Saudi Stocks Sink to March 2013 Low as BofA Warns of Rating Cut

Saudi Arabian equities dropped to the lowest level in almost three years as Bank of America Merrill Lynch said the country’s creditworthiness may deteriorate further.

The Tadawul All Share Index declined 1.6 percent to 6,955.11 at the close in Riyadh, the lowest since March 2013. Property company Jabal Omar Development Co. was the biggest contributor to the loss, falling 6.8 percent after reporting its first loss in five quarters.

Tadawul All Share Index vs. Brent crude

The kingdom’s credit rating is at an “elevated" risk of a second cut after it was reduced by Standard & Poor’s last week because the government may not be able to narrow its budget deficit as expected by the New York-based rating company,  BofA said Tuesday. The decline in oil prices, coupled with the nation’s dependency on energy exports, prompted S&P on Friday to downgrade Saudi Arabia one step to A+ with a negative outlook.

Investors “aren’t getting clarity on what the budget will look like and aren’t getting enough of a reassurance from the government," said Muhammad Shabbir, the head of regional equities at Rasmala Investment Bank Ltd. in Dubai, which is cutting back investments in the market. "We’re going to more stable places where we can see the markets will hold better, primarily in the region."

‘Still Scared’

The government is creating a special office to tighten oversight of government spending, two people with knowledge of the matter said this week. The ministries of housing, municipalities, labor, health, education and transportation are some of those that will be affected, they said. Government spending is one of the kingdom’s main drivers of growth.

Shares valued at about 5.1 billion riyals ($1.4 billion) traded, or 28 percent less than the market’s one-year daily average, according to data compiled by Bloomberg. Tuesday’s decline sent the Tadawul’s 14-day relative strength index down to 28 points. A level below 30 indicates to some technical analysts that a market is oversold and may be poised to rebound.

"Investors are still scared from the S&P downgrade, because it usually impacts major players, such as banks and the petrochemicals sector," said Talal Touqan, the head of research at Abu Dhabi-based Al Ramz Securities. The drop gives "good opportunities for bargain hunters to start re-positioning themselves in the market," he said.

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