Purge awakens investors to Saudi Arabia risks
Listen to this article
This is an experimental feature.
Give us your feedback.
Thank you for your feedback.
What do you think?
Until recently, investors took for granted that whatever damage a lower oil price has inflicted on Saudi Arabia’s once rock-solid finances, they did not need to worry about political stability.
With a spate of arrests of senior Saudi political and business figures over the weekend, financial markets are trying to understand whether the Gulf state is a riskier bet than previously thought. Investors must judge whether the developments are a sign of Crown Prince Mohammed bin Salman’s strength and determination to reform or a warning of turmoil to come.
The immediate reaction to news that Prince Mohammed had launched what was dubbed an anti-corruption purge has been negative. The blended yield of JPMorgan’s dollar-denominated Saudi Arabia corporate emerging markets bond index rose to its highest level for seven years on Monday, at 4.517 per cent. A wider regional indicator, the JPMorgan diversified Mideast bond index yield, has climbed to 6.28 per cent, the highest since early January.
Questions over the future of the Saudi economy and the sustainability of pegging the riyal to the US dollar, however, are not new. The deterioration in the Saudi fiscal position has been sharp since the era of $100-a-barrel oil ended in 2014, with the country liquidating more than a third of its foreign assets since the end of that year.
While the oil price has rallied in recent months, hitting a two-year peak after the weekend arrests, it remains below the $84 level that the International Monetary Fund estimates Saudi Arabia requires to break even fiscally.
What has changed since the start of the year has been an increase in the number of yield-starved international investors willing to overlook these issues and lend money via the bond markets to both the Saudis and other Gulf states. This lending has been conducted at low rates based on the assumption of political stability.
Demand for Gulf debt so far this year has been insatiable. In September, Saudi Arabia launched the largest syndicated emerging market deal, selling $12.5bn worth of bonds. Middle Eastern sovereigns and local authorities have in total sold $60bn of syndicated debt so far in 2017.
Jan Dehn, head of research at emerging markets investor Ashmore Group, says he is happy to hold Saudi debt and would see any market jitters as a buying opportunity: “If we do get a bit of a blowout in yields I would definitely be interested in buying into that — it’s an opportunity to pick up assets that are ultimately going to do pretty well.”
Rather than see the purge as a sign of increased political risk, Mr Dehn argues it is a corollary of much needed political and economic reform. “This is the equivalent of President Xi [Jinping’s] Bo Xilai moment in China,” he says, referring to the disgraced Chinese politician. “Saudi Arabia needs to transform itself and if the crown prince gets his way, he will be in a good position to do so.”
Others are less sanguine about Saudi Arabia’s prospects and question the crown prince’s ability to balance the budget and defend the currency peg while maintaining political stability. The weaker tone seen in bond prices has room to run, they argue.