Saudi Arabia is a country on the Arabian Peninsula in the Middle East, with an absolute monarchy that governs the country following Islamic principles. It is a high-income economy with strategic importance to the West both politically (as a key power in the Middle East) and economically (Saudi Arabia is the world’s second largest arms importer and world’s largest oil exporter). Following petroleum discovery in 1938, Saudi Arabia has derived much of its wealth from the oil industry and this continues to fund much of the kingdom’s spending.

As such, the fortunes of Saudi Arabia rise and fall with the price of oil and the economy has been described as having a low level of diversification, with a relatively under-developed service and production sector. In 2015, oil accounted for 70% of overall government revenue. Almost all of the country’s oil assets and revenues are owned and generated by the Saudi Arabian Oil Company, ARAMCO, a company privately owned by the Saudi Royal family (and regarded as the most valuable company in the world).

Going forward, Saudi Arabia has unveiled ambitious plans to triple its non-oil revenue (to 530bn Saudi Riyals or US$141bn) by 2020 to mitigate against falling oil prices. This will largely be achieved through a mix of development of key industries (such as mining and tourism) and scaling back of government subsidies (introduction of indirect taxation, reduction in utility subsidies, and reduction in public sector wages).

As part of this drive to diversify the economy, the Tadawul, Saudi Arabia’s stock exchange, opened up to foreign investors in June 2015. This move was designed to attract more investment into Saudi Arabia and increase stability.

Looking at the Tadawul today allows The Virgin Investor to greater understand the largest industries and companies operating in the gulf country and so puts into context the programme of diversification of the economy that is set to unfold over the next few years.

 

Top 3 industries on the Tadawul

 

Petrochemical: Tadawul Market Cap: USD $100bn

The petrochemical industry is dominated by one company – Saudi Basic Industries Corporation, SABIC , the largest listed company in the Middle East. SABIC operates in chemicals, polymers, fertilizers and metals with revenues of around USD $50bn. It is owned by private investors from a number of gulf countries.

 

Banks and Financial Services: Tadawul Market Cap: USD $84bn

Two companies dominate this industry – Al Rahji Bank and National Commercial Bank, both of similar market capitalization. The banks exhibit similar structures to western banks – having both a ‘high street’ presence and also offering an array of modern financial services and products, all in compliance with the principles of Islamic finance.

 

Telecommunications: Tadawul Market Cap: USD $40bn

The telecommunications industry is also dominated by one company – The Saudi Telecom Company, STC. STC operates in fixed line, mobile, internet and TV communications in a number of different countries – Saudi Arabia, across the rest of the gulf, Turkey, South Africa Malaysia and India. This significant global footprint has allowed STC to grow to a USD $12bn+ revenue company with a market capitalization of USD $33bn.

It perhaps makes sense that there is one main national telecommunications operator given the security importance of the telecommunications sector. In March 2016, the Saudi ministry of Labour gave the telecoms industry 6 months to ensure that 100% of its workers were Saudi nationals. This is expected to lead to further nationalisation in the near future. This move is likely to increase costs for the industry in the short term and may discourage foreign investment.

 

Future listing of Aramco on the Tadawul?

Saudi Arabia’s state owned oil company ARAMCO, is likely to be listed on the Tadawul in early 2017 to help raise funds for the economic diversification programme. With initial valuations placing the company value around USD $2 trillion, this would easily become the largest IPO in history (for context this valuation places it at 4 times the value of Apple). Only 5% of the company is likely to actually become available for sale according to the Saudi ruling family. Certainly one to watch.

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