Saudi Purge Puts Investments at Risk as Uncertainty Lingers

Updated on
  • Cost of insuring Saudi debt may rise if doubt persists: MUFG
  • Prince Alwalweed and others freed from Ritz over the weekend
Bloomberg’s Yousef Gamal El-Din reports on the future of Saudi Prince Alwaleed bin Talal.

Saudi Arabia’s corruption clampdown has everyone guessing what’s next, risking investments into the kingdom, according to the head of Middle East and North Africa research at Japan’s biggest bank.

"The speed and magnitude of the anti-corruption clampdown could increase uncertainty in the short-term for some corporates, which could delay investment decisions," Mitsubishi UFJ Financial Group Inc.’s Ehsan Khoman said in an interview in Dubai. More clarity and guidance from authorities on “how far they want to take the anti-corruption drive would be welcomed from the investment community,” he said.

Saudi Arabia over the weekend freed Prince Alwaleed bin Talal and several of the kingdom’s most prominent businessmen from detention, clearing out the Ritz-Carlton hotel that served as a jail for the country’s elite during a crackdown on corruption. The departures from the hotel mark the end of the first phase of Crown Prince Mohammed bin Salman’s campaign, which shook the kingdom when it was launched in November.

Shares of Alwaleed’s Kingdom Holding Co. on Monday surged back to where they were before the crackdown started, rising as much as 8.6 percent. The stock closed up 2.5 percent at 10.29 riyals in Riyadh.

Lack of Transparency

The probe has been criticized for its lack of transparency and comes amid Prince Mohammed’s efforts to reform the economy by reducing its dependence on oil. Critics also say the prince initiated the drive to intimidate potential opponents and consolidate his grip on the country. Government officials have denied that accusation.

Still, in the long run, the crackdown will ultimately be good for Saudi’s economy if it is able to remove the “complex bureaucracy” and improve the operating environment for companies, MUFG’s Khoman said. Smaller businesses have also struggled to compete against larger corporates that have developed closer ties to individuals in privileged positions, he said.

“The anti-corruption probe is net positive for both sentiment as well as investment flows in the long term,” Khoman said. “At the current juncture, some corporates are in a wait-and-see mode, both in terms of seeking further guidance and clarity from the authorities, as well as observing what decisions their peers will take or announce before they make any firm business decisions.”

After climbing more than 20 basis points in the week after the crackdown began, the cost of insuring Saudi Arabia’s dollar debt against default has since fallen to its lowest level since at least 2016, when the kingdom sold its first dollar bonds. The country’s credit default swaps could rise again if businesses and investors are forced to wait too long to “decipher what steps are taken next in this process,” Khoman said.

MUFG is set to become the first Japanese lender to start full banking operations in the world’s biggest oil exporter after obtaining approval from the kingdom’s central bank. The lender plans to hire 20 people and open its first branch in Riyadh by the end of 2018, Elyas Algaseer, the bank’s co-head in the Middle East and North Africa, said in August. It is one of many foreign banks seeking to benefit from privatizations that could be valued at more than $350 billion over the next five years.

(Updates with Kingdom Holding share price in fourth paragraph.)
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