Saudi Arabia’s Plaintive Pilgrimage Plot
Consecutive Mecca tragedies, with a large crane collapse and stampede killing hundreds of worshipers around the annual haj pilgrimage, coincided with continued decline in the Gulf’s biggest stock market after minor foreign investor opening as the 30-year old peg to the dollar also came under unaccustomed strain following China’s regime change. Ishares went ahead to launch a dedicated country ETF on the assumption it could enter the main index with a tiny weight in 2017. Fund house Invesco completed an upbeat survey, with 60 percent of respondents predicting near term inflows into the $570 billion exchange despite the initial 10 percent international ownership cap. The government has begun a spending review to slash the 20 percent of GDP budget gap and has resumed local bond issues and may impose land and value-added taxes. Growth will continue around 2.5 percent next year with soft oil prices, and fuel subsidies may be reduced as in the UAE, as the costs of the Yemen bombing campaign escalate along with geopolitical tensions with Iran supporting Houti rebels. Call options in the peg foresee a dip to 3.8/dollar in the face of regular central bank spot and forward market intervention, and while an outright break is unlikely a recalibration has been on the agenda since the 2008 crisis, when neighboring Kuwait altered the regional formula to manage more flexibly against a currency basket. Since the Iran nuclear sanctions deal with its partners was announced and overcame opposition in the US Congress, the Tehran Stock exchange has lost momentum on realization that current business prospects are poor and may not be remedied with an estimated $50-billion plus in immediate account unfreezing. The average price/earnings ratio is below 6 as listed companies project 50 percent lower earnings, with the commodities sector outlook particularly grim. Hydrocarbon industry investment needs alone amount to hundreds of billions of dollars in the medium term and the Rouhani administration has pledged large sums for urgent infrastructure and banking overhauls. Non-performing loans are reported at 15 percent but would be higher with international classification standards according to the IMF, and real estate has also crashed as a supplemental support to bank balance sheets. Multinational banks are wary of reentry after paying record penalties for skirting the UN boycott, and would have to comply with complex Sharia-compliant rules unlike Islamic finance approaches elsewhere.
Kuwait as the largest MSCI frontier market also shed-double digits as it prepared a sukuk framework for budget borrowing. For the GCC first half volume of conventional and Islamic bonds was $48 billion, a 15 percent drop from 2014. Outside central banks, UAE names were most active as many buyers argue that a diversified economic base and fuel subsidy elimination better position them for a post-oil era. Egyptian shares got scant lift from a “supergiant” offshore gas find by Italy’s ENI, with the MSCI core gauge off 20 percent ahead of long-delayed parliamentary polls. President al-Sisi ordered harsher measures against corruption and dissent and reshuffled his cabinet after the Agriculture Minister was accused of kickbacks. Another Eurobond tap is scheduled as the global peg panic has the pound in the crosshairs for further weakening past 8/dollar over strongman objections.
