In the news: Saudi Arabia’s upgrade

With strong first quarter results and the Crown Prince’s 2030 Vision in place, Saudi Arabia’s economy is on course to rise
by Bethan Rees

Change is on the horizon for Saudi Arabia. In June 2018, the country lifted its driving ban on women, and now, its economy appears to be improving, after four consecutive quarters of recession, triggered by a reduction in oil prices and structural reforms.

Middle Eastern news outlet Al Bawaba reports that the oil-producing country’s national accounts show a significant recovery in the first quarter of 2018, with annual real GDP growth of 1.2%, thanks to rising oil prices and a “surge in the non-crude sector”.

The report describes the main drivers behind the recovery as growth in the non-oil manufacturing (4.6%) and mining (6.3%) sectors. This will be welcomed by Saudi Arabia’s leaders, whose Vision 2030 plan aims to reduce the kingdom’s dependence on oil through economic diversification into sectors such as financial services, health, education, infrastructure, recreation and tourism by 2030. 

The first quarter of 2018 also saw the government services sector grow by 3.4%, while the financial services sector grew by 2.1%. Al Bawaba reports that growth in both of these sectors is expected to continue, following Saudi Arabia’s admittance to the MSCI emerging markets index, which will sharply broaden its investor base. A Saudi programme of financial services sector initiatives is also expected to drive growth. 

Al Bawaba article
What does this mean for investors?Vision 2030, led by Saudi Crown Prince Muhammad Bin Salman, is an indication that the kingdom is transforming from a conservative country into a “modern day nation”, Katherine Denham writes for City AM

Being included in the MSCI Emerging Markets Index was a move that was widely anticipated, according to Denham. She reports that the chief investment officer at Tilney, Ben Seager-Scott, says: “While there is little argument that Saudi Arabia meets the requirements in terms of economic development, the main hurdle to date has been the restricted access to its markets, which is a requirement of index inclusion.”

The announcement from MSCI, which came in June 2018, also gave the go-ahead for companies to launch their own Saudi investment products. One such company that is doing so is Invesco. It has launched Europe’s first exchange-traded fund that tracks the Saudi market, available on the London Stock Exchange.

What does this mean for investors? Denham writes: “Saudi is the largest economy in the Middle East, so for many investors, this presents fresh stock-picking opportunities in an interesting market. The returns look appealing too, with the MSCI Saudi Arabia Index scooping up 32% for investors over the past year.”

The scope for investment opportunities is expected to grow and foreign capital could help make the Saudi market more liquid, Denham predicts.

She does point out, however, that although Saudi Arabia’s inclusion in the MSCI Emerging Markets Index is positive, it does only represent 2.6% of the index and is unlikely to have “a major impact on the performance of passive portfolios”. 

City AM article
The Crown Prince’s new adviserIn another sign of change in the kingdom, Klaus Kleinfeld, former president and CEO of Siemens AG and chairman and CEO of Arconic, will take on a new role advising the Crown Prince on his reform plans, Bloomberg reports.

Kleinfeld is currently CEO of Saudi Arabia’s NEOM project – a city being built on the kingdom’s Red Sea coast, which officials claim will have more robots than humans. Bloomberg reports that, in his new role, Kleinfeld will “take over wider responsibilities to enhance the economic, technological and financial development” of Saudi Arabia. This change is effective from 1 August 2018 and Kleinfeld will remain a board member on the NEOM project. 

The Crown Prince’s decision to appoint an external heavyweight adviser such as Kleinfeld signals his commitment to the 2030 Vision, and the MSCI’s decision to include Saudi Arabia in its emerging markets index suggests the outside world is starting to take the kingdom’s reform plans seriously. For investors, this is definitely an opportunity to watch.

Bloomberg article
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Published: 05 Jul 2018
  • The Review
  • economy
  • Middle East
  • Islamic finance

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