Saudi Arabia’s Reserved Access Axis
Saudi Arabia, which trounced MENA markets with a 20 percent jump through April on the MSCI index, finalized the June incremental foreign direct opening rules in line with earlier signals as it also looks to replenish $35 billion in reserve loss, 5 percent of the total, in recent months. Qualified investors will need minimum $5 billion in assets, above the scale of smaller frontier specialists, and the collective exchange and individual company control stakes are to be capped at 10 percent and 49 percent respectively with single funds unable to own more than 10 percent of a listing. The swap market will remain intact although the regulator will promote greater disclosure and standardization. Local retail investors are ambivalent about the additional non-resident liberalization beyond the GCC as they fear crowding but welcome increased trading and corporate governance focus. In the run-up to June the US-trained stock market overseer stepped up insider dealing and broker capitalization enforcement after norms were routinely breached.
The Kingdom, which just reshuffled the leadership for a younger generation, has spent $50 billion of its $700 billion in reported reserves the last six months as it contends with lower oil prices and outstanding infrastructure projects. The new monarch also granted public sector employees bonuses on assuming the throne, and the IMF’s latest regional outlook warned Gulf States to pare wages and subsidies to avoid reserve depletion. With allies Kuwait and the UAE funds were also diverted to Egypt to allow its holdings to rebuild to $20 billion. With its top credit rating sovereign external and local borrowing is a backstop option but authorities are wary of repeating a debt cycle like in the 1990s ending in crisis. Military outlays may represent further drag as the aerial bombing campaign continues against Houtis in Yemen and US equipment is requested to forestall Iranian action as an anti-nuclear sanctions deal is contemplated. As these issues evolve contractors for the Saudi mega-projects have encountered payment delays, according to industry sources, and they must absorb the risk without legal recourse.
Global foreign exchange reserves overall shrank almost 5 percent to $11.5 trillion in the second half of last year, with two-thirds of the drop attributed to euro devaluation, the IMF believes. With negative bond yields on the ECB’s quantitative easing the single currency share of the total at a decade-low 22 percent will likely dip further versus the dollar’s 60 percent. Emerging economies with two-thirds of the sum have hit plateaus with a few exceptions like India and Mexico. In China and Russia recent losses were in the $100 billion range. Moscow’s liquid assets may only be $150 billion, according to the Peterson Institute and other analysts, equal to external sovereign and corporate obligations due this year. China’s heft continues to recede from the $4 trillion mark on capital outflows and deleveraging as the central bank may have also drawn on the pile for currency support.
Elsewhere in Asia Indonesia and Malaysia with flat MSCI stock market performance have experienced major reserve falls as foreign investors rethink heavy portfolio positions. Coverage is precarious for short-term external debt where IMF guidelines recommend 100 percent servicing capacity, and an international backlash has also formed against their leaders for unreserved harsh security measures.
