This was not supposed to happen. When Saudi Arabia opened up its stock exchange to foreign investors in June, after many years of preparation, some of the cannier analysts warned investors not to expect an immediate surge in share values in the kingdom.
It would take some time for global investor appetite to feed through to actual equity-buying demand.
But nobody forecast what has actually taken place. This week, the Tadawul All-share index slipped below the 7,000 level for the first time since late 2012. In the five months since global investors were allowed to own Saudi shares, the index has lost nearly 30 per cent of its value.
It goes to show, as any good retailer will tell you, that you can have the best merchandise in the business, in a shop in a prime location, but if you cannot entice punters across the store threshold, there is no point.
All agreed that the Saudi goods on display were first class back in June – a fast-growing demography boosted by a policy of diversification from oil backed by heavy financial muscle. It added up to a wealth of investment opportunities in those sectors associated with such an economic profile: infrastructure, real estate and construction; consumer industries such as retail, health care, education and telecoms; and financial services including banking, insurance and credit products.
But what has dragged Saudi down is location: in the middle of the world’s biggest oilfields in a region plagued by geopolitical insecurities. The reliance on oil, once the kingdom’s great strength, has proved to be a big investor turn-off with the oil price apparently refusing to stay above $50 per barrel for any serous length of time.
From oil, of course, all else flows in Saudi. You might argue that the plan to keep supply high even as the world was awash in the black stuff was the wrong strategic decision, but it does seem to have protected the vital energy sector of the Saudi economy.
Recent research from London based consultancy Capital Economics shows that the growth in the oil sector eased last September, but it is still growing at a very respectable 4.5 per cent annualised. With so many jobs and so much economic activity dependent on the oil sector, that is vital for Saudi policymakers.
The downside, of course, is that oil sales are bringing in only half the revenue they were this time last year. That has hit the non-oil economy badly. CapEcon says that non-oil growth is at the lowest levels since 2009, with imports – a proxy for domestic consumption and investment – down 25 per cent year on year.
So the legendary Saudi consumer is staying away from the malls in droves. ATM cash withdrawals and point of sale transactions have slowed markedly, consumer confidence has weakened and personal loans are now rising at their slowest pace in five years.
The fiscal squeeze is already under way, and could accelerate. The run-up to next month’s budget is being watched with fear and loathing.
Against this background, capital markets experts gathered in Riyadh this week for a conference on the corporate mergers and acquisitions sector. Mergermarket, the organiser, was able to point to record-breaking activity in the healthcare sector, still buoyant in the Arabian Gulf region generally, and some big deals in industrials and chemicals.
With share prices low, the global private equity groups are hovering, with possible multibillion dollar deals in the food and other consumer sectors. Many companies that had been thinking of IPOs are now looking instead to private equity deals, the conference heard.
In the circumstances, the level of M&A business is probably holding up as well as can be expected. But you get the feeling that all attention in Riyadh is really on the global capital markets. The Saudi government has said it will attempt to make up the shortfall in oil revenues by tapping the international bond markets, raising debt levels to as much as 50 per cent of GDP within five years.
That will give the Saudi economy a profile more in line with international norms, but will it help get punters back in the Tadawul shop? We shall see.
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