Business

Desert winds

The Sterling Report

Sunday, October 21, 2018

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I don't know if a lot of people regularly keep up with Saudi Arabia in their news cycles. While they come up periodically when OPEC is in the news, they always seem to be very far away with seemingly little influence over our everyday lives.

Saudi Arabia announced in 2016 that it was planning an IPO (initial public offering) for a minority interest in Saudi Aramco (an enormous oil company). This was touted as a huge initiative to move the country away from its reliance on oil to modernise its economy and society. It was expected to be the largest IPO in history.

The proceeds were to help to build a US$500-billion business zone in the northwest of the country.

However, the IPO was delayed for various reasons, and now another deal is planned for Saudi Aramco to buy a stake in SABIC (petrochemical company), which would increase the flow of funds into their PIF (Public Investment Fund). This fund is a critical engine for growth, with the implication being that as more money flows into the fund the country can better balance the budget and create more jobs for its citizens.

Investment bankers were very upset over the delay in the Aramco IPO as that meant that a lot of the fees they were looking forward to would not materialise. However, it may be a very strategic decision, as Saudi Arabia's stock market is to enter emerging market equity indices in 2019, which would make the stocks more attractive and pull in foreign investment funds.

The stock market is expected to join the FTSE Russell's index in stages between March and December 2019, and MSCI's index between May and August 2019. It is extremely likely that the indices would purchase Aramco shares as a component of the index.

In 2015, when the new king of Saudi Arabia was crowned, he gave a lot of power to his son, Prince Mohammed bin Salman. The prince was initially embraced by the West as an engine for change. He led reform that allowed women to drive in June 2018 — with their husband's permission of course!

However, the ongoing attack on Yemen, which triggered a humanitarian crisis, has been widely criticised. But it was the rounding up hundreds of suspects, including some of the country's richest individuals and government ministers in November 2017, that really drew the attention of many investors. It was said that it was done to curb corruption, and the accused paid for their freedom, literally in billions of US dollars.

The whole world paid attention when on October 2, a columnist who wrote for the Washington Post, Jamal Khashoggi, entered the Saudi Arabian consulate in Turkey to obtain proof of his divorce to facilitate his engagement status.

It is alleged that he was murdered and dismembered when he arrived, and more details are freely available on the Internet. He had been very outspoken in his criticism of the prince and his actions.

The incident has had unintended consequences for the conference “Future Investment Initiative” apparently dubbed “Davos in the Desert” hosted by the Prince. Each day, the list of people pulling out of the conference increases — it started with Richard Branson (Virgin); Uber CEO Dara Khosrowshahi; Jaime Dimon (JP Morgan); and now the US Treasury Secretary Steven Mnuchin just to name a few.

The implications of the increasing isolation of Saudi Arabia are unclear. They are a long-time ally of the United States through their dealings in oil and weapons. Many would expect oil prices to rise, but instead the US increased supply and oil prices fell as a result, despite the uncertainty related to possible sanctions against Saudi Arabia.

How the events will unfold is anybody's guess, but it certainly is a story worth following.

Yanique Leiba-Ebanks, CFA, FRM is the AVP, Pensions & Portfolio Investments at Sterling Asset Management. Sterling provides financial advice and instruments in U.S. dollars and other hard currencies to the corporate, individual and institutional investor. Visit our website at www.sterling.com.jm Feedback: If you wish to have Sterling address your investment questions in upcoming articles, e-mail us at: info@sterlingasset.net.jm

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