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Why Saudi Arabia Needs An Aramco IPO

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Can The Saudi Stock Exchange Handle An Aramco Listing?

Aramco Oil

The Saudi stock exchange, Tadawul, will make sure that the weighting of the oil giant Aramco in the bourse’s main index will not be too big, the Saudi stock market’s chief executive Khalid al-Hussan said on Wednesday.

“We have technical ways to address this issue,” Reuters quoted al-Hussan as telling the Euromoney business conference in Riyadh.

Investors are concerned that the Saudi stock market may face liquidity problems if it absorbs 5 percent of Aramco when it lists its shares there, possibly in early 2019.

If the Saudi valuation of Aramco at US$2 trillion stands—which most analysts see as unlikely—listing 5 percent of the oil firm on the Saudi Arabian domestic stock exchange would mean US$100 billion of Aramco, compared to a total market capitalization of Tadawul at below US$500 billion.

Saudi Arabia has been targeting a foreign listing as well, but it has reportedly shelved such plans for now in favor the local stock market.

One of the biggest concerns about a Saudi-only listing is the possible lack of sufficient liquidity due to the smaller size of the Tadawul stock exchange, Amy Myers Jaffe and Jareer Elass wrote in an article on the Council on Foreign Relations in March. The Saudi stock market is small compared to the major international exchanges, with a total market capitalization of some US$470 billion and just 171 listed companies, compared to the NYSE, for example, whose market capitalization is US$21 trillion with more than 2,000 listed companies.

There is concern that the Saudi stock exchange wouldn’t be able to absorb the Aramco shares and that such a large sale could create too much volatility when investors sell other company shares to free up capital to buy up Aramco stock, Jaffe and Elass argue.

Related: Canada’s Oil Patch To Turn Profitable In 2018

Now al-Hussan says that one of the ways to address the weighting issue is to introduce an ‘index cap’ on Aramco, but he did not go into any details on how that would work.

The manager also reiterated previous comments that the Tadawul was ready for the Aramco listing.

In early April, al-Hussan said that the Tadawul was experiencing an influx of foreign funds and expects even more in the future, confident that this would enable the bourse to accommodate the listing of Aramco without any liquidity problems.

By Tsvetana Paraskova for Oilprice.com

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  • Mamdouh G Salameh on May 02 2018 said:
    Listing the IPO of Saudi Aramco on the Saudi stock exchange, Tadawul, will overwhelm it and create a serious liquidity problem.

    However, this is now academic as I have been saying for the last five months that the Saudis will eventually withdraw the IPO of Saudi Aramco altogether as they no longer need it financially as a result of the rise in oil prices and the strengthening of the Saudi economy as a whole.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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