Earlier this week, Fitch downgraded Saudi Arabia’s credit rating by one notch to A from A+ reflecting ‘rising geopolitical and military tensions in the Gulf region, Fitch’s revised assessment of the vulnerability of Saudi Arabia’s economic infrastructure and continued deterioration in Saudi Arabia’s fiscal and external balance sheets’.
Earlier this week Moody’s revised its growth forecast for Saudi Arabia, to 0.3% in 2019; from its estimate of 1.5% at the beginning of the year. The rating agency cited the OPEC-led reduced production agreement as the main effect on government revenue. The rating agency currently has the Kingdom’s long-term rating at A1, in-line with Fitch, while S&P’s is at A-. Of note is that there has currently been no mention from the rating agencies on reviews to Saudi Arabia’s stable ratings.
With Brent trading up at 67.71 a barrel of crude, almost a 26% rally from year-end, OPEC+ it would appear have decided to cancel their meeting set for April. This means any further supply curbs will now be delayed until their next scheduled meeting in June.
At the heart of the delay is rumoured to be the Russian and Saudi relationship, the two most powerful members of the 24 nation coalition.
Earlier in the week MSCI announced the inclusion of Saudi Arabia in the Emerging Markets Equity Index in June 2019 following a two step inclusion process. This follows an announcement earlier in the year that the FTSE Russell Emerging Market Index would also include Saudi Arabia (in phases) from March 2019. We would expect Saudi Arabia and its issuers to continue to take a more prominent role in global equity and bond indices, particularly if the proposed listing of Saudi Aramco goes ahead. In our opinion, Saudi Arabia is under-represented in indices for an economy with a 2017 GDP of USD684bn.
In what is the first state visit to Russia by a Saudi ruler, King Salman bin Abdulaziz today will meet Vladimir Putin to discuss oil markets, investment deals, the Syrian war and to deepen the nascent friendship between the two largest oil producers in the world. The delegations are tabling $3bn worth of energy deals with the possibility of a collective $1bn energy investment fund and a $1bn Sibur plant in Saudi Arabia; there’s talk of Gazprom Neft and Saudi Aramco establishing joint research projects; and interminable rhetoric on the “promising areas for bilateral co-operation.”
Earlier this week, the Saudi Government issued its first riyal denominated sukuk which comprised 3 tranches (3, 5 and 7 year maturities) and raised SAR 17bn (USD4.5bn). The issue was well received with SAR 51bn of orders: last year the government had focused its domestic fund raising in the conventional bond segment and the April issue of USD9 bn was an international sukuk so there was a lot of pent up demand for a domestic sukuk.
As was widely expected, MSCI Inc. announced that it is to include Chinese A-shares on the world's most followed Emerging Market Indices; a symbolic victory for China. According to the statement, 222 of China’s large-cap onshore stocks will be included in the MSCI Emerging Markets Index via a two phase process from May to August next year. MCSI stated: ‘This decision has broad support from international institutional investors ... primarily as a result of the positive impact on the accessibility of the China A market of both the Stock Connect program and the loosening by the local Chinese stock exchanges of pre-approval requirements’.
Last weekend King Salman of Saudi Arabia put out a royal decree which has rescinded salary cuts and reinstated bonus payments to thousands of civil servants; around two thirds of the population work for the state. The official line was that the reinstatement reflects an improved fiscal position with the deputy economy minister, Mohammad al-Tuwaijri, saying the first quarter deficit was SAR26bn against projections of SAR54bn. The salary cuts are estimated to have saved SAR36-40bn since last October.
Where else would you wish to end the most colourful US Presidential debate in history, but the city of Las Vegas. Yesterday Trump remained his unconventional self calling Clinton a ‘nasty woman’, Clinton bit back declaring Trump ‘the most dangerous person to run for president in the history of America’; apparently quoting her nemesis Bernie Sanders. With just over 18 days left until the election, polls indicate that Clinton is winning the race although Trump is not willing to accept an election loss claiming the results could be ‘rigged’. The election’s proxy currency, the Mexican peso continued its appreciation yesterday and is now one of the strongest performing currencies so far this month having gained ~4.5% against the dollar.
Today sees the end of the month and what a month it has been! Amongst the recent doom and gloom our portfolios have benefited from the risk-on bounce, with holdings in emerging market and “frontier” markets such as the Middle East enjoying the rally.
This week, we heard that Abu Dhabi is seeking to merge two of its strategically important sovereign wealth funds, the International Petroleum Investment Company (IPIC) and Mubadala Development Company. This deal swiftly follows last week's announcement of state-run bank tie-up as the emirate looks to streamline operations, cut costs, realise synergies and diversify the economy.
Reports this week suggest that two of largest state-owned banks in Abu Dhabi are looking to merge; National Bank of Abu Dhabi (NBAD) and First Gulf Bank (FGB). According to those in the know, the merger could lead to the creation of a bank with a market cap just under USD30bn, larger than that of Standard Chartered and Deutsche Bank for example. The NBAD-FGB tie-up would see combined assets of ~USD171bn, according to Q1’16 figures. If the merger goes through, the combined entity could be the MENA region’s largest bank in terms of assets, ahead of QNB, which recorded assets at USD150bn in Q1’16.
Hypothetically, what would be the official creditor position of someone who has a year’s salary in their bank but many years’ salary worth of valuable commodities buried in their backyard? Technically it would just be the one year’s salary - which is the equivalent to how we all traditionally measure countries’ government debts; but there’s an obvious omission in such accounting methods. For a number of governments with vast oil reserves who are facing moderate deficits concerns for their creditworthiness have grown to levels which perhaps have yet to fully account for the funds they could raise should they decide to privatise such assets or sell rights to such deposits.
Saudi Arabian Deputy Crown Prince Mohammed bin Salman outlined the Kingdom’s package of programmes over the coming four years to rebalance the Kingdom's balance sheet to boost non-oil income in an interview last week. The cornerstone of the package of programs is to restructure the Kingdom’s Public Investment Fund (PIF) into a Sovereign Wealth Fund which will be the biggest ever seen and in time will mean that Saudi could rely on investment income from the fund being greater than income from oil within 20 years.
As regular readers are aware, we manage the portfolios with the Net Foreign Asset (NFA) as the first level of investment guidelines. For inclusion of any credit at first they must be domiciled in a ‘Wealthy Nation’ as defined by the NFA calculation; Saudi Arabia more than qualifies having a NFA to GDP of 178% (7 stars). Although there are concerns over the country’s forecast budget, we view the recent 2016 budget as credit positive; it is evident that policymakers have taken positive proactive steps in the face of further declining oil prices (of their own making).
It’s well known that the 3 things Saudi Arabia has in abundance are, oil, sun and land. As well has having some of the world’s largest oil fields, it also has some of the world’s most intense sunlight, and vast expanses of open desert. Over the last few years the kingdom has been slow to catch on when it comes to renewable energy (for obvious reasons), especially solar, however that all might be about to change. At the moment Saudi Arabia produces most of its electricity by burning oil, over 70% of which was consumed by air conditioners in 2013. With a population of just over 30m people, this makes it the 6th largest consumer of oil on the planet. At the moment approximately 25% of the oil the Saudi’s lift goes towards domestic consumption, and this was growing at 7% a year.
Unquestionably Saudi Arabia faces a number of challenges; Christine Lagarde noted at the conclusion of her visit to Saudi Arabia that the economy “has performed strongly in recent years, but is now facing the challenge of adjusting to the sharp drop in oil prices. …. Prudent fiscal management has helped build-up substantial policy buffers over the past decade, but reforms that would put the large fiscal deficit on a firm downward path are needed. The banking sector is in a strong position to weather lower oil prices and weaker growth.”
Saudi Arabia’s bond issuance program has got off to a good start; a local issue of SAR 20bn (USD5.3bn) was recently sold to local banks and institutions following an issue of SAR 15bn in bonds in a private placement to institutions in June. These are the first notable bond issues since 2007 reflecting an increase in its budget deficit due to lower crude prices. Up to this point Saudi Arabia had been using its sizeable foreign exchange reserves to sustain government spending. As at the end of June foreign exchange reserves were USD672bn; this is down from a high of USD746bn in August 2014, or what was then approaching 100 percent of 2014 nominal GDP.