Feast and famine: current investor sentiment towards Saudi Arabia

Institutional investors are salivating over Saudi Arabia’s first international debt sale, likely to be held next month, as reports over the weekend suggest a “clamour” of interest – reportedly prompting Riyadh to consider a whole series of such sales. Together with the promised (though so far vague in its detail) partial float of Saudi Aramco, thought to be the world’s most valuable company, global investors are preparing for a feast.

Based on this buoyant market sentiment you might think that everything is fine with the Saudi economy, and that any talk of an oil-price induced decline is overblown. In fact you don’t need to look far behind the headline numbers to see why the Kingdom is taking these unprecedented steps. The last 18 months has seen the country start to run a deficit which has steadily grown over that time, a situation almost unthinkable three years ago. Data from the Saudi Arabian Monetary Agency (SAMA) also showed that net foreign assets held by the central bank has been falling consistently month-on-month, and stood at $555bn in July, down 16% from a year before. And although we are waiting for up-to-date FDI figures in 2016, the trend is clearly on a downward trajectory.

I am not of course suggesting that the Kingdom is not aware of these issues, nor that its sale of various assets is its only response – step in the second in line to the throne Prince Mohammed bin Salman and his hugely ambitious Saudi Transformation Plan which promises to wean the economy off hydrocarbons entirely by 2030 through a combination of radical reforms to education, employment, subsidies, investment rules, and not least the plan to part-privatise Aramco.

The short term effect of all this is a situation where investors involved in the ‘real’ economy in Saudi Arabia are looking at the backdrop of low oil prices, worsening public finances and longer term policy uncertainty and sitting on their hands. The evidence we have to back this up – and it is by no means a recognised barometer of investor activity – is the number of requests relating to Saudi Arabia made to Diligencia, often a pre-cursor to investments or partnership deals, and which are running around 30% below last year’s levels. Thankfully for us this client activity has been diverted elsewhere in the region as something of a re-balancing occurs, but for Saudi Arabia (unless you happen to invest in the global debt markets) it is likely to be slim pickings for some time to come.