman have continued to struggle. Oman also returned to deflation for the first time in four years.
  • Recently-released figures showed that Egypt’s economic recovery continued in Q2. However, more timely activity data suggest that the economy has since stuttered.
  • The political turmoil in Lebanon has pushed the country to the brink of a messy devaluation, default and banking crisis. In Jordan, the industrial sector has experienced a sharp downturn in recent months.
  • Mass protests in Algeria have continued to weigh on economic activity. GDP growth in Morocco eased in Q2, but it is likely to strengthen as output from the Kenitra car plant comes online and boosts exports.
  • Tunisia’s political landscape remains in gridlock, but there are growing signs that a coalition will be formed soon. This would be the first step towards addressing the country’s large macro imbalances.
  • The performance of financial markets have been mixed this month. The MSCI Arabian Markets Index rose, but still underperformed the broader MSCI Emerging Markets Index. Meanwhile, Lebanese dollar bond spreads spiked as fears of a sovereign default increased.

Saudi Arabia

  • The Saudi government has stepped up preparations for the sale of a stake in the state oil company, Aramco. 1.5% of the firm is due to be listed on the Tadawul in December and Crown Prince Mohammed bin Salman seems to have relaxed his target of a $2trn valuation. It is touch and go whether the Aramco IPO will break the record for the largest public listing, currently held by China’s Alibaba (1).
  • The proceeds from the sale would finance the budget deficit, which stands at just over 4% of GDP (2), for less than a year. And with signs that there will be very little foreign investor participation in the listing, there will be a minimal boost to the balance of payments position. Meanwhile, we doubt that there will be much effect from the sale on the Kingdom’s oil policy. The main impact will be if the IPO puts renewed impetus behind the Vision 2030 reform plans.
  • Meanwhile, our GDP Tracker suggests that economic growth slowed from 0.5% y/y in Q2 to -0.2% y/y in August (3). The drag from the oil sector intensified, but activity in the non-oil sector picked up (4). Private sector credit growth expanded at its fastest pace since 2016 in September and the whole economy PMI – which covers the non-oil private sector – hit a four-year high in October (5). Deflation eased in October, with consumer prices falling by 0.3% y/y (6).

Chart 1: Largest Initial Public Offerings ($bn)

Chart 2: Budget Balance (4Q Sum, % of GDP)

Chart 3: GDP & CE GDP Tracker (% y/y)

Chart 4: CE GDP Trackers (% y/y)

Chart 5: Whole Economy PMI

Chart 6: Consumer Prices (% y/y)

Sources: CEIC, Refinitiv, Markit, Capital Economics


United Arab Emirates

  • The early signs suggest that the UAE’s economic slowdown has intensified in the second half of this year. In year-on-year terms, which is what matters for GDP growth, oil output declined for the first time since mid-2018 in October. This contraction in output looks set to deepen in the coming months before fading out at the start of next year (7).
  • The non-oil sector has continued to struggle. Imports – a proxy for domestic demand – are contracting at their fastest pace since the end of 2017 (8). Private sector credit growth has remained weak (9). And the slump in Dubai’s real estate sector shows no signs of abating (10). Next year’s World Expo should provide some boost to activity. But we are concerned that once the Expo leaves town, some government-related entities may struggle to service their large debts (11).
  • Consumer prices continued to decline in September. The headline rate of inflation fell from -2.0% y/y in August to -2.2% y/y (12). The breakdown down showed that food and housing inflation picked up but that this was more than offset by weaker transport inflation.

Chart 7: UAE Oil Production (% y/y)

Chart 8: Imports

Chart 9: UAE Private Sector Credit

Chart 10: Dubai Real Estate Prices & Rents (% y/y)

Chart 11: IMF Estimates of Gross General Government Debt (% of GDP, 2018)

Chart 12: UAE Consumer Prices (% y/y)

Sources: CEIC, Refinitiv, Capital Economics


Qatar

  • The blockade imposed on Qatar by its Gulf neighbours in mid-2017 may be close to an end. In a sign of easing tensions, football teams from Saudi Arabia and the UAE will compete in the Gulf Cup in Qatar this month. The tourism sector was the main casualty of the blockade (13), so arrivals would probably increase if the blockade is lifted. But we don’t think that this would offset numerous headwinds facing the economy.
  • The real estate sector is still in the doldrums – property prices are now more than 25% below their 2015 peak (14). Admittedly, private sector credit expanded at its fastest pace since 2015 in September (15). But this has been driven by banks’ borrowing from abroad, which we don’t think will be sustained (16). Meanwhile, the whole economy PMI – which covers the entire non-oil private sector – fell last month (17).
  • Finally, headline inflation dropped from +0.1% y/y in September to -0.8% y/y last month – the weakest reading since March – on the back of a sharp decline in food prices (18). Looking ahead, though, we expect that deflation will ease and the headline rate will return to positive territory at the start of 2020.

Chart 13: Tourist Arrivals (000s)

Chart 14: Real Estate Prices

Chart 15: Commercial Banks’ Private Sector Credit
(% y/y)

Chart 16: Commercial Banks’ Loan-to-Deposit Ratio

Chart 17: Whole Economy PMI

Chart 18: Consumer Prices (% y/y)

Sources: CEIC, Refinitiv, Markit, Capital Economics


Kuwait, Oman & Bahrain

  • Tensions between the Kuwaiti government and parliament have ratcheted up this month, with the prime minister submitting the resignation of the cabinet. This turmoil reinforces our view that, despite the strong sovereign balance sheet (19), fiscal policy is unlikely to be loosened in order to support the struggling economy. Steps to overhaul the dire business environment (20) are also unlikely to make headway.
  • Meanwhile, the year-on-year pace of contraction in oil output eased a little in October (21). Recent reports suggest the authorities are close to an agreement with Saudi Arabia to restart production in the neutral zone. But even if a deal is reached, we doubt that there will be a near-term impact on oil output as Kuwait continues to comply with the OPEC+ agreement.
  • Elsewhere, both the Bahrain and Oman economies have continued to struggle. Private sector credit growth has continued to slow in both economies – in the former, it slowed to a two-year low in September (22). Finally, headline inflation eased in both countries too – in Oman, inflation fell into negative territory for the first time since 2015 in October (24 & 25).

Chart 19: Kuwait Budget Balance (% of GDP)

Chart 20: World Bank Ease of Doing Business Index (2018)

Chart 21: Kuwait Oil Production

Chart 22: Bahrain Private Sector Credit (% y/y)

Chart 23: Bahrain Consumer Prices (% y/y)

Chart 24: Oman Consumer Prices (% y/y)

Sources: CEIC, Refinitiv, Capital Economics


Egypt

  • Recently-released national accounts data showed that Egypt’s economy strengthened in Q2. GDP growth edged up from 5.6% y/y in Q1 to 5.7% y/y in Q2, the best performance since 2013 (25). The breakdown revealed that stronger activity in the agricultural, manufacturing and construction sectors more than offset weaker growth in mining output (26).
  • More timely data suggest that the economy has slowed in the second half of this year. Industrial production – which includes some services, such as tourism – contracted by 1.0% y/y in September, the worst performance in 10 months (27). And the whole economy PMI edged down from 49.5 in September to 49.2 in October, leaving it below the 50-mark which, in theory at least, separates expansion from contraction (28). On a more positive note, private sector credit growth remains strong (29).
  • Headline inflation dropped from 4.8% y/y in September to 3.1% y/y in October, its lowest level since 2005 and well below the central bank’s target range of 9±3% for end-2020. On the back of this, the central bank cut its overnight deposit rate by 100bp, to 12.25%, this month (30). We think that inflation is now at a bottom and will rise over the coming months. But it will remain subdued, paving the way for further monetary loosening – we expect rates to be lowered to 10.00% by the end of next year.

Chart 25: GDP (% y/y)

Chart 26: Gross Value-added by Sector (% y/y)

Chart 27: Industrial Production

Chart 28: Whole Economy PMI

Chart 29: Domestic Credit to Non-government
(Local Currency, Deflated by CPI, % y/y)

Chart 30: Consumer Prices & Overnight Deposit Rate

Sources: CEIC, Refinitiv, Capital Economics


Lebanon & Jordan

  • The recent protests in Lebanon have pushed the economy to the brink of a crisis. With no new government in place and Mohammed Sadafi, the favourite to be the next prime minister, pulling his candidacy last week, investors are almost fully pricing in a sovereign default. Dollar bond spreads have jumped (31) and are now above to those in Argentina, where default fears have also crystallised in recent months.
  • Pressure on the dollar peg is mounting. Even before the protests, non-resident deposits fell in September for only the second time in twelve years (32) and capital flight has almost certainly intensified. The central bank’s ability to prop up the pound is limited – at $39.4bn, FX reserves pale in comparison with the country’s gross external financing needs of around $100bn. The government’s large FX debts means that a devaluation could trigger a messy currency, debt and banking crisis. The economy already seems to be in recession and the experience from other EMs suggests that GDP could contract by 8% (33 & 34).
  • Elsewhere, the slowdown in Jordan’s economy appears to have deepened. Industrial production contracted by 15.4% y/y in September, the worst performance since 2003, on the back of weakness in the manufacturing sector (35). On a more positive note, the tourism sector has continued to recover (36).

Chart 31: JP Morgan Lebanon EMBI Index

Chart 32: Lebanon Non-resident Deposits (% y/y)

Chart 33: Lebanon GDP & Coincident Indicator

Chart 34: Peak-to-trough Fall in GDP During Simultaneous Currency, Debt and Banking Crisis (%)

Chart 35: Jordan Industrial Production

Chart 36: Jordan Tourist Arrivals (12m Sum, mn)

Sources: CEIC, Refinitv, Capital Economics


Algeria

  • Political turmoil in Algeria has continued to weigh on the economy. Recently-released national accounts figures showed that GDP growth slowed from 1.3% y/y in Q1 to 0.3% y/y in Q2, the weakest pace of growth since the end of 2009 (37). The downturn in the hydrocarbon sector deepened and growth also slowed in industry, agriculture and business services.
  • The economy’s struggles have shown no sign of abating in the second half of the year. Oil production has continued to contract in year-on-year terms (38). Private sector credit has slowed sharply (39) and the recent drop in bank deposits adds to evidence of capital flight (40). The authorities have maintained a tight grip on the dinar but at the expense of a further drawdown of foreign exchange reserves (41).
  • Finally, headline inflation jumped from 1.9% y/y in August to 2.9% y/y in September, a six-month high. This was driven by a sharp rise in food price inflation, which returned to positive territory for the first time since April (42).

Chart 37: GDP (% y/y)

Chart 38: Oil Production

Chart 39: Private Sector Credit (% y/y)

Chart 40: Bank Deposits

Chart 41: FX Reserves (US$bn)

Chart 42: Consumer Prices (% y/y)

Sources: CEIC, Refinitiv, Capital Economics


Morocco

  • The latest figures suggest that Morocco’s economic slowdown bottomed out in Q2. Recently-released data show that GDP growth eased from 2.8% y/y in Q1 to 2.5% in Q2, the weakest pace of growth since the end of 2016 (43). This was driven by a slowdown in the non-agricultural sector, which outweighed the easing pace of contraction in the agricultural sector.
  • Export growth has picked up since July (44), which may have been supported by the start of production at Peugeot’s new plant in Kenitra. Once at full capacity the plant will add an additional 200,000 vehicles per year (45). This fillip to exports will largely offset the headwinds from weakness in the euro-zone and help to rein in the current account deficit, which stood at 5.3% of GDP in Q2 (46). Meanwhile, private sector credit growth continued its gradual recovery in September (47).
  • Finally, consumer price data for September showed that the headline rate of inflation slowed from 0.8% y/y in August to 0.2% y/y the following month, driven largely by a fall in food prices (48).

Chart 43: GDP by Sector (% y/y)

Chart 44: Merchandise Trade (EUR, % y/y, 3m avg.)

Chart 45: Vehicle Production (000s Units)

Chart 46: Current Account Balance (4Q Sum, % of GDP)

Chart 47: Private Sector Credit (% y/y)

Chart 48: Consumer Prices (% y/y)

Sources: CEIC, Refinitiv, Capital Economics


Tunisia

  • Tunisia’s political gridlock has continued, but hopes of a coalition being formed are rising. Ennahda, who backed President Saied in the election, have put forward a candidate for prime minister. And the opposition party, Heart of Tunisia, have backed a previous Ennahda leader as parliamentary speaker. These two parties control the most seats in parliament, but still fall short of the 109 required to form a majority (49).
  • However, any new government faces a tough task to turn the economy around. Recently-released national accounts data showed that GDP growth slowed from 1.2% y/y in Q2 to 1.0% y/y last quarter, its weakest pace since the start of 2016 (50). The breakdown showed that softer activity in the industry and services sectors outweighed stronger agricultural output.
  • Meanwhile, the government will need to tighten fiscal policy to rein in the large budget and current account deficits (51). The authorities also need to undertake wider structural reforms, particularly in the labour market – unemployment has remained close to 15% over the past decade (52). The authorities are also likely to have to loosen their grip on the dinar, which has been kept strong (53). A fall in the dinar would push up inflation, which in October fell to 6.5% y/y – its lowest reading since January 2018 (54).

Chart 49: Parliamentary Election Results
(No. of Seats Won)

Chart 50: GDP (% y/y)

Chart 51: Current Account and Budget balance
(% of GDP)

Chart 52: Unemployment Rate (%)

Chart 53: Tunisian Dinar vs. US$

Chart 54: Consumer Prices (% y/y)

Sources: CEIC, Refinitiv, Capital Economics


Financial Markets

  • Equities across the region have underperformed those in the rest of the emerging world. The MSCI Arabian Markets Index rose 0.8% m/m (in local currency terms), compared with a 1.8s% gain of the MSCI EM Index (55). At a country level, performances were mixed (56). Stock markets in the UAE struggled, with Dubai’s index down by almost 3% over the past month.
  • Sovereign dollar bond moves over the past month have been mixed (57). In most cases, spreads narrowed – particularly in Bahrain, Oman and Egypt. The main exception to this was Lebanon. Since the mass protests began in mid-October, spreads have widened by around 1,000bp and are now close to those in Argentina, another EM where default fears have crystallised (58).
  • Capital flight has put pressure on Lebanon’s dollar peg. We have highlighted before that the low level of FX reserves compared with the monetary base has underlined the credibility of the peg – reserves only cover around 40% of the monetary base (59). The IMF estimates that the Lebanese pound is overvalued by around 50%. Elsewhere, the Egyptian pound has continued its rally against the dollar, strengthening by around 1% over the past month and is now up by over 11% year-to-date (60).

Chart 55: MSCI Indices (Local Ccy, Jan. 2019 = 100)

Chart 56: Equity Indices (Local Currency, % m/m)

Chart 57: Change in EMBI Dollar Bond Spread over US Treasuries (bp, Change 24th Oct. – 24th Nov.)

Chart 58: EMBI Dollar Bond Spread over US Treasuries (bp)

Chart 59: Ratio of FX Reserves to Monetary Base

Chart 60: Egyptian Pound (vs. $, Inverted)

Sources: CEIC, Refinitiv, Capital Economics


Background Data

Chart 61: GDP ($bn, 2018, Market Exchange Rates)

Chart 62: Population (Millions, 2018)

Chart 63: GDP Per Capita
($000, 2018, Market Exchange Rates)

Chart 64: Share of World Output (%, 2018, PPP)

Chart 65: Real GDP (% y/y)

Chart 66: Consumer Prices (% y/y)

Chart 67: Budget Balance (% of GDP)

Chart 68: Current Account Balance (% of GDP)

Sources: CEIC, Refinitiv, Capital Economics


Key Historic Data

Table 1: Real GDP & Inflation

Share of World(1)

GDP (% y/y)

Inflation (% y/y)

14-18

2014

2015

2016

2017

2018

14-18

2014

2015

2016

2017

2018

Saudi Arabia

1.37

2.2

3.7

4.1

1.7

-0.7

2.2

1.4

2.2

1.3

2.0

-0.9

2.5

Egypt

0.96

4.2

2.9

4.4

4.3

4.2

5.3

15.6

10.1

10.4

13.8

29.5

14.4

Algeria

0.49

2.8

3.8

3.7

3.2

1.4

2.1

4.8

2.9

4.8

6.4

5.6

4.3

United Arab Emirates

0.54

3.0

4.4

5.1

3.0

0.8

1.7

2.6

2.3

4.1

1.6

2.0

3.1

Qatar

0.26

2.7

4.0

3.7

2.1

1.6

2.2

1.7

3.4

1.8

2.7

0.4

0.2

Morocco

0.23

3.1

2.7

4.6

1.1

4.1

3.1

1.2

0.4

1.6

1.6

0.7

1.9

Kuwait

0.23

0.5

0.5

0.6

2.9

-3.5

1.7

2.3

2.9

3.3

3.1

1.4

0.6

Tunisia

0.11

1.9

3.0

1.2

1.1

2.0

2.5

5.2

4.9

4.8

3.6

5.3

7.3

Oman

0.15

2.4

1.4

4.7

5.0

-0.9

2.1

0.9

1.0

0.1

1.1

1.7

0.8

Lebanon

0.07

0.9

1.9

0.4

1.6

0.6

0.3

1.6

1.8

-3.7

-0.8

4.5

6.1

Jordan

0.07

2.3

3.1

2.4

2.0

2.1

2.0

1.8

2.9

-0.9

-0.8

3.3

4.5

Bahrain

0.06

3.3

4.4

2.9

3.5

3.8

1.8

2.2

2.6

1.9

2.7

1.4

2.1

Middle East & North Africa

4.5

2.8

3.7

3.7

2.6

1.3

2.8

5.1

3.9

3.9

4.8

7.2

5.5

(1)% 2018 in PPP terms

Table 2: Current Account & Budget Balance

Current Account (% of GDP)

Budget Balance (% of GDP)

14-18

2014

2015

2016

2017

2018

14-18

2014

2015

2016

2017

2018

Saudi Arabia

1.4

9.8

-8.7

-3.7

1.4

8.3

-10.1

-3.5

-15.8

-17.2

-9.2

-4.6

Egypt

-3.8

-0.9

-3.7

-6.0

-6.1

-2.4

-10.9

-11.3

-10.9

-12.5

-10.4

-9.5

Algeria

-11.9

-4.4

-16.4

-16.5

-13.2

-9.1

-9.5

-7.3

-15.3

-13.0

-6.6

-5.2

United Arab Emirates

7.1

13.5

4.9

3.7

6.9

6.6

-1.4

1.9

-3.4

-2.0

-1.6

-1.8

Qatar

8.0

24.0

8.5

-5.5

3.8

9.3

3.2

14.3

4.5

-5.4

-2.9

5.3

Morocco

-4.1

-5.9

-2.1

-4.2

-3.6

-4.5

-4.1

-4.8

-4.2

-4.5

-3.5

-3.7

Kuwait

10.2

33.4

3.5

-4.6

5.9

12.7

9.2

22.4

5.6

0.3

6.6

11.4

Tunisia

-10.1

-9.8

-9.7

-9.3

-10.2

-11.2

-5.2

-3.9

-5.3

-6.2

-5.9

-4.6

Oman

-10.1

5.2

-15.9

-18.7

-15.2

-5.9

-11.8

-1.1

-15.9

-21.2

-12.9

-7.7

Lebanon

-24.7

-28.2

-19.3

-23.1

-25.7

-27.0

-8.9

-6.2

-9.1

-9.4

-8.6

-11.0

Jordan

-8.7

-7.2

-9.0

-9.4

-10.6

-7.4

-5.9

-8.6

-8.5

-3.7

-3.7

-4.8

Bahrain

-2.6

4.6

-2.4

-4.6

-4.5

-5.8

-12.7

-1.6

-18.4

-17.6

-14.2

-11.7

Source: Refinitiv


William Jackson, Chief Emerging Markets Economist, +44 20 7808 4054, william.jackson@capitaleconomics.com
Jason Tuvey, Senior Emerging Markets Economist, +44 20 7808 4065, jason.tuvey@capitaleconomics.com
James Swanston, Middle East and North Africa Economist, +44 20 7808 4991, james.swanston@capitaleconomics.com
Ruby Chamberlain, Research Assistant, +44 20 7808 4068, ruby.chamberlain@capitaleconomics.com