Complex Made Simple

From corruption probe to Vision 2030, big payoffs for Saudi strategies

Saudi Crown Prince Mohammed Bin Salman is now in the US and for several weeks more, he is on a mission to complete several major business deals.

It’s been argued that the Saudi Royal is burdened by the uncertainty that surrounded the Saudi anti-corruption probe that grabed the headlines for 3 months following the November 4, 2017 detention of over 200 high level officials and princes, which netted the kingdom around $106bn in cash, property and assets.

Recent new information is dispelling that notion and the Saudi crown prince is more emboldened than ever on what could prove to be the most successful trip by any Saudi royal ever.

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What’s hot in Saudi?

According to CNN, Equity funds investing in Saudi Arabia saw net inflows of $110 million between the start of the year and March 7, quoting EPFR Global, a financial market data provider.

“That’s equivalent to 7% of their net assets, representing much stronger growth than other emerging market funds,” said CNN.

The Saudi stock market, the Tadawul, has gained more than 7%, outpacing many other indexes.

Investors rattled by the anit-graft roundup are now showing confidence, bolstered by rising oil prices, economic growth, and proof that Saudi Vision 2030 is not a mere slogan.

A new reality is taking shape with several reforms underway: Women empowerment, entertainment, tourism, non-oil diversification, regulatory environment such as bankruptcy laws and others.

“Strong underlying fundamentals, supported by the government’s efforts to diversify the economy, will translate into increased investment activity in the kingdom,” Sammy Kayello, CEO of Morgan Stanley Middle East and North Africa, told CNN.

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Capital inflows to Saudi

CNN said two best bet income streams for Saudi are selling shares in Saudi Aramco, as well as transforming the Tadawul in the eyes of foreign investors.

Initially, it was believed that an Aramco $2trn evaluation would bring in $100bn from a 5% share sale on various stock markets. With oil prices ramping up, this may in fact be the case.

Saudi officials have yet to decide when to launch the IPO, and more importantly where, and despite talks that New York and London are out, leaving Tadawul as a primary listing option.

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However yesterday, Saudi finance minister Mohammed Al-Jadaan told Bloomberg that “The IPO is still on track and all options remain on the table, be it a New York, London, or Hong Kong listing in addition to Tadawul.”

Reform of the Saudi stock market Tadawul is helping too.

“Index compiler MSCI is due to review the most recent changes in June, and could grant the stock exchange emerging market status. Another index compiler, FTSE, is conducting a similar review at the end of this month,” said CNN.

HSBC estimates that an upgrade by MSCI could trigger flows of more than $17 billion into Saudi Arabia. A move by the FTSE could lead to inflow of at least $7 billion.

Ratings agency Moody’s said in a report on Wednesday that higher public spending and stimulus will allow the country to return to growth this year, after the economy shrank in 2017.

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Winning strategies

Fortune ran an article saying that the Saudi Crown Prince is on a marketing mission to the selling his campaign to transform a formerly closed, hyper-conservative Petro-state into an open economy hungry for U.S. investments and will spend the next two weeks courting business leaders in New York, Houston, and Silicon Valley.

Bernard Haykel, professor of Near Eastern Studies at Princeton University, who met the Saudi Crown Prince, describes the Saudi royal as someone who” inundates you with facts and figures and analysis, rattling off incredible amounts of information in the form of numbers.”

“Saudi Arabia imports almost all of its defense equipment,” says Haykel. “(the crown prince) MBS has a goal of manufacturing half of the armaments in Saudi Arabia.”

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Hence his plans to tour America’s biggest defense contractors on his current visit.

According to Fortune, the crown prince had told Haykel that his goal is to monetize a large portion of the kingdom’s vast oil holdings upfront through an Aramco IPO, and invest the cash to develop new industries.

“Part of the proceeds, MBS explained, would go to building a sovereign wealth fund that would make investments abroad, bringing the kingdom sorely needed income,” said Haykal.

Haykal also explained what prompted the corruption probe.

“The Saudi business elite would bill the government exorbitant amounts for all kinds of infrastructure and industrial projects, use part of the money to bribe ministers and members of the royal family, then subcontract out the work at half of what they were paid,” Haykel told fortune.

Fortune said that the crown prince has stated that the over-billing, bribes and kickbacks inflated the annual budget, totaling around $260 billion in 2017, by 10% to 20% a year.

This was a clean up aimed at helping foreign investors rest assured that the law is on their side, and this seems to be working.