Mohammed Salih Al Hashemi: Is a wave of privatisation about to sweep the GCC?

Investors have been anticipating the privatisation of GCC state-owned assets, which would open up billions of dollars to foreign investment, as speculation rises that some regional governments are looking to counter the effect of the falling oil price by tapping into their vast hidden wealth.

Government budgets have been hit by the near 70 per cent decline in the price of oil over the past 18 months, and GCC governments have so far been focusing on ways to plug their deficits through economic reforms that will help them cut costs. These include the removal of state subsidies on fuel and utilities, cuts in government spending and the planned introduction of value-added tax and corporate tax in 2017 and 2018.

But governments are also looking for ways to raise money. They need to maintain spending on essential projects that will help to boost economic growth, such as in the healthcare, social housing and education sectors.

Rumours are circulating that Saudi decision-makers are considering the listing of the state-owned oil giant Saudi Aramco, estimated to be valued between US$1.5 trillion and $5tn. And talk of the Saudi Stock Exchange (Tadawul) and Saudi Arabia’s Grain Silos and Flour Mills Organisation considering initial public offerings has further excited market participants.

While most of the speculation about potential privatisation has revolved around Saudi Arabia, Oman and Bahrain have also hinted at listing some of their state-owned enterprises.

Both of the latter countries have little or no hydrocarbon exports, but their economies have been facing challenges of their own. Simmering unrest in Bahrain has hampered its economy, and long-standing privatisation candidates include Gulf Air and Bahrain Airport Company.

In Oman, government-owned companies across a wide range of sectors have been touted as candidates for possible privatisation, including Oman Airports Management Company, Oman Air, Oman Oil Refiners and Petroleum Industries, the postal service and power generation enterprises.

Expectations of privatisation in the UAE, Qatar and Kuwait, on the other hand, have been unsurprisingly muted because of their very different financial positions. The three countries have amassed significant financial assets relative to the size of their economies in domestic and foreign reserves and investments over the past decade. These reserves are readily available sources of capital, and will act as buffers against falling oil revenue.

The size of their economies, and the budget deficits that arose last year, are of a much smaller magnitude (low-to-mid single digits as a percentage of GDP) when compared to Saudi Arabia ($98 billion, or 15 per cent of GDP, with an $87bn deficit predicted for this year).

Saudi Arabia’s foreign sovereign wealth reserves, held through the Saudi Arabian Monetary Agency, are estimated at $650bn. While they are by no means small, they are considered insufficient for the kingdom to solely rely upon in the context of a prolonged period of lower oil prices and current rate of government spending.

The IMF expects that the kingdom is likely to exhaust all its reserves in just a few years if no other measures are taken, and unless it changes its public spending plans materially. This helps to make a more compelling case for Saudi decision-makers to look at other means of funding in a period of low oil prices. In Saudi Arabia at least, privatisation will continue to top the agenda for the foreseeable future.

Mohammed Salih Al Hashemi is the executive director of asset management at Abu Dhabi Investment Company.

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