DUBAI, April 19 (Reuters) – Saudi Arabia’s inclusion in global equity indexes and the planned privatisation of oil company Aramco are expected to bring big inflows of overseas money into the kingdom next year.
This should help Riyadh rebuild its financial reserves and fund investment plans after the 2014 plunge in oil prices that cut export earnings and deprived the banking system of funds.
Reversing the trend would shift the outlook for an economy which shrank last year for the first time in nearly a decade.
“It’s quite a change — before, the issue was a shortage of liquidity. We now face a situation in which we’re about to have too much liquidity,” said Hans-Peter Huber, chief investment officer at Riyad Capital, a top Saudi investment bank.
“Massive inflows are to be expected over the next two years.”
The inflows are likely to boost foreign reserves. The central bank’s net foreign assets have slid to $480 billion from a peak of $737 billion in August 2014, raising concern about Riyadh’s long-term ability to support its currency.
Ehsan Khoman, head of regional research for Bank of Tokyo-Mitsubishi UFJ, said they could rebound by $30-40 billion before the end of 2019.
Officials predict the sale of a 5 percent stake in Saudi Aramco will raise $100 billion. It was planned for late 2018 but after delays in preparations, bankers now expect early 2019.
This will attract portfolio funds. Saudi Arabia could see $30-45 billion of portfolio inflows in the next two years if it reaches the same level of foreign ownership in stock markets as the United Arab Emirates and Qatar, according to investment bank EFG Hermes.
In addition to Aramco, Riyadh has slated dozens of enterprises and assets for privatisation in the next few years, aiming to raise $200 billion. Bureaucracy and legal uncertainties have stalled the programme, but it may start to move ahead later this year.
Khoman estimated privatisations other than Aramco could create a total $30-35 billion of capital inflows in the next five years, assuming necessary legal changes were made such as lifting ownership ceilings on non-listed entities.
Foreign direct investment in industries which Riyadh is just starting to develop, such as tourism, technology, logistics and infrastructure, could also become significant. Khoman said inward FDI flows, $7.4 billion in 2016, could at least double in the next few years.
There are risks to the outlook. The most recent forecasts for the Saudi economy assume Brent oil, now at $74 a barrel, will average at least $60 this year. If it drops much below that level, the government might have to resume drawing down foreign reserves heavily to pay its bills.
This could scare away some foreign investment and perhaps cause Riyadh to further postpone the Aramco sale.
Many analysts think Aramco is more likely to raise $50-75 billion, significantly lower than the government’s $100 billion estimate.
Foreign investors are expected to buy most of the stake, but it is unclear how much of their money will be added to foreign reserves. More than half may be allocated to the Public Investment Fund, Riyadh’s top sovereign fund, for reinvestment abroad, Iradian said.
One wild card is the money which private Saudi citizens transfer abroad; if this increases because of political or economic instability, it could offset much of the fund inflows. Bank for International Settlements data shows private Saudi deposits at banks abroad jumped $18 billion in 2017.
“The November 2017 crackdown on alleged corruption among the kingdom’s elite may have accelerated the pace of capital outflows,” Iradian said.