Odd Lots - Saudi Arabia's IPO Drama

Episode Date: October 8, 2018

A little over two years ago, Saudi Arabia revealed plans to IPO part of its huge state-owned national oil company. The listing would have been the largest in history and a centerpiece of the Kingdom's efforts to reduce its reliance on oil income and open its economy to the wider world. But in recent weeks, there've been reports that the IPO has been put on ice. So what does this mean for Saudi Arabia's future?See omnystudio.com/listener for privacy information.

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Saturdays and Sundays starting at 7 a.m. Eastern. Make us part of your weekend routine on Bloomberg television, radio, and wherever you get your podcasts. And welcome to another episode of the Oddlots podcast. I'm Tracy Alloway. My co-host, Joe Wisenthal, can't be with us today. But maybe it works out for the best because today we are going to be focusing on a topic that is very close to something I've been doing for the past couple of years, which is living in the Middle East, in Abu Dhabi, specifically.

And my move to Abu Dhabi was in the spring of 2016. It coincided with a very, very big event in finance and markets. And that was when Saudi Arabia first started talking about the potential to list part of its giant state-owned national oil company Saudi Aramco. Now, fast forward two years later, we've seen those plans really start to get. walked back. And in the meantime, we've had all sorts of developments in Saudi Arabia, including a new crown prince, Muhammad bin Salman, the 32-year-old crown prince. We've also had a diplomatic rift between the Gulf Cooperation Council nations, including Saudi Arabia and Qatar. So really, a action-packed two years when it comes to Middle East politics with Saudi Arabia really at the

center of it all. I've now left the region. So just to bookend my time there, today we are going to be diving into all things Saudi, and we're going to do that with one of the best analysts on the topic, I think. His name is Ihem Kamel. He is the head of Middle East and North Africa research over at Eurasia Group. So Ihem, thank you so much for joining me today. A pleasure to be here, and thank you for all seeming. So I got to say, when I think back to the start of, let's say, May 2016 and how much excitement we had over Saudi Arabia, the transformation of Saudi Arabia from an oil-dependent economy into potentially something different, and it was all pegged to the notion of the Ceramco listing, things have changed so quickly over the course of two years, just,

remind everyone why the Aramco IPO was important in the beginning and what the rationale was for actually doing the listing. Well, I think Tracy, the big attraction for the powerful leader of Saudi Arabia at the time or the emerging new leader in the kingdom, Crown Prince, Muhammad bin Salman, was to create a lot of excitement. He needed flashy ideas. He needed bold ideas to change the kingdom, to change its dependency on oil, and transform what has been relatively a large-scale economy

that is outside the international system or international economy in many respects. It's a closed economy. The major players are domestic, and the dependency on the government and energy revenues was high. He needed to change that, and he needed to present ideas that would create a sense of excitement internationally. Implicitly, the Crown Prince didn't only focus on the economics. I think that Mohammed bin Salman wanted to present ideas

that would have him present... Muhammad bin Salman as a young, bold leader capable of changing what the Saudi system has represented for many, many decades. Transitioning away from a conservative kingdom into not necessarily a liberal one, but certainly a more open society or open kingdom when it comes to liberal rights for women, when it comes for the rights of employment, when it comes to just social liberties.

Also, economically, he wanted to change what was a stagnating engine. Oil prices were low. he needed the oil income from Aramco or from a potential sale of Aramco to fund other ventures in the kingdom. Right. This is something I completely forgot to mention in the intro, but of course it was really a driving force of a lot of the stuff that we've seen happen in the Gulf. And that's the fact that in early 2016, of course, oil prices were still relatively low. eventually you had OPEC get together and agree to curb their crude production in order to boost prices. So kind of a different environment. I'm still curious, though, when it comes to the listing itself, you know, Muhammad bin Salman, MBS, as we often call him,

he didn't have to pursue an IPO. Did he? He had this big set plan, Vision 2030, that really set out how he wanted the Saudi economy. to look like in a 15 or 14 years time. So why the element of the listing specifically? Well, I absolutely agree, Tracy. In part, the vision was comprehensive. They didn't really need to make the IPO or core part of that plan, but oil prices were low. And Mohammed bin Salman needed to find a way to generate income to invest in the local economy, to have the public investment fund, really the sovereign wealth fund of Saudi Arabia, have more money to invest both

domestically and internationally. And that wouldn't have been possible with oil around $40 or $50 a barrel. It's really the OPEC, non-OPEC agreement, primarily a deal between Mohammed bin San Man and President Putin of Russia that allowed oil prices. to jump high into the 17th and really touch the 80s. Today, Saudi Arabia doesn't necessarily need to rush with an IPO. They have the income. They're breaking even when it comes to their budget.

They don't need to rush with an IPO, but the environment was different. I think broadly I agree with you that Saudi Arabia did not have to make the IPO a core part of Vision 2030. They could have separated the vision and the transformation. plan from the IPO. The attachment was probably not appropriate at the time. And I think they're probably paying a price for that connection right now. So what's your sense of how much domestic support there is for the transformation plan, including the Aramco listing? Because of course,

every once in a while we would hear a little bit of Saudi grumbling that maybe the country, the kingdom, was selling off its prized assets at an inopportune time. Is that still the case? And were those grumblings ever serious enough to force the authorities to rethink that plan? I think that there was and there still remains resistance in Saudi Arabia, due IPOing or putting any piece of Aramco, the crown jewel of the country, as many people see it, floated B, it, internationally or domestically. There are two elements of this. I think the public, part of the public, has been against it,

but also members of the ruling family that saw disclosure or more transparency as a threat to their income sources. It's very clearly an engine that funds the Saud family in the kingdom, and members of the ruling family did not want to see those numbers exposed or how much they would receive on an annual basis. from the state. So I think the pressure was probably higher amongst members of the ruling family, but the public also did not see what the rationale was, at least at the very beginning.

So definitely not a popular move, and I think the leadership in Saudi Arabia reconsidered, partly because they don't need it, and partly because the political cost of putting a Ramco on the stock exchange would have been relatively high. What I would emphasize over here, I don't think that this is out of the way completely. I think that Mohammed bin Salman doesn't need it right now, and he's going to reassess whether he needs it three, four, five years down the line, if the appropriate conditions emerge, if he needs the money, and if there's a right global stock exchange that can host the IPO,

and that has been a big problem for the company. Right. Well, in terms of the messaging on this, you know, even though we've had several stories, not just from Bloomberg, but elsewhere in the world, talking about the Saudis really scaling back plans for the IPO, the authorities there have been sort of reluctant to admit that it might be on ice, at least for the time being. Why do you think that is? Is the IPO so essential to, you know, the Saudi story at the moment, this notion that here you have a market that was to date very, very closed, and now it's beginning to open up.

Is it that important that they can't walk it back? No, I don't necessarily think so. I think the core idea here is that the leadership hasn't fully thrown these plans in the bin, and they're not convinced that they might not have to resort to some form of a sale of part of Oramco in the future. But they certainly don't see the conditions right now, be it the market conditions or the political conditions in Saudi Arabia, primarily the resistance to the IPO, as appropriate, right? In the future, they might have to still do some form of IPO or sale of Aramco. Completely abandoning the plans and then a few years down the line announcing an IPO would not make any sense. There is really very limited cost to saying that this IPO is on, but not now, as in not fully abandoning the plans.

And if they need to do so in the future, three, four, five years down the line to really say that an IPO is no longer part of our reform story, we don't need it, we have alternatives. They can certainly do that. But in the meantime, there is very little value add politically or economically to end. announce that the IPO is off. All right, well, let's zero in on the man behind the IPO, Muhammad bin Salman. It's so rare that we get to talk about palace intrigue on the Odd Lots podcast. So I'm going to take every opportunity that I can get here.

But, you know, this really interesting figure, 32 years old, has a very specific economic and social policy, a social policy that many people would destroy. as liberalizing, at least compared to what other Saudi rulers had in place before. But on the foreign policy side, quite hawkish, quite aggressive, Saudi's been fighting this war in Yemen for some time now. How would you characterize Muhammad bin Salman's ruling style over the past two years or so? I would say that Mohammed bin Salman's character is evolving. It is changing. The man that we've known two years.

years ago is probably a different one today. He has made mistakes and in private conversations he would even admit that he's made some in Yemen or elsewhere. I think part of the challenge here for Mohammed bin Salman is that he's trying to do so much in a very short period of time. I think he recognizes that the system in Saudi Arabia is broken and he does not like people or advisors or consulers that tell him no. He wants bold ideas and he wants to move forward with these ideas as fast as possible. I think part of the challenge or the problems with his plans is that they're contradictory. That's certainly the case when it comes to the foreign policy agenda that directly contradicts the domestic agenda. Saudi Arabia needs foreign investment

investment needs to liberalize its economy and is diversifying effectively in very small steps. But the foreign policy agenda, which is very hawkish, as you have mentioned, be it against Iran or against the Houthi rebels in Yemen, that is compromising regional stability or creating additional tensions. Very difficult, in my view, to convince investors to put more money in Saudi Arabia. or put any money at all, given these challenges. So I think part of really the critical problem that the Saudi leadership and Mohammed bin Senman needs to address is,

how effectively is he going to manage these contradictions? And you can find these contradictions across the board, even in the local economy. So there are no easy solutions for Saudi Arabia. That's something that he has, I think, to begin to accept as a real economy. reality for the kingdom. The kingdom is clearly a big energy producer, but getting it to become a diversified economy is going to be a completely different transformation than anything Saudi Arabia

has witnessed in the last five or six decades. And he needs to accept that there will be painful steps along the way, and in certain times he needs to recalibrate or reconsider elements of his strategy. Right. What do you think is the biggest roadblock when it comes to that transformation or diversification project? And do you think MBS has a sort of end state goal in mind or an idea of what he wants Saudi to look like? In terms of an end state, I think he does have an idea. He wants to see a more powerful Saudi Arabia regionally. He wants to see a more open and diverse economy, one where the Saudi labor force is not actually employed by the government only, but also by the private sector. He wants to see a more open society, but not necessarily open in a Western way.

He wants to see women at work, but he also realizes that there are conservative values in the kingdom that he needs to preserve himself. So it's really about modernizing the state rather than liberalizing it. So he has an idea on what he would like Saudi Arabia to be not now but 10, 15 years down the line. What I think he does not appreciate at times is the challenge or the series of challenges he faces. The country hasn't changed much over the last three or four decades. and the steps, the series of reforms that he's introducing, are divisive. They're creating enemies for him, they're creating or exposing contradictions in Saudi society, and that's something that he has to manage very carefully.

So in my view, it is not really about the strategy, but it's how he gets there, and whether he accepts that along the way there will be no voices, or there be voices that tell him to slow down, that things cannot be done that quickly. It's finding the right balance of pushing the head, but also moderating when he needs to do so. You can get the news whenever you want it with Bloomberg News Now. I'm Amy Morris.

And I'm Karen Moscow here to tell you about our new on-demand news report, delivered right to your podcast feed. Bloomberg News Now is a short five-minute audio report on the day's top stories, episodes are published throughout the day with the latest information and data to keep you informed. Yes, there are other products like this from a variety of news organizations,

but they usually rerun their radio newscasts throughout the day. That's not what we do. We create customized episodes that can only be heard on Bloomberg News Now. And we don't wait an hour to publish breaking news. When news breaks, we'll have an episode up in your podcast feed within

minutes, so you're always getting the latest stories and developments. Get the reporting and the context from Bloomberg's 3,000 journalists and analysts we're all over the world. Listen to the latest from Bloomberg News Now on Apple, Spotify, or anywhere you listen. So it's interesting that you mentioned making enemies just then because, of course, a large part of the Saudi economy and society basically operates on the principle of a social pact, which is that Saudis get a lot of money from the state. either in terms of gifts or, you know, guaranteed employment at large government firms or entities. And I remember when they announced that Muhammad bin Salman was becoming crown prince, it was a few months after the king had decided to roll back some of the payments for government workers,

which, of course, was very controversial. And when they made the announcement, they said they were reinstating those payments. So they seem to, you know, on the one hand, they were promoting this prince who had a very strong agenda of economic reform. But on the other hand, that same day, they were going back to the old ways of just sort of doling out government handouts. It seems like a really difficult line to be walking. Absolutely. I think that's where you see some form of contradiction between the domestic agenda and really the economic agenda. and really the economic agenda.

Muhammad bin Salman wants to be king of Saudi Arabia. It's not popular for a new emerging leader, even a new crown prince, to begin to really cut the benefits for Saudi citizens across the board. So I think he walked those back, or the leadership did walk those back, because it would have compromised his domestic standing and made it very difficult for Saudis'

to support him or to support his rise. Over the long term, I think what he needs to do is begin to introduce more concrete changes to the Saudi welfare state. Now, there is a problem here, which is that Saudi Arabia's citizens are also not ready to hear the message, that there is less now, and there's going to be less in the future, and that the welfare state cannot survive over the long term, be it in Saudi Arabia or any other economy, any other country in the world, I think it's very difficult to break that message to your citizens or for the leadership to promote an idea that we have to live with less, not more, in the future.

Certainly much more difficult for a leader that wants to become king. Is there anything he can do to soften that blow to the domestic population? there anything that could offset that? I think part of what could offset that is really the social liberalization measures, which don't appeal to everyone, certainly not to conservative Saudis, but part of the youth population sees that as a positive, having more liberty and ability to experience life, entertainment. The social reforms aren't really something. that the government needs to fund, but they do matter for a big part of Saudi Arabia's

population, the youth population. So I think that might help along the way. Incrementalism, the benefits were reintroduced, but only on a temporary basis. So I think he has to deal with it in terms of shocks, doing it over a few steps rather than one big one along the way. And at the end of the day, I think it's going to be still challenging, even if you create a very clear strategy and implement it perfectly, I think the message is going to be difficult and it's certainly not going to be popular for a large base of Saudi Arabia's society that is not ready for modern employment in some respects or don't necessarily see this as a good deal from the state or that the state should be cutting their benefits in the future. Right. As we're talking, all these big Saudi or GCC developments are sort of filtering up in my mind and jogging my memory. And one thing that I just remembered is we are coming up pretty close to the one year anniversary of the corruption crackdown or the alleged corruption crackdown. This is when Muhammad bin Salman and the Saudi authorities arrested a bunch of Saudis, lots of businessmen. lots of royals, and accused them of corruption in various ways and stealing from the state, imprisoned them in the Ritz-Carlton, where they had just been having a big investment forum that was largely aimed at foreign investors getting them to invest in the country.

A year on from that, or almost a year on from that, what do we think the point of that exercise was? Was it about rooting out corruption? was it about sending a message about dissent? Was it about recouping some money? Because, of course, the authorities were said to have gotten about $100 billion as a result of those actions. What do we think, Ayam? I think this is about dealing with corruption.

It is about sending a message to Saudi society that there's a new leader in town, Mohammed bin Salman, that is willing and able to consolidate power. And it is about finding, revenue or new sources of funding that could help the public investment fund put some money in the domestic economy and into international projects. But I think what matters here more than anything is that Saudi Arabia isn't trying to build a Western-style capitalist society.

I think that when it comes to Mohammed bin Salman, he doesn't look at the US or Europe as examples. He wants to build a state capitalist structure in which he or the state have influence over the decision-making process of the private sector. Think China or Russia, one where the leader of the state isn't necessarily outside the private sector and has extensions and has an ability to influence what the private sector does in its everyday affairs. So I think the idea that Saudi Arabia was ever going to be a European-style economy or U.S. style economy was probably a mistake. And we can see that already with Mohammed bin Salman and the style that he's introducing. Well, let's focus on the U.S. relationship

for a second, because even if Saudi Arabia doesn't want to replicate the U.S. economic model, it certainly seems to be developing closer ties with the U.S. as a political ally, or maybe I should say with one U.S. politician in particular, and that is, of course, Donald Trump. And we saw him make that visit to Saudi Arabia where we had a lot of memorable imagery, such as him holding the glowing orb with the king. And there's a sense that Donald Trump and his friendship with the Saudi rulers may have emboldened some of Saudi's foreign policies, certainly the anti-Iran part of it. Do you think that view is justified? Absolutely. I think it would be very difficult to imagine Saudi Arabia introducing, adopting and committing to such hawkish policies against Iran. the Yemen War included, had it not been for an explicit message of support from President Donald Trump. There's a marriage of convenience here.

Trump was hosted in Saudi Arabia, was presented with multibillion-dollar arms agreements that helped him domestically, and the Saudis wanted something back or in return. And we do have a relationship that works, at least, between these leaders. transactional politics is effective. It's not necessarily about long-term strategy or stability in the Middle East, but certainly the two sides see something to win from each other over the short term. And that means that the relationship with the US has improved, at least with the current administration.

I wouldn't necessarily say that over the long term, the Saudi-U.S. relationship does not face critical challenges. We still have that. that. But certainly over the short term, it's working with the US. And the Trump, Mohammed bin Salman relationship is very positive. It's not just the Riyadh's visit. It's coordination between the two sides on a host of different issues. And the Iran strategy, the hawkish Iran, anti-Iran strategy that we're seeing from Saudi Arabia really was just an introduction to what we've seen from the U.S. the U.S. withdrawal.

from the nuclear agreement with Iran and the introduction of sanctions against Tehran. This is the era of the return of containment against Iran. And what the Saudis did would have not been possible without U.S. support. Just to try to tie everything together, is there a oil price component in that transactional relationship between the U.S. and Saudi? because, of course, we saw Donald Trump tweeting about the oil price recently that gas prices at the pump were too high as a result of the OPEC production cut agreement. And then we did see the Saudis respond or appear to respond to that tweet with the energy minister there saying that they would do whatever it takes to balance the market. Is there a sense that Saudi is now beholden maybe to U.S. wishes when it comes to gas prices?

Well, I think that the Saudi leadership has always been careful in terms of dealing with the U.S. interests, giving the strategic nature of the relationship and the dependence on the U.S. for security. But I think with the Trump administration, this is much more important, given that Mohammed bin Salman is planning his rise in the kingdom and his consolidation of power across different institutions in the kingdom. Accommodating Trump, I think, was a natural choice for the Saudi leadership, finding a way really not to bring prices or oil prices down to 60 or so at barrels, but to push it below 80, to keep it in the $70 to $80 range,

given that the Trump administration is introducing sanctions against Iran, given that every Iranian barrel that leaves the market is probably going to go to either Saudi Arabia or Russia. There was also a win in the process. So definitely I think that there is an oil component, a willingness to really accommodate what is a challenge in the midterm election in the U.S. Or supporting Trump and hoping that oil prices, lower oil prices would help him in the midterm election. elections. They've done that, and I think in the future, they'll try to accommodate different priorities for the Trump administration. All right. So I'm going to try to survey, you know, the past two years and just think, again, when I arrived in the region, it was right after the

Saudi Aramco announcement. So many foreign investors were excited about the Saudi story, this narrative of opening up. And since then, we've seen some successes, especially on social side, such as women now allowed to drive. We've seen some setbacks. The Yemen war continues to drag on. The Iranian relationship is getting worse. The corruption crackdown in some eyes was done without the rule of law, and it wasn't really clear what was achieved. We have oil prices that have certainly recovered, but we have an overriding question mark about the future of OPEC itself. We have the Qatar blockade, and I'm probably for getting something else, but really any number of things have happened in a short amount of time.

So net net, putting it all together, are you bearish or bullish on the Saudi story? I think I'm mildly bullish on the Saudi story, as in the new system is by definition going to be a better system than the old one, because the old one, where the Saudi state would remain dependent on hydrocarbons and the welfare state remaining as it is, would have imploded. The old system where conservative preachers dominated the system would have also created a lot of security challenges for the world over the long term. The new one won't be much better. It will probably be a model three. for Saudi Arabia, and the economic transformation will be very difficult. So mildly bullish, but with a lot of risks emerging as Muhammad bin Salman tries to change this very complex place called Saudi Arabia.

All right. I think complex is exactly the right description. I am Kamel, the head of Middle East and North Africa research for Eurasia group. Thank you so much for joining us. Thank you so much for walking us through really. a laundry list of things that have happened in Saudi in a relatively short amount of time. Thank you so much for hosting me and have it. So that was another episode of Odd Lots, really bookending, a two-and-year experience in the Middle East.

We will be back to our regular scheduling next week. But in the meantime, you can follow me on Twitter at Tracy Allaway. You can follow my co-host, Joe Wisenthall, at The stalwart. And you can follow our producer, Tofer Forges, at Forges T. And you should follow Francesca Levy, the head of Bloomberg podcast at Francesca today. Thanks for listening. I'm Francine Lacqua, an award-winning journalist, and I've got a new podcast, leaders with Francine Lacqua from Bloomberg podcasts. I've interviewed everyone from Heads of State to fashion icons about the news of the moment. But I've always been curious who are these people as leaders. I don't think there's one right way to be a leader. Make decisions. A poor decision is always better than no decision. Listen to new episodes every other Monday.

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