Saudi Arabia’s Dulled Driving Ambitions

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Saudis shares stayed mildly positive on the MSCI index, as another big sovereign bond issue was prepared to avoid dipping into reserves and Vision 2030 economic overhaul targets were pared back amid reports of political purges within the ruling royal family. A modernizing wing could claim traction as women finally won the right to drive autos after years of protest, although it will not take effect until next year as religious conservatives vow to scuttle the decision. Aramco is still plodding ahead on its IPO as oil reserves are audited and balance sheet information may then dribble out once international listing locations are finalized. Only a 5% stake will be offered, but the megadeal has spawned a raft of other Gulf state energy company taps as over 30 IPOs worth $1.5 billion were completed through September, more than in 2015 and 2016 together. By contrast Moody’s estimates another $30 billion in external bond sales after last year’s debuts. Even with petroleum prices at $50/barrel to moderate the fiscal deficit, it will come in around $50 billion on 1-2% GDP growth, as the National Transformation Program Prince Mohammed bin Salman introduced in 2016 with global management consultant advice was forced to “adjust and adapt” after state employee allowances were reinstated. Domestic energy subsidies were to be cut further in July, but officials have turned wary with unemployment at 12.5 percent and opted instead to concentrate on promoting private sector-led industrial projects. Privatization deadlines have also slipped to the end of the plan period although a dedicated agency was created, and foreign ownership was liberalized for the education and health sectors while curbs remain on stock exchange access. MSCI dashed core roster graduation hopes in its last review, when it urged authorities to lift quotas and also modernize law and regulation for investor protection.

On that front with specific application to Islamic finance, the showdown between UAE-based Dana Gas and its bondholders on the fate of a $700 million sukuk is under close scrutiny. The company missed payments in the past on contract arrears in Iraq’s Kurdish province, which recently voted for independence in a referendum, and seeks to unilaterally restructure the instrument on the basis of retroactive noncompliance with Shariah code. Attorneys and religious scholars have waded into the fight waged at London’s Royal Court, with global houses like BlackRock maintaining big positions. The saga has cast a market pall with an issuance halt and higher yields, and after the London battle a UAE tribunal will pass judgment in December. The imbroglio has a diplomatic equivalent with the Gulf Cooperation Council member boycott against Qatar for alleged Iran and terrorist sympathies. Both sides have waged aggressive international media campaigns, and Moody’s calculates a 25 percent of GDP cost since embargo launch in June, with $30 billion in capital outflows including 10 percent banking system deposit withdrawal. Trade dropped 40 percent, with two-thirds of construction materials routed through Saudi Arabia and the UAE for offshore gas and football World Cup projects. US and Kuwait mediation attempts failed, and the sovereign rating outlook turned negative as the agency report cited an indefinite pause in regional infrastructure and capital market development drivers.

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