Saudi Aramco, high-value IPOs face impending pressure in 2023

DUBAI — Saudi Aramco and other regional companies delayed listing their initial public offerings this week in a trend that reflects the growing impact of the regional and global, economic slowdown that began in 2023.

The first quarter of this calendar year saw a 33% drop in volume of IPO listings in the Middle East and North Africa, and a 14% decrease in value compared to the same quarter in 2022, according to global professional service network Ernst & Young.

Economic downturn is expected to continue throughout 2023 in a trend experts believe exposes MENA to external shocks that could further exacerbate economic hardships.

Still, Ernst & Young MENA Strategy and Transactions Leader Brad Watson wrote in a press release that globally, the region will fare better in the coming year.

“Q1 2023 proved MENA IPOs continue to go against global trends in these uncertain economic times, building on the momentum from last year,” he said.

What happened: Saudi Aramco decided to push back its planned IPO, one that would have been one of the world’s biggest this year, according to Bloomberg, quoting unidentified sources on Thursday.

The world’s most valuable company as of May 2022, with a worth of $2.3 trillion, revealed a 19% drop in its first quarter earnings for 2023.

Oil and gas driller ADES International Holding, backed by Saudi Arabia’s Public Investment Fund, also delayed its public offering to the latter half of 2023, according to the news agency.

Despite these delayed offerings, Saudi Arabia ranked the highest in Q1 2023 for listing activity, according to Ernst & Young, with a range of companies from diverse sectors. They include Parallel Market, with earnings reaching $700 million, and Real Estate Investment Trust raising $100 million.

The United Arab Emirates saw the world’s largest IPO of Q1 2023, with ADNOC Gas PLC raising $2.5 billion on the Abu Dhabi Securities Exchange. On its first closing day, the share price traded 19% higher than its listing price.

Why it matters: The short-term appetite for high-value IPOs will likely diminish as a result of the recent global economic downturn, as indicated from first quarter results of this year, indirectly affecting how regional governments manage their spending.

Ryan Bohl, senior Middle East and North Africa analyst at the Risk Assistance Network + Exchange, told Al-Monitor that moves by Saudi Aramco and others to delay listing their IPOs sends a message that will negatively affect general IPO interest.

“MENA companies will face headwinds when trying to pull off a successful IPO this year and will struggle to achieve the results of the boom times of 2021 and 2022,” he said.

Crude production cuts, inflation and overall global macroeconomic stability exacerbated by the Russian war on Ukraine and other factors are having a cumulative effect this year on regional IPO activity, which saw Saudi’s gross domestic product growth outlook slow from 8.7% last year to 3.2% in 2023, according to Reuters. UAE economic growth slowed from 7.6% in 2022 to an estimated 3.7% this year.

Although Gulf countries may be seeing better GDP growth at 2.7% on average for 2023, they will likely see a change in their government spending.

Bohl said countries like Saudi Arabia will maintain their state spending to support long-term projects such as Vision 2030, even if that means greater deficits in the near term. Failing to do so and holding off on the spending that is fueling the country’s economic transformation and diversification from oil reliance would lead to even greater financial losses, he added.

Economic growth slowing this year and likely in 2024 won’t necessarily tip the scales into a full-blown recession, he added, but it’s not an impossible scenario.

“The recession does become more likely if there are more geopolitical shocks like the potential of a US debt default,” he told Al-Monitor. Signs from both the market and the US government suggest a default is a distinct possibility sometime in June.

“Such a shock would further erode the environment for IPOs for MENA and [Gulf Cooperation Council] companies and drive their governments to shift toward shielding their populations from the impact,” said Bohl. 

Know more: The public sector revenues of GCC governments benefited from elevated energy prices in 2022 that permitted GCC states to begin 2023 in relatively strong fiscal positions. Now regional governments must spend wisely to ensure momentum continues for their respective economic diversification efforts.