Saudi turmoil is hopefully a sign of reform

INVESTORS hope the sweeping anti-graft probe ensnaring some of Saudi Arabia’s top politicians and businessmen is a sign of reform, but those holding its bonds worry about instability. Saudi stocks recovered their losses after the wave of arrests over the weekend, but bonds came under pressure as investors pondered the outlook for the kingdom.

Saudi Arabia embarked on an ambitious reform programme, including fiscal reforms and a massive privatisation programme, 16 months ago in a quest to shift its $690 billion (R9.78 trillion) economy away from dependency on oil and entice investors. King Salman announced on Saturday the creation of a new anti-corruption committee chaired by Crown Prince Mohammed bin Salman.

In the hours that followed, news emerged that dozens of politicians and a number of senior princes – including billionaire Prince Alwaleed bin Talal – had been detained on corruption charges.

“In times of fundamental change it is to be expected that it won’t be a smooth ride – it never is,” said Roy Scheepe, senior portfolio manager for emerging market debt at NNIP, who holds some Saudi debt.

“But the notion that even countries like Saudi can’t go on indefinitely in the old

way, but also has to act on diversifying its economy and future revenue sources, is welcome.”

The purge rattled Saudi stock markets in the first hours of trading on Sunday, as some investors feared that those caught in the crackdown could be asked to dump their assets.

Rebound But equities rebounded later in the day, as the government’s move was seen as strengthening the crown prince’s authority and his

ability to push through economic reforms. The main stock index has risen 0.5 percent since Thursday’s close.

“It is a positive development… we see it as part of the transformation of Saudi into a more modern economy,” said Fabiana Fedeli, head of global fundamental equities at Robeco in the Netherlands, adding that the pull-back had been limited.

“At this point in time, one needs to give them the benefit of the doubt that this latest move will also be in the direction (of modernisation). However, we need more

clarity on what happened.”

Hasnain Malik, global head of equity research at investment bank Exotix Capital, agreed that the consolidation of power was necessary, at least in the short term.

“Further out, economic performance will ultimately determine how the grip on power is loosened,” he said.

Pressure However, bond investors took a more cautious view. Saudi Arabia’s dollar bonds came under pressure as well as the country’s debt risk, measured by the cost of insuring against a possible debt default.

Yields on the $6.5bn dollar-denominated bond maturing in 2046 widened about 8 basis points.

Saudi Arabia’s five-year credit default swops widened by only a couple of points in the early hours of trading, moving to 84 basis points (bps) from 82 bps at Friday’s close, still far below the 117 bps level reached in July, according to IHS Markit data.

“This is about political instability, not about corruption,” said Marcus Chenevix, Mena analyst at TS Lombard, adding the arrest of Prince Alwaleed was “hugely concerning”.

“What it tells investors is that Saudi politics can’t be ignored. And that’s worrying because Saudi politics is a black box.”

Given the lack of detail on the arrests as the crackdown widened on Monday, some fund managers expected no let-up for Saudi bonds.

“Spreads are likely to drift wider as investors wait for additional colour on the arrests,” said Janelle Woodward, president and portfolio manager at Taplin, Canida and Habacht, part of the BMO Financial Group, who holds Saudi debt.

But for others, such as Carmen Altenkirch, emerging market sovereign analyst at Axa Investment Managers, it was time to look past the current events. – Reuters