Saudi Exchange Counting on Foreign Funds to Aid Aramco IPO

Saudi Arabia's stock exchange expects an influx of foreign funds to smooth the listing of national oil firm Saudi Aramco, despite concern among some analysts about whether the market can absorb the huge offer, the exchange's chief executive said on Sunday. "Foreign investors are putting in more money -- every day we have improved liquidity capacity," Khalid al-Hussan said in an interview.

The government has said it plans to sell about 5% of Aramco, hoping to raise some US$100 billion or more in what is likely to be the world's biggest initial public offer. Officials have said that in addition to Riyadh, Aramco may list on one or more foreign markets such as New York, London and Hong Kong.

Many private analysts think the US$100 billion target is too ambitious, but even a US$50 billion IPO could strain the Saudi market, which has a capitalization of about US$500 billion -- especially if the burden is not shared with a foreign exchange. Saudi Arabia's biggest IPO so far, the sale of a stake in National Commercial Bank 1180.SE in 2014, raised just US$6 billion. In January this year, an advisory council to the government asked the securities regulator to study whether the Aramco sale might destabilize the market.

Hussan insisted, however, that from technical and regulatory perspectives, the Saudi exchange was fully prepared to handle the Aramco IPO, alone if necessary. He noted that foreign investors were not permitted to buy shares directly in the National Commercial Bank offer. Now, rules have been changed to permit foreigners to take part in local IPOs. Hussan also said last month's decision by equity index compiler FTSE Russell to upgrade Saudi Arabia to emerging market status, and a similar decision which fund managers expect MSCI to make in June, would attract billions of dollars of fresh foreign money to the local market.

Regional investment bank EFG Hermes estimates Saudi Arabia could see fund inflows totaling US$30 billion to US$45 billion in the next two years if it reaches the foreign ownership levels of markets in neighboring United Arab Emirates and Qatar. Some foreign money has started to enter the Saudi market in anticipation of a positive impact from the FTSE and MSCI decisions. Foreign investors, including qualified foreign institutions (QFIs), have been buyers of stocks every week this year, purchasing a net US$2.17 billion, exchange data shows.

"What we have seen at the beginning of this year from foreign investor participation and the cash inflows and the number of registered QFIs in the market, gives us a very comfortable state," Hussan said. He did not comment on the timing of the Aramco IPO. Officials originally said it would take place by the end of 2018, but Saudi Crown Prince Mohammed bin Salman told Reuters last month that it could occur at the end of 2018 or in early 2019, depending on market conditions. If Saudi officials are relying on foreign fund inflows to facilitate the Aramco IPO, they may be tempted to wait until early 2019.

"Passive" funds benchmarked to FTSE indexes will only enter Saudi Arabia when its upgrade takes effect, in stages between March 2019 and December that year. Similarly, if MSCI decides to upgrade Riyadh, the decision would probably only take effect in mid-2019. Passive funds may account for roughly a third to a half of foreign mutual funds entering Saudi Arabia in the next couple of years, fund managers estimate.