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Economy
In April 2016, King Salman and Deputy Crown Prince Mohammed bin Salman Al Saud announced an ambitious ‘Vision 2030’, which mapped out the Kingdom’s social and economic future. It heralded a dramatic transformation in Saudi Arabia’s strategic approach moving forward. At the core of Vision 2030 is the partial sale of shares in Aramco, the world’s largest oil company, as a step toward creating what it hopes can be a country transforming wealth fund.

Is Saudi Aramco the planet’s most valuable company?

In October 2016 Aramco’s CEO Amin Nasser announced plans to sell a 5% stake in its entire business rather than just the downstream business. This puts Aramco in a position to emerge as the world’s most valuable company post-IPO. Aramco’s reserves are twelve times greater than those of their nearest Western competitor, ExxonMobil . The initial listing will be on the Saudi stock exchange and listings on London, Hong Kong and New York may follow.

Why an IPO?

Believe it or not, Saudi Arabia is running out of cash. Years of deficit funding, profligate public subsidies, lavish defense spending and an expensive war in Yemen combined to produce a budget deficit of $79 billion in 2016. All this, despite steep cuts to public spending and state subsidies. Using the Kingdom’s $2 trillion company valuation, a partial sale of Aramco could raise $100 billion, positioning Saudi Arabia for financial independence from oil. “IPOing Aramco and transferring its shares to PIF (the Public Investment Fund) will technically make investments the source of Saudi government revenue, not oil” Deputy Crown Prince Mohammed bin Salman Al Saud said last year. “What is left now is to diversify investments. So within 20 years, we will be an economy or state that doesn’t depend mainly on oil.”

Potential IPO barriers

Traditionally, oil has been one of Saudi Arabia go-to levers of ‘soft power’. Preserving that power has involved shrouding Saudi Arabia’s oil reserves and operating costs behind a veil of secrecy that is a poor fit with the levels of transparency investors expect. With management and the board all being government appointments, this sets the scene for potential conflicts between the demands of the Saudi state and the need to serve its public investors. Similarly, much of Saudi Aramco’s income from operating the world’s largest onshore oil field flows through a complex mix of royalties and taxes laid out in an opaque concession agreement. An IPO would require Saudi Aramco to open its books for the first time in 2017 and provide accurate data on the Kingdom’s total crude reserves as preparation. Yet that very mystery enables the Saudis to exert significant influence over global oil prices so effectively.

So what?

Turbulence can, of course, be the investor’s friend by opening up new opportunities. Equally, turbulence can wreak havoc with carefully weighted investment decisions. The mooted Saudi Aramco IPO offers a ringside seat to Big Oil’s river of cash and the October statement could be a game changer for investors now the whole Saudi Aramco business is likely to be included in the IPO. However, as always the devil is likely to lie in the detail around pricing, and the level of information investors can expect to receive around profits, operating costs and particularly – reserves.In April 2016, King Salman and Deputy Crown Prince Mohammed bin Salman Al Saud announced an ambitious ‘Vision 2030’, which mapped out the Kingdom’s social and economic future. It heralded a dramatic transformation in Saudi Arabia’s strategic approach moving forward. At the core of Vision 2030 is the partial sale of shares in Aramco, the world’s largest oil company, as a step toward creating what it hopes can be a country transforming wealth fund.
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Investment
Algeria has always been a notoriously closed economy. It has a history of very strict protectionist laws that make it hard for foreigners to invest directly, such as a requirement for majority 51% Algerian ownership in all new business ventures (49/51 investment law). In the most recent “Doing Business” global survey (June 2016) it ranked at 156 out of 190. It has a few tricks up its sleeve though.

Unsurprisingly, oil and gas has been the one area that countries like the United States have directed their money when it comes to investing in Algeria, but there is now a push to change this.

In June 2016 Algeria’s Prime Minister Abdelmalek Sellal announced a recovery plan known as the New Economic Growth Model. The aim is to diversify the national output away from hydrocarbons and the associated damage that their fluctuating prices can cause to an economy too heavily reliant on them as a source of income. Not an uncommon theme across oil dependent nations.

If the country is to have a chance of acheiving the lofty targets they have set themselves then they will need to continue to shed the legacy of vested interests, problems with repatriating profits, convoluted bureaucracy and a lack of intellectual property enforcement. No mean feat, but they are serious. Tax revenues increased 6% year on year in September 2016 and much of this gain was as a result of the growth of non-oil and gas businesses in the country rather than austerity measures.

Measures such as VAT and custom duty exemptions for imports related to foreign direct investment, tax breaks on property and other incentives were announced in April 2016 in order to attract outside money to help with an economy suffering from volatile energy prices.

With barriers to entry being removed to many key markets in the region there is real hope that they will replicate the advances of neighbouring Morocco who have a well-diversified workforce.

There is little doubt that Algeria has taken some bold steps towards supporting its economic vision. Don’t pop the champagne just yet though. Companies will still have to overcome language barriers, distance, customs challenges, an entrenched bureaucracy, difficulties in monetary transfers, currency conversion, repatriating dividends, and of course price competition from Chinese and Turkish business, amongst others.

Nobody said it would be easy, but in the words of Thomas A. Edison, “Opportunity is missed by most people because it is dressed in overalls and looks like work.”
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