With sluggish economies and bad personal balance sheets in Europe and the US, investors have been moving their money in droves towards emerging markets. The main destination was Asia-Pacific, but a sizeable amount went to Gulf Cooperation Council (GCC) countries that were known to be awash in oil money.
And then a debt crisis struck Dubai. Stock markets across the region took a severe beating as it was unclear who, if anyone, would bail Dubai out. One country that stayed resolutely out of the fray was Saudi Arabia, a country with billions in sovereign cash and a staid financial system that embodies sharia, or Islamic law. The kingdom has tantalised foreign investors for years with its lucrative potential but infamously rigid regulations. Even just visiting Saudi as a foreigner is both difficult and expensive as very few people are allowed to travel to the country independently.
Now, post-Dubai, the country is proceeding as cautiously as ever, but signs are appearing that Saudi Arabia will be able to shake off the crisis – though massive internal economic problems remain unresolved – and even open up its markets to foreigners. Meanwhile, its institutions will be able to pick and choose what they want from the wreckage. It is unclear if they will, as they have always been wary of speculative plays, but with so many distressed assets and rock bottom prices it could be hard for them to ignore the opportunities that exist outside the kingdom.
When the news of Dubai’s problems broke, stock markets around the world, and especially those in the Gulf region, fell dramatically. Dubai’s index lost 7 per cent while Abu Dhabi was down by more than 8 per cent. Eygpt was also down by similar figures. Hedge funds that focus on emerging markets were up for the month of November by 1.6 per cent, but those predominantly involved in Middle Eastern investments were down by more than 5 per cent.
However, Saudi Arabia chugged through with the Saudi Tadawul All Share Index suffering only marginal losses in the days following Dubai’s crash. While the country’s index has continued to decline since the crash, it has lost far less than many of its neighbours.
Why? For one, credit quality deterioration is not an issue for the Saudis. With so much oil revenue, meeting a bond payment is never a problem. The country also has one of the lowest levels of public debt in the G20, with domestic debt levels at 13.4 per cent of GDP. Compare this to the US rate of 50 per cent and India’s 81 per cent. Furthermore, the country’s two main institutional investors, the sovereign wealth funds (SWFs) the Saudi Arabian Monetary Agency (SAMA) and the Public Investment Fund (PIF) of Saudi Arabia, have billions of dollars in foreign assets, most of which is in liquid and low risk investments.
But the country’s investors are still rattled. Regional bond sales have been hurt as spreads have widened. Many corporations in the region had wanted to tap the international bond market, but are now holding off. The Gulf Investment Bank, which is owned by SAMA and the PIF, has postponed its dollar bond sale.
Yet John Sfakianakis, Banque Saudi Fransi’s group general manager and chief economist, is confident that eventually Saudi Arabia will emerge from the Dubai debacle in good shape once investors recover their nerve and differentiate between the good and bad bets in the region.
He says: “The region is often wrongly sold to the world as uniform when in fact the six states comprising the GCC follow very different development models. Even within the UAE, Dubai and capital Abu Dhabi, holder of the majority of the state’s crude oil reserves, had followed two extremely different development paths this decade.
“Once the dust settles, we believe there will be a flight to quality, with foreign funds favouring Saudi Arabia, Qatar and Abu Dhabi.”
Institutions
Apart from Saudi’s high net worth individuals and wealthy families, the unquestionably dominant institutional investors are the $431bn (€292bn) SAMA and its far smaller counterpart, the $5.3bn PIF. As two of the least transparent SWFs in the world, hardly anything is known about them, except from asset managers who claim to have worked with them. Those managers are extremely reluctant to share their knowledge of the SWFs, even off the record, as they risk losing a potential multi-billion dollar mandate. One manager replied with a few short answers via an off-the-record email that was ‘locked’, meaning that the email could not be replied to, forwarded, printed or even copied and pasted into a word document.
Strategically and not surprisingly, the SWFs’ assets are highly conservative, with huge investments in US sovereign debt, equities and cash. The recent events in Dubai will likely reinforce their conservative convictions, but many managers are trying to get them to take advantage of depressed prices among the wreckage. However, there have been no reports of any Saudi institutions coming to the rescue of Dubai or making any speculative plays, as all eyes looking to UAE capital Abu Dhabi to sort out the emirate’s problems.
The most activity could come from the smaller and younger PIF, which was established only a year ago. Prior to its launch, officials at the Saudi ministry of finance said it would initially start with its current level of about $5bn, but in recent months it has been announced that the PIF would act as the manager for the creation of a new SWF within itself, called Saudia Al Sanabil. Officials boasted that with the country’s budget surplus and seemingly endless oil revenues, the new fund could reach as much as $900bn, which would make it the largest SWF in the world.
As expected, it is unclear what the new SWF’s exact
