Saudi Arabia’s Unsettled Opening Salvo
Saudi shares continued their 30 percent MSCI climb as initial direct foreign ownership limits were circulated and bank heavyweight NCB prepared a flotation despite run-up prudential fears voiced by the IMF in its Article IV report and the launch of joint military operations against the Islamic State in the region under US coordination. The capital markets authority tabled a 49 percent maximum individual and aggregate 20 percent control ceiling for qualified international institutions, with at least 5 years in operation and $5 billion in assets according to the preliminary formula. Eventual promotion to the core index following the recent Qatar and UAE path could bring in an estimated $40-50 billion as fund managers gravitate toward the Gulf’s largest weighting. Many are already active through structured swaps and ETFs but complain of high costs and low liquidity with P/E ratios around 15 also deterring allocation. The opening move has been previewed for years and was pushed by a $150 billion program to develop the non-energy economy and generate skilled local employment. The Fund’s September macro review cited these priorities despite the pivot global oil producer position as the number two exporter and only leader with spare capacity. Despite price decline output has been constant since 2013 fostering GDP growth near 5 percent on better food-driven inflation at 3 percent. With heavy infrastructure spending on transport, housing and holy shrine upgrades the fiscal surplus will slacken to 2.5 percent of GDP, as the current account excess likewise narrows. Bank private credit expansion has slowed to barely double digits although mortgage activity is up 30 percent following passage of a new law. Capital ratios are steep at near 20 percent of assets and NPLs are just 1.5 percent, but the IMF recommended consideration of equity market exposure rules. Debt market development could also feature for fund-raising and monetary policy purposes, but the government after previous difficulties is intent on minimal issuance unlikely to foster a benchmark yield curve or secondary trading, and has not yet approved overseas involvement despite workshops regularly organized by industry and ratings groups. Mortgage-backed securities may be introduced in the medium term as the Kingdom’s home ownership rate is just 35 percent and another 500,000 units and cheap loans have been pledged so far to meet demand.
The UAE advance has retraced to 40 percent as an IPO for a unit of big builder Emaar goes ahead and the Sharjah emirate debuted a $750 million sukuk that was oversubscribed tenfold. Asian and European buyers took almost half the A-rated issue, which priced inside Dubai’s at a spread under 150 basis points. The latter’s ruling al-Maktoum family insists the debt crisis is past as it embarked on a $30 billion global airport hub project as passenger volume is due soon to outstrip London’s Heathrow. The quasi-sovereign Investment Corporation launched a Korean joint venture and increased its stake in Africa’s biggest cement company, Nigeria’s Dangote, which has also solidified its presence in electricity distribution.
