Aramco’s IPO proceeds could ease Saudi austerity measures: Fitch

Saudi Aramco’s initial public offering (IPO) is likely to have little direct fiscal impact in Saudi Arabia, but could help ease the economic effect of austerity measures by allowing the country’s sovereign wealth fund to boost domestic investments, says Fitch Ratings.

“This could mitigate the impact from renewed central government austerity,” Fitch said on Tuesday, explaining that “October’s pre-budget statement signaled an intention to refocus on budget discipline, planning a 3 percent [year-on-year] spending cut in 2019, and a further 9 percent cut by 2022.”

Aramco is offering 1.5 percent of its shares to local and qualified foreign investors (QFIs) in the Saudi Stock (Tadawul), and could generate around 90-96 billion riyals ($24-$25.6 billion) in proceeds, which are expected to flow to the Public Investment Fund (PIF), the country’s sovereign wealth fund.

PIF is expected to use the proceeds to invest in local and foreign investments.

“The funds will be small relative to medium-term financing needs and we will not treat them as government revenue in our sovereign rating analysis,” said Fitch Ratings in a research note on Tuesday, adding that it expects the fund’s investments to be primarily domestic.

The Kingdom plans to use the proceeds to diversify its economy, which could help support non-oil growth.

“However, the timeline and economic impact of announced PIF projects is uncertain,” Fitch said. “They include a large theme park complex outside Riyadh, tourist developments on the Red Sea coast and Saudi Arabian Military Industries, a defense company launched in 2017 that is a key pillar of the Saudi Arabia's industrial development strategy.”

If Saudi Arabia’s wealth fund decides to use the IPO proceeds for PIF investments abroad or towards domestic investments with high import content, this could also put pressure on Saudi Arabia’s official foreign exchange reserves, the agency added.