09 February 2018 BY Aljosa Popovic and James Cunnison

The U.A.E has long been regarded as a financial hub for its Middle Eastern neighbour Saudi Arabia and has since taken greater steps towards attaining hegemony in the region by establishing the Dubai International Finance Centre (DIFC) in 2004. Saudi Arabia has moved to publicly list Aramco (Saudi Arabia’s national oil company estimated to be valued anywhere up to $2 trillion) in a challenge to Dubai’s economic dominance. This move plays a key part in ‘Vision 2030’ as Saudi Arabia’s plan to increase the country’s economic growth by diversifying away from the oil which has been the foundation of the Kingdom’s wealth. At a time when there is a strong drive for environmental protection with technological advances in electric cars and renewable electricity generation the risk of a turn against oil cannot be ignored. The capital raised will fund the Vision 2030 plan.

International banking’s approach to Saudi Arabia has been cautiously warming, HSBC already has a strong presence through its local unit, in June 2017 Goldman Sachs applied for an equity trading license and October 2016 saw Saudi Arabia’s first ever international bond sale. Saudi Arabia’s previous efforts to integrate with the western financial system have led analysts to predict that banks such as HSBC and J.P Morgan will be the winners when it comes to leading advisory roles for Aramco’s eventual IPO, although around thirty banks are believed to be involved. Meanwhile, other banks are being left behind due to the lack of entrenched lending relationships with Saudi Arabia.

The success of Vision 2030 will pivot on the reform of Saudi Arabia’s financial sector. To develop a thriving economy, the Kingdom will need to implement changes to its bond markets, equity markets and financial system as a whole. Western companies have long been weary of the close ties between the royal family and business, as well as charges of corruption and strict adherence to an interpretation of Islamic law which prohibits alcohol and limits the role of women in society. Crown Prince Mohammed bin Salman has acted as a moderniser. In less than a year since his ascension to the role of heir apparent women have been permitted driving licenses and Saudi policy has become more interventionist.

As Aramco is likely to become the most valuable company in the world, the IPO will distort whichever exchange is chosen. New York, London, Hong Kong are the three stock exchanges in the running, and in an unusual move Aramco has asked for draft prospectuses for all three options. With an expected valuation of $2 trillion dollars, a sole listing in London would add 50% to the market capitalization of the London Stock Exchange (LSE) instantly (LSE listed companies has a combined market capitalization of the order of $4 trillion in February 2018). The signals from Aramco are that one or two of these exchanges will be chosen, probably with an additional listing on the local exchange in Tadawul. With a total market capitalization of just $470 billion Tadawul will not be able to absorb a large chunk of the stock.

Mirroring the westernisation of Saudi Arabia, the New York, London, Hong Kong markets have adapted to make the relationship work. London is regarded as a market where the exchange and investors demand high standards of governance from listed companies, but LSE has proposed a new form of listing, which would remove some of the disclosure requirements. Active managers and index fund providers alike are concerned about the standards of oversite of a company which is to remain majority controlled by a government controlled by a theological monarchy. Indexes are also concerned about overweighting.

To develop economically, Saudi Arabia will need to improve its banking sector and develop a thriving small to medium enterprise (SME) sector, 25% of the Kingdom’s employment comes directly from SMEs. Currently banks are reticent to lend unless the domestic capital markets improve. This will improve over time if more financial instruments are offered to banks. For this to occur the equity and bond markets will have to improve in tandem with the banking sector, and the newfound openness of the government to western ideals is likely to facilitate this by making Saudi Arabia more attractive to foreign banks and their products. In this way it seems inevitable that the Aramco IPO will open access to financial markets to all Saudi firms.

These economic reforms must improve the banking system, along with the equity and bond markets if the objectives of the Vision 2030 plan are to be met. The Kingdom has taken the first steps to move away from Dubai and to become an independent player in the world financial markets. The Saudi government has taken steps to show the Kingdom is willing to address the concerns of western governments. The economic situation and a fear of an overdependence on oil has lead to a rapid modernising, the requirements of investors and bankers has ironically proven more effective than sanctions by western governments. This change has worked both ways, with stock exchanges competing for the listing of Saudi Aramco by creating bespoke roles, creating friction with investors. In the longer term the integration of Saudi Arabia into the global financial system can only be a good thing, but concerns remain over the secrecy of the government and the pressures of performing the world’s largest IPO.


  1. http://www.bondsloans.com/news/article/1551/exploring-the-next-frontier-in-the-gcc-capita
  2. https://www.bloomberg.com/news/articles/2017-10-24/everyone-from-goldman-sachs-to-hsbc-wants-a-piece-of-saudi-banking
  3. https://www.euromoney.com/article/b12kp8s76cl69z/saudi-accelerates-capital-markets-reform
  4. https://uk.reuters.com/article/us-saudi-economy-cma/saudi-arabia-to-give-foreign-investors-full-access-to-parallel-stock-market-idUKKBN1CV0FQ
  5. https://www.ssga.com/investment-topics/general-investing/2017/transforming-saudi-arabias-capital-markets.pdf (main)
  6. http://vision2030.gov.sa/en/node/6
  7. https://www.breakingviews.com/considered-view/aramco-ipo-beggars-neednt-feel-like-losers/
  8. https://www.nytimes.com/reuters/2018/01/17/business/17reuters-saudi-aramco-ipo-fees.html
  9. https://economictimes.indiatimes.com/markets/stocks/news/how-saudi-aramco-ipo-could-impact-global-markets/articleshow/57366901.cms
  10. https://uk.reuters.com/article/aramco-ipo-regulator/saudi-regulator-asked-to-study-local-market-impact-of-aramco-ipo-idUKL8N1PJ0QW
  11. https://www.reuters.com/article/us-saudi-hsbc/hsbc-plans-saudi-growth-thanks-to-kingdoms-unprecedented-transformation-idUSKBN1AO1PZ
  12. https://www.argaam.com/en/article/articledetail/id/432862