Saudi Arabia expected to encourage generous Aramco dividend policy
S&P anticipates government to be incentivized to reward investors
LONDON: A “generous” dividend policy would help to align the interests of Saudi Aramco investors and the government, S&P said in a report.
The rating agency noted that a reduction in income tax rates for the larger hydrocarbons producers earlier this year means that the government will be encouraged to push the national oil company to offer attractive dividends when it floats.
A plan to list Saudi Aramco in 2018 is on track, the company’s CEO confirmed this week. The flotation of about 5 percent of Saudi Aramco is a centerpiece of Vision 2030, a wide-ranging reform plan to diversify the Saudi economy beyond oil.
The Kingdom this year reduced the tax rate for the largest oil producers like Saudi Aramco to 50 percent from 85 percent. That is in addition to a 20 percent royalty payment the company makes to the government.
“The government will now be incentivized to encourage Saudi Aramco to follow a generous dividend policy to compensate for the reduction in tax revenues,” said S&P in a report published over the weekend that affirmed the Kingdom’s ratings.
“In this way, the interests of investors and the government will be more aligned,” it said.
Because the ultimate use of the proceeds from the IPO has not yet been defined, S&P did not factor them into its projections for the non-oil economy which it expects to grow by about 1 percent this year and next.
The Kingdom is expected to “consolidate its public finances to ensure liquid assets are maintained” close to total economic output over the next two years, S&P noted.
The agency affirmed its foreign and local currency rating and said the country had a stable outlook.
Saudi Arabia last year announced the National Transformation Program (NTP) — which offers structure and detail to Vision 2030, the country’s blueprint for economic and social transformation.
Among the targets included in the plan is the creation of 450,000 private sector jobs by the end of the decade and an increase of the private sector’s share of the economy to 60 percent from 40 percent in 2014.
It also aims to boost education and increase home ownership to 52 percent by 2020 from 47 percent.
The total budgeted cost of the NTP is more than SR268 billion ($71.4 billion) — or about 12 percent of gross domestic product (GDP).
S&P expects the NTP could result in “accelerated economic growth” and an overall rebalancing of the economy.
But it noted that much depends on achieving challenging targets over a number of years.
The construction sector in the Kingdom still faces payment pressures and the industry accounts for about 8 percent of total bank loans, S&P estimates.
It expects non-performing loans to rise to between 2 percent to 3 percent over the next two years from about 1.4 percent at the end of last year — largely due to construction exposure
S&P said it expected Saudi Arabia’s external and government balance sheet positions to remain strong over the next three years.
The IMF last week estimated that the Kingdom may get a budget boost of more than $90 billion by 2020 from new taxes and changes to subsidies but cautioned that it should slow the pace of reforms.